REVENUE, DEFERRED REVENUE AND DEFERRED COMMISSIONS

9 Months Ended

Apr. 30, 2018

Revenue Recognition and Deferred Revenue [Abstract]

REVENUE, DEFERRED REVENUE AND DEFERRED COMMISSIONS

ue Recognition

Effective August 1, 2017, we adopted ASC 606 using the full retrospective method, which required us to recast our historical financial information to conform with the standard. The most significant impact of ASC 606 on our historical financial information relates to the timing of revenue recognition for certain software licenses sold with post-contract customer support ("PCS"), for which we did not have vendor specific objective evidence, ("VSOE"), of fair value under the previous revenue recognition guidance. Under ASC 606, the requirement to have VSOE for undelivered elements is eliminated and we now recognize revenue for such software licenses upon transfer of control to our customers. In addition, the adoption of ASC 606 also resulted in differences in the timing of recognition of contract costs, such as sales commissions, as well as the corresponding impact to our provision for income taxes. The adoption of the standard had no significant impact on our provision for income taxes and had no impact on the net cash from or used in operating, investing or financing activities on our condensed consolidated statements of cash flows. See "ASC 606 Adoption Impact to Previously Reported Results" below for the impact of the adoption of the standard on our consolidated balance sheet and condensed consolidated statements of operations.

ASC 606 Adoption Impact to Previously Reported Results

We adjusted our condensed consolidated financial statements from amounts previously reported due to the adoption of ASC 606. Selected consolidated balance sheet line items, adjusted for the adoption of ASC 606, are as follows:

	As of July 31, 2017
	As Previously Reported		Impact of Adoption				As Adjusted
	(in thousands)
Assets
Deferred commissions—current	$	27,679	$	(3,836	)	(1)	$	23,843
Deferred commissions—non-current	33,709		15,975			(1)	49,684
Total deferred commissions	$	61,388	$	12,139			$	73,527
Liabilities
Deferred revenue—current	$	233,498	$	(63,375	)	(2)	$	170,123
Deferred revenue—non-current	292,573		(93,640		)	(2)	198,933
Total deferred revenue	$	526,071	$	(157,015	)		$	369,056
Accrued expenses and other current liabilities	$	9,414	$	293		(3)	$	9,707
Stockholders' Equity	$	48,202	$	168,861			$	217,063

(1) Impact of cumulative change in commissions expense

(2) Impact of cumulative change in revenue

(3) Impact of cumulative change in provision for income taxes

Selected unaudited condensed consolidated statement of operations line items, adjusted for the adoption of ASC 606, are as follows:

	Three Months Ended April 30, 2017
	As Previously Reported			Impact of Adoption			As Adjusted
	(in thousands, except per share data)
Revenue
Product	$	143,142		$	16,934		$	160,076
Support, entitlements and other services	48,621			(3,027		)	45,594
Total revenue	$	191,763		$	13,907		$	205,670
Gross profit	$	108,557		$	13,907		$	122,464
Operating expenses
Sales and marketing expenses	$	128,007		$	(1,261	)	$	126,746
Loss from operations	$	(109,667	)	$	15,168		$	(94,499	)
Net loss	$	(111,977	)	$	15,142		$	(96,835	)
Basic and diluted net loss per share	$	(0.78	)	$	0.11		$	(0.67	)

	Nine Months Ended April 30, 2017
	As Previously Reported			Impact of Adoption			As Adjusted
	(in thousands, except per share data)
Revenue
Product	$	411,307		$	60,518		$	471,825
Support, entitlements and other services	129,460			(7,840		)	121,620
Total revenue	$	540,767		$	52,678		$	593,445
Gross profit	$	310,953		$	52,678		$	363,631
Operating expenses
Sales and marketing expenses	$	368,026		$	(1,281	)	$	366,745
Loss from operations	$	(338,338	)	$	53,959		$	(284,379	)
Net loss	$	(367,358	)	$	53,852		$	(313,506	)
Basic and diluted net loss per share	$	(3.07	)	$	0.45		$	(2.62	)

Unaudited revenue by geographic location, based on bill-to location, adjusted for the adoption of ASC 606, is as follows:

	Three Months Ended April 30, 2017
	As Previously Reported		Impact of Adoption		As Adjusted
	(in thousands)
U.S.	$	112,218	$	2,105	$	114,323
Europe, the Middle East and Africa	38,023		1,248		39,271
Asia-Pacific	35,508		9,935		45,443
Other Americas	6,014		619		6,633
Total revenue	$	191,763	$	13,907	$	205,670

	Nine Months Ended April 30, 2017
	As Previously Reported		Impact of Adoption		As Adjusted
	(in thousands)
U.S.	$	317,262	$	8,271	$	325,533
Europe, the Middle East and Africa	95,543		3,746		99,289
Asia-Pacific	101,798		39,435		141,233
Other Americas	26,164		1,226		27,390
Total revenue	$	540,767	$	52,678	$	593,445

Selected unaudited condensed consolidated statement of cash flows line items, adjusted for the adoption of ASC 606, are as follows:

	Nine Months Ended April 30, 2017
	As Previously Reported			Impact of Adoption			As Adjusted
	(in thousands)
Cash flows from operating activities:
Net loss	$	(367,358	)	$	53,852		$	(313,506	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Deferred commissions	$	(13,406	)	$	(1,282	)	$	(14,688	)
Accrued expenses and other liabilities	$	5,291		$	108		$	5,399
Deferred revenue	$	160,527		$	(52,678	)	$	107,849

The core principle of ASC 606 is to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services. This principle is achieved by applying the following five-step approach:

• Identification of the contract, or contracts, with a customer — A contract with a customer exists when (i) we enter into an enforceable contract with a customer that defines each party’s rights regarding the goods or services to be transferred and identifies the payment terms related to these goods or services, (ii) the contract has commercial substance and (iii) we determine that collection of substantially all consideration for goods or services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. We apply judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors, including the customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining to the customer.

• Identification of the performance obligations in the contract — Performance obligations promised in a contract are identified based on the goods or services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the goods or services either on their own or together with other resources that are readily available from third parties or from us, and are distinct in the context of the contract, whereby the transfer of the goods or services is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised goods or services, we apply judgment to determine whether promised goods or services are capable of being distinct and distinct in the context of the contract. If these criteria are not met, the promised goods or services are accounted for as a combined performance obligation.

• Determination of the transaction price — The transaction price is determined based on the consideration to which we will be entitled in exchange for transferring goods or services to the customer.

• Allocation of the transaction price to the performance obligations in the contract — If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price ("SSP"). We determine SSP based on the price at which the performance obligation is sold separately. If the SSP is not observable through past transactions, we estimate the SSP, taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations.

• Recognition of revenue when, or as, we satisfy a performance obligation — We satisfy performance obligations either over time or at a point in time, as discussed in further detail below. Revenue is recognized at the time the related performance obligation is satisfied with the transfer of a promised good or service to a customer.

Disaggregation of Revenue

We generate revenue from the sale of our software solution, which can be delivered on a hardware appliance or on a standalone basis, PCS and professional services. A substantial portion of our revenue is generated through channel partners, including distributors and resellers. We also sell our software solution through our OEM partners, such as Dell Technologies and Lenovo Group Ltd. These OEM partners embed our software in their own hardware, and we provide limited PCS on these transactions. The following table depicts the disaggregation of revenue by revenue type, consistent with how we evaluate our financial performance:

	Three Months Ended April 30,				Nine Months Ended April 30,
	2017		2018		2017		2018
	(in thousands)
Software revenue	$	100,810	$	158,500	$	308,400	$	441,885
Hardware revenue	59,266		62,617		163,425		221,454
Support, entitlements and other services revenue	45,594		68,296		121,620		188,370
Total revenue	$	205,670	$	289,413	$	593,445	$	851,709

Software revenue — A majority of our product revenue is generated from the sale of our software, which is either delivered on a hardware appliance that is configured to order, or delivered as standalone software, which can be installed on our customers' hardware appliances that are typically purchased separately from an OEM partner or other manufacturers of compatible hardware, including our contract manufacturers. Software revenue includes our base operating system, which can be delivered through different platforms, and licenses to other additional features, which are sold by us. Revenue from our software products is generally recognized upon transfer of control to the customer.

Hardware revenue — In transactions where we deliver the hardware appliance, we consider ourselves to be the principal in the transaction and we record revenue and costs of goods sold on a gross basis. We consider the amount allocated to hardware revenue to be equivalent to the cost of the hardware procured. Hardware revenue is generally recognized upon transfer of control to the customer.

Support, entitlements and other services revenue — We generate our support, entitlements and other services revenue primarily from PCS contracts, and, to a lesser extent, from professional services. The majority of our product sales are sold in conjunction with PCS contracts, with terms ranging from one to five years. We recognize revenue from PCS contracts ratably over the contractual service period. The service period typically commences upon transfer of control of the corresponding products to the customer. We recognize revenue related to professional services as they are performed.

Contracts with multiple performance obligations — Some of our contracts with customers contain multiple performance obligations. For these contracts, we account for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative SSP basis. For deliverables that we routinely sell separately, such as support and maintenance on our core offerings, we determine SSP by evaluating the standalone sales over the trailing 12 months. For those that are not sold routinely, we determine SSP based on our overall pricing trends and objectives, taking into consideration market conditions and other factors, including the value of our contracts, the products sold and geographic locations.

Contract balances — The timing of revenue recognition may differ from the timing of invoicing to customers. Accounts receivable are recorded at the invoiced amount, net of an allowance for doubtful accounts. A receivable is recognized in the period we deliver goods or provide services, or when our right to consideration is unconditional.

Payment terms on invoiced amounts are typically 30 days. The balance of accounts receivable, net of allowance for doubtful accounts, as of July 31, 2017 and April 30, 2018 is presented in the accompanying condensed consolidated balance sheets.

Costs to obtain and fulfill a contract — We capitalize commissions paid to sales personnel and the related payroll taxes when customer contracts are signed. These costs are recorded as deferred commission expense in the condensed consolidated balance sheets, current and non-current. We determine whether costs should be deferred based on our sales compensation plans, if the commissions are incremental and would not have been incurred absent the execution of the customer contract. Sales commissions for renewals of customer contracts are not commensurate with the commissions paid for the acquisition of the initial contract given the substantive difference in commission rates in proportion to thei

r respective contract values. Commissions paid upon the initial acquisition of a contract are amortized over the estimated period of benefit, which may exceed the term of the initial contract. Accordingly, the amortization of deferred costs is recognized on a systematic basis that is consistent with the pattern of revenue recognition allocated to each performance obligation and included in sales and marketing expense in the condensed consolidated statements of operations. We determine the estimated period of benefit by evaluating the expected renewals of our customer contracts, the duration of our relationships with our customers, customer retention data, our technology development lifecycle, and other factors. Deferred costs are periodically reviewed for impairment.

Deferred revenue — We record deferred revenue when cash payments are received in advance of our performance. The current portion of deferred revenue represents the amounts that are expected to be recognized as revenue within one year of the consolidated balance sheet date.

Significant changes in the balance of deferred revenue (contract liability) and total deferred commissions (contract asset) for the periods presented are as follows:

	Three Months Ended April 30, 2018
	Deferred Revenue			Deferred Commissions
	(in thousands)
Balance as of January 31, 2018	$	478,000		$	99,628
Additions	130,061			30,755
Revenue/commissions recognized	(68,296		)	(27,655		)
Assumed in a business combination	124			—
Balance as of April 30, 2018	$	539,889		$	102,728

	Nine Months Ended April 30, 2018
	Deferred Revenue			Deferred Commissions
	(in thousands)
Balance as of July 31, 2017(1)	$	369,056		$	73,527
Additions	359,079			110,344
Revenue/commissions recognized	(188,370		)	(81,143		)
Assumed in a business combination	124			—
Balance as of April 30, 2018	$	539,889		$	102,728

(1) See details above for the summary of adjustments to deferred commissions and deferred revenue as a result of the adoption of ASC 606.

Of the $102.7 million deferred commissions balance as of April 30, 2018, we expect to recognize approximately 30% as commission expense over the next 12 months, and the remainder thereafter.

During the three and nine months ended April 30, 2017, we recognized revenue of approximately $38.8 million and $77.9 million pertaining to amounts deferred as of January 31, 2017 and July 31, 2016, respectively. During the three and nine months ended April 30, 2018, we recognized revenue of approximately $49.4 million and $136.8 million pertaining to amounts deferred as of January 31, 2018 and July 31, 2017, respectively.

The majority of our contracted but not invoiced performance obligations are subject to cancellation terms. Revenue allocated to remaining performance obligations represents contracted revenue that has not yet been recognized ("contracted not recognized"), which includes deferred revenue and non-cancelable amounts that will be invoiced and recognized as revenue in future periods and excludes performance obligations that are subject to cancellation terms. Contracted not recognized revenue was approximately $567.1 million as of April 30, 2018, of which we expect to recognize approximately 46% over the next 12 months, and the remainder thereafter.