Revenue from Contracts with Customers

Adoption of ASC 606

We adopted ASU 2014-09, Revenue from Contracts with Customers (ASC 606) using the modified retrospective approach. Prior period information was not restated and continues to be reported under the accounting standards in effect for those periods. We recognized a cumulative effect adjustment from the adoption of this standard that reduced opening retained earnings by $9 million. Significant components of the cumulative effect adjustment include:


•	The write-off of previously capitalized deferred marketing costs that did not meet the criteria for capitalization under ASC 606.


•	The capitalization of certain costs to obtain a contract, primarily sales commissions, that are permitted to be capitalized under ASC 606.


•	The establishment of deferred revenue related to the early renewal of software and data license contracts with terms beginning in 2018, as ASC 606 requires revenue recognition at the commencement of the license term.


•	The write-off of deferred revenues and related costs for certain software licenses bundled with a lease that are recognized at time of delivery under ASC 606.


•	The write-off of advance billings related to certain software data products that are recognized upon delivery under ASC 606.

The pro forma impact on our consolidated financial statements as if they were presented under the prior guidance is as follows:



	Three months ended March 31, 2018
	As reported		Pro forma		Total increase (decrease)
Income Statement
Total revenue	$	983,182	$	970,451	$	12,731
Equipment sales	$	155,808	$	153,607	$	2,201
Software	$	81,616	$	70,597	$	11,019
Business services	$	386,538	$	387,027	$	(489	)

Total costs and expenses	$	910,090	$	907,747	$	2,343
Cost of equipment sales	$	78,751	$	76,738	$	2,013
Cost of software	$	25,353	$	24,071	$	1,282
Selling, general and administrative	$	312,108	$	313,060	$	(952	)

Income before taxes	$	73,092	$	62,704	$	10,388
Provision for income taxes	$	19,579	$	16,931	$	2,648
Net income	$	53,513	$	45,773	$	7,740

Basic earnings per share attributable to common stockholders	$	0.29	$	0.25	$	0.04
Diluted earnings per share attributable to common stockholders	$	0.28	$	0.24	$	0.04

The most significant change to the Consolidated Statement of Income for the three months ended March 31, 2018, was due to higher software revenue and income before taxes of $11 million and $9 million, respectively, under ASC 606 primarily as a result of the renewal of software data licenses with a term beginning in 2018.



	March 31, 2018
	As reported			Pro forma			Total increase (decrease)
Balance Sheet
Total Assets	$	6,319,618		$	6,331,186		$	(11,568	)
Accounts receivable, net	$	488,028		$	486,327		$	1,701
Current income taxes	$	42,274		$	42,472		$	(198	)
Other current assets and prepayments	$	94,227		$	97,909		$	(3,682	)
Noncurrent income taxes	$	61,367		$	61,571		$	(204	)
Other assets	$	531,225		$	540,410		$	(9,185	)

Total Liabilities	$	6,104,725		$	6,115,357		$	(10,632	)
Accounts payable and accrued liabilities	$	1,375,166		$	1,373,465		$	1,701
Current income taxes	$	9,457		$	6,034		$	3,423
Advance billings	$	292,174		$	302,586		$	(10,412	)
Deferred taxes on income	$	239,472		$	243,843		$	(4,371	)
Other noncurrent liabilities	$	499,794		$	500,767		$	(973	)

Total Stockholder's equity	$	214,893		$	215,829		$	(936	)
Retained earnings	$	5,235,874		$	5,236,690		$	(816	)
Accumulated other comprehensive loss	$	(771,995	)	$	(771,875	)	$	(120	)

The most significant changes to the Consolidated Balance Sheet at March 31, 2018 were:


•	Lower Other current assets and prepayments due to the write-off of prepaid costs related to software licenses and software data products, which are now recognized at time of delivery rather than ratably under previous guidance.


•	Lower Other assets primarily due to the write-off of deferred marketing costs at January 1, 2018, offset by the capitalization of certain costs to obtain a contract, primarily related to sales commissions.


•	Lower Advance billings due to the write-off of deferred revenue from software licenses bundled with leases and data products, which are now recognized at time of delivery rather than ratably under previous guidance.

Cash Flow Statement

The adoption of ASC 606 had no impact on our Consolidated Statements of Cash Flows.

Significant Accounting Policies

The most significant impact of ASC 606 on our consolidated financial statements will be in the timing of recognizing certain revenues and costs to obtain a contract related to software and software related products. We will continue to recognize revenue from equipment sales under sales-type leases and related financing income and rental of postage meters and mailing equipment in accordance with ASC 840, Leases.

We applied the following practical expedients and policy elections when adopting ASC 606:


•	Costs incurred to obtain a contract with a customer are expensed if the amortization period of the asset is one year or less.


•	With the exception of certain services contracts, all taxes assessed by government authorities, such as sales and use taxes, value added taxes and excise tax, are excluded from the transaction price.


•	The transaction price is not adjusted for a significant financing component when a performance obligation is satisfied within one year.


•	Revenue is recognized based on the amount billable to the customer, when that amount corresponds to the value transferred to the customer.


•	Shipping and handling activities are accounted for as a fulfillment activity rather than a separate performance obligation.


•	We reflected the aggregate effect of all modifications when identifying performance obligations and allocating transaction price.

Significant changes to accounting policies disclosed in our 2017 Annual Report due to the adoption of ASC 606 are discussed below.

Software Sales and Integration Services

Our software products include software and data licenses that are either “right to use” or “right to access”. A majority of our software and data license products are considered right to use and are generally distinct from other promised goods and services within a contract. Revenue for right to use software and data licenses is recognized at a point in time when control has transferred to the customer, which is generally upon delivery or acceptance for those licenses requiring significant integration or customization. Revenue from renewals are recognized at the beginning of the license term.

Right to access licenses generally bundle certain software licenses, data licenses and data updates that are highly interdependent and the updates are critical to the continued use of the license by the customer. Revenue for these arrangements are deferred and recognized ratably over the license term.

We generally invoice customers upon delivery of our software and data licenses. Data contracts that include both data and data updates are invoiced in one or more equal installments. A contract asset is recognized on data licenses for which consideration will be received in future periods.

We allocate the transaction price based on relative standalone selling prices, which are generally based on observable selling prices in standalone transactions for our data products, maintenance and professional services. We estimate the standalone selling prices for our software licenses using the residual approach, as the selling prices are highly variable and when observable standalone selling prices exist for the other goods and services in the contract.

We often bundle software licenses with lease contracts. Revenue is recognized upon delivery of those software licenses considered distinct and functional in nature.

Costs to Obtain a Contract and Marketing Costs

Certain incremental costs to obtain a contract are capitalized as contract costs if we expect the benefit of those costs to be realized for a period greater than one year. These costs primarily relate to sales commission on multi-year equipment and software support service contracts. These costs will be amortized in a manner consistent with the timing of the related revenue over the period of contract performance or a longer period, if renewals are expected and the renewal commission is not commensurate with the initial commission. Amortization expense for the three months ended March 31, 2018 was $4 million and is included in Selling, general and administrative expenses. Unamortized contract costs at March 31, 2018 were $26 million and are included in Other assets.

Certain marketing costs associated with the acquisition of new customers are expensed as incurred since these costs do not meet the criteria of a cost to obtain a contract.

Revenue from Contracts with Customers

The following table disaggregates our revenue by major source:



	Three months ended March 31, 2018
	Global Ecommerce		Presort Services		North America Mailing		International Mailing		Software Solutions		Production Mail		Total Revenue from sales and services (ASC 606)		Revenue from leasing transactions and financing		Total Consolidated Revenue
Equipment sales	$	—	$	—	$	17,145	$	13,364	$	—	$	45,435	$	75,944	$	79,864	$	155,808
Supplies	—		—		38,951		21,041		—		5,382		65,374		—		65,374
Software	—		—		—		—		81,616		—		81,616		—		81,616
Rentals	—		—		730		2,167		—		—		2,897		92,383		95,280
Financing	—		—		16,577		2,976		—		—		19,553		60,550		80,103
Support services	—		—		50,744		22,278		—		45,440		118,462		—		118,462
Business services	246,590		134,458		3,803		1,688		—		—		386,539		—		386,539
	$	246,590	$	134,458	$	127,950	$	63,514	$	81,616	$	96,257	$	750,385	$	232,797	$	983,182

Revenue from sales and services (ASC 606)	$	246,590	$	134,458	$	127,950	$	63,514	$	81,616	$	96,257	$	750,385	$	—	$	750,385
Revenue from leasing transactions and financing	—		—		197,480		34,383		—		934		—		232,797		232,797
Total revenue	$	246,590	$	134,458	$	325,430	$	97,897	$	81,616	$	97,191	$	750,385	$	232,797	$	983,182

Timing of revenue recognition (ASC 606)
Products/services transferred at a point in time	$	—	$	—	$	56,096	$	34,405	$	26,057	$	50,817	$	167,375
Products/services transferred over time	246,590		134,458		71,854		29,109		55,559		45,440		583,010
Total revenue	$	246,590	$	134,458	$	127,950	$	63,514	$	81,616	$	96,257	$	750,385

Our performance obligations are as follows:

Equipment sales and supplies: Our performance obligations generally include the sale of mailing equipment, excluding sales-type leases, and supplies. We recognize revenue upon delivery for self-install equipment and supplies and upon acceptance or installation for other equipment. We provide a warranty that our equipment is free of defects and meets stated specifications. The warranty is not considered a separate performance obligation.

Software: Our performance obligations include the sale of software licenses, maintenance, data products and professional services. Revenue for licenses is generally recognized upon delivery or over time for those licenses that require critical updates over the term of the contract.

Rentals: Our performance obligations include the fees associated with postage refills for meters.

Financing: Our performance obligations for financing revenue include services under our equipment replacement program. The fees received for this program are recognized ratably over the contract term.

Support services: Our performance obligations include providing maintenance and professional services for our equipment. Maintenance contract revenue is recognized ratably over the contract period and revenue for professional services is recognized when services are complete.

Business services: Our performance obligations include mail processing services and ecommerce solutions. Revenue is recognized as the services are provided as these services represent a series of distinct services that are similar and the revenue is recognized as the services are provided.

Revenue from leasing transactions and financing include revenue from sales-type leases, finance income and late fees that are not accounted for under ASC 606.

Contract Assets and Advance Billings from Contracts with Customers



	March 31, 2018		January 1, 2018 ⁽¹⁾		Total increase (decrease)
Contracts assets, current portion	$	4,565	$	5,075	$	(510	)
Contracts assets, noncurrent portion	$	1,752	$	648	$	1,104
Advance billings, current portion	$	236,599	$	238,707	$	(2,108	)
Advance billings, noncurrent portion	$	14,887	$	17,874	$	(2,987	)

⁽¹⁾Balances adjusted for the cumulative effect of accounting change

Contract assets, current and non current, are recorded in Other current assets and prepayments and Other assets, respectively. Advance billings, current and noncurrent, are recorded in Advance billings and Other noncurrent liabilities, respectively.

Contract Assets

We record contract assets when performance obligations are satisfied in advance of invoicing the customer when the right to consideration is conditional on the satisfaction of another performance obligation within a contract.

Advance Billings from Contracts with Customers

Advance billings are recorded when cash payments are due in advance of our performance. Items in advance billings primarily relate to support services on equipment and software licenses, subscription services and certain software data products. Revenue is recognized ratably over the contract term.

The net decrease in advance billings at March 31, 2018 is primarily driven by revenues recognized during the period, which includes $107 million of advance billings at the beginning of the period, partially offset by advance billings in the quarter.

Future Performance Obligations

The transaction prices allocated to future performance obligations will be recognized as follows:



	Total		Remainder of 2018		2019		2020-2023
North America Mailing⁽¹⁾	$	269,197	$	91,823	$	90,473	$	86,901
International Mailing⁽¹⁾	121,695		38,663		33,801		49,231
Production Mail⁽²⁾	8,321		4,194		3,557		570
Software Solutions⁽³⁾	87,868		40,592		30,440		16,836
Total	$	487,081	$	175,272	$	158,271	$	153,538

⁽¹⁾Revenue streams bundled with our leasing contracts, primarily maintenance and other services

⁽²⁾ Noncancellable maintenance contracts for production mail equipment for contract terms greater than 12 months

⁽³⁾Multiple-year software maintenance contracts, certain software and data licenses and data updates

The table above does not include revenue related to performance obligations for contracts with terms less than 12 months and expected consideration for those performance obligations where revenue is recognized based on the amount billable to the customer.