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Revenue from Contracts with Customers | 3 Months Ended
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Dec. 29, 2018
Revenue from Contract with Customer [Abstract] |
Revenue from Contracts with Customers | Revenue from Contracts with Customers Upon adoption of ASC 606, we recorded a decrease in accumulated deficit of $431.9 million ($367.4 million, net of tax) due to the cumulative effect of the ASC 606 adoption, with the impact primarily derived from revenue related to on-premise subscription software licenses. Nature of Products and Services Our sources of revenue include: (1) subscription, (2) perpetual license, (3) perpetual support and (4) professional services. Revenue is derived from the licensing of computer software products and from related support contracts. We enter into contracts that include combinations of products, support and professional services, which are accounted for as separate performance obligations with differing revenue recognition patterns.
Performance Obligation | When Performance Obligation is Typically Satisfied
Term-based subscriptions |
On-premise software licenses | Point in Time: Upon the later of when the software is made available or the subscription term commences
Support and cloud-based offerings | Over Time: Ratably over the contractual term; commencing upon the later of when the software is made available or the subscription term commences
Perpetual software licenses | Point in Time: when the software is made available
Support for perpetual software licenses | Over Time: Ratably over the contractual term
Professional services | Over time: As services are provided
Judgments and Estimates Our contracts with customers for subscriptions typically include commitments to transfer term-based on-premise software licenses bundled with support and/or cloud services. On-premise software is determined to be a distinct performance obligation from support which is sold for the same term of the subscription. For subscription arrangements which include cloud services, we assessed whether the cloud component was highly interrelated with on-premise term software licenses. Other than a limited population of subscriptions, the cloud component is not currently deemed to be interrelated with the on-premise term software and, as a result, cloud services will be accounted for as a distinct performance obligation from the software and support components of the subscription. Judgment is required to allocate the transaction price to each performance obligation. We use the estimated standalone selling price method to allocate the transaction price for items that are not sold separately. The estimated standalone selling price is determined using all information reasonably available to us, including market conditions and other observable inputs. The corresponding revenues are recognized as the related performance obligations are satisfied. We determined that 50% to 55% of the estimated standalone selling price for subscriptions that contain distinct license and support performance obligations are attributable to software licenses and 45% to 50%, depending upon the product offering, is attributable to support for those licenses. Our standard multi-year, non-cancellable on-premise subscription contracts provide customers with an annual right to exchange software within the original subscription with other software. Although the exchange right is limited to software products within a similar product grouping, the exchange right is not limited to products with substantially similar features and functionality as those originally delivered. We determined that this right to exchange previously delivered software for different software represents variable consideration to be accounted for as a liability. We have identified a standard portfolio of contracts with common characteristics and applied the expected value method of determining variable consideration associated with this right. Additionally, where there are isolated situations that are outside of the standard portfolio of contracts due to contract size, longer contract duration, or other unique contractual terms, we used the most likely amount method to determine the amount of variable consideration. In both circumstances, the amount of variable consideration included in the transaction price is constrained by an amount where it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. As of December 29, 2018, the total refund liability was $23.6 million, primarily associated with the annual right to exchange on-premise subscription software. Contract Assets and Contract Liabilities
| December 29, 2018 |  | October 1, 2018, as adjusted
| (in thousands)
Contract asset | $ | 14,513 |  |  | $ | 26,265 |
Deferred revenue | $ | 335,119 |  |  | $ | 357,490 |
As of December 29, 2018, our contract assets are expected to be transferred to receivables within the next 12 months and therefore are included in other current assets. Approximately $12.2 million of the October 1, 2018 contract asset balance was transferred to receivables during the current period as a result of the right to payment becoming unconditional. The majority of both the contract asset balance and the amounts transferred to receivables relates to two large professional services contracts with invoicing terms based on performance milestones. Additions to contract assets of approximately $0.4 million related to revenue recognized in the period, net of period billings. There were no impairments of contract assets during the three months ended December 29, 2018. During the three months ended December 29, 2018, $153.7 million of revenue that was included in the deferred revenue opening balance was recognized. There were additional deferrals of $131.3 million, which were primarily related to new billings. Costs to Obtain or Fulfill a Contract The new revenue recognition standard requires the capitalization of certain incremental costs of obtaining a contract, which impacts the period in which we record our commission expense. Prior to our adoption of the new revenue standard, we recognized commissions expense as incurred. Under the new revenue recognition standard, we are required to recognize these expenses over the period of benefit associated with these costs. This results in a deferral of certain commission expenses each period. Upon adoption, we reduced our accumulated deficit by $70.0 million and recognized an offsetting asset for deferred commission related to contracts that were not completed prior to October 1, 2018. We recognize an asset for the incremental costs of obtaining a contract with a customer if the benefit of those costs is expected to be longer than one year. These deferred costs are amortized proportionately related to revenue over five years, which is generally longer than the term of the initial contract because of anticipated renewals as commissions for renewals are not commensurate with commissions related to our initial contracts. As of December 29, 2018, deferred costs of $19.9 million were included in other current assets and $52.5 million were included in other assets (non-current). As the revenue recognition pattern has changed under ASC 606, the costs to fulfill contracts has also changed to match this pattern of expense recognition. As of October 1, 2018, this resulted in a $2.8 million increase in our accumulated deficit with recognition of an offsetting current liability. Remaining Performance Obligations Our contracts with customers include amounts allocated to performance obligations that will be satisfied at a later date. As of December 29, 2018, amounts allocated to these remaining performance obligations are $938 million, of which we expect to recognize 90% over the next 24 months with the remaining amount thereafter. Disaggregation of Revenue
|  | Three months ended
|  | As Reported ASC 606 |  | ASC 605 |  | As Reported ASC 605
|  | December 29, 2018 |  | December 29, 2018 |  | December 30, 2017
Revenue |  |  |
|  | (in thousands)
Subscription license |  | $ | 63,517 |  |  |  |  |
Subscription support & cloud services |  | 77,424 |  |  |  |  |
Total Subscription |  | 140,941 |  |  | $ | 148,413 |  |  | $ | 100,008 |
Perpetual support |  | 110,497 |  |  | 109,225 |  |  | 131,197 |
Total recurring revenue |  | 251,438 |  |  | 257,638 |  |  | 231,205 |
Perpetual license |  | 41,805 |  |  | 41,750 |  |  | 33,985 |
Total software revenue |  | 293,243 |  |  | 299,388 |  |  | 265,190 |
Professional services |  | 41,446 |  |  | 39,369 |  |  | 41,454 |
Total revenue |  | $ | 334,689 |  |  | $ | 338,757 |  |  | $ | 306,644 |
For further disaggregation of revenue by geographic region and product area see Note 11. Segment and Geographical Information. Practical Expedients We elected certain practical expedients with the adoption of the new revenue standard. We do not account for significant financing components if the period between revenue recognition and when the customer pays for the products or services will be one year or less. Additionally, we recognize revenue equal to the amount we have a right to invoice, when the amount corresponds directly with the value to the customer of our performance date. Transition Disclosures In accordance with the modified retrospective method transition requirements, we will present the financial statement line items impacted and adjusted to compare to presentation under ASC 605 for each of the interim and annual periods during the first year of adoption of ASC 606. The following tables present our Balance Sheets and Statements of Operations as reported under ASC 606 for the current period with comparative periods reported under ASC 605:
| As Reported ASC 606 |  | ASC 605 |  | As Reported ASC 605
| December 29, 2018 |  | December 29, 2018 |  | September 30, 2018
ASSETS |  |  |  |  |
Current assets: |  |  |  |  |
Cash and cash equivalents | $ | 276,990 |  |  | $ | 276,990 |  |  | $ | 259,946 |
Short-term marketable securities | 25,598 |  |  | 25,598 |  |  | 25,836 |
Accounts receivable (1) | 385,670 |  |  | 138,989 |  |  | 129,297 |
Prepaid expenses | 63,045 |  |  | 63,045 |  |  | 48,997 |
Other current assets (2) | 48,682 |  |  | 143,104 |  |  | 169,708 |
Total current assets | 799,985 |  |  | 647,726 |  |  | 633,784 |
Property and equipment, net | 107,359 |  |  | 107,359 |  |  | 80,613 |
Goodwill | 1,230,901 |  |  | 1,230,901 |  |  | 1,182,457 |
Acquired intangible assets, net | 205,084 |  |  | 205,084 |  |  | 200,202 |
Long-term marketable securities | 30,054 |  |  | 30,054 |  |  | 30,115 |
Deferred tax assets (3) | 201,149 |  |  | 234,558 |  |  | 165,566 |
Other assets (4) | 178,437 |  |  | 34,328 |  |  | 36,285 |
Total assets | $ | 2,752,969 |  |  | $ | 2,490,010 |  |  | $ | 2,329,022 |
LIABILITIES AND STOCKHOLDERS’ EQUITY |  |  |  |  |
Current liabilities: |  |  |  |  |
Accounts payable | $ | 57,249 |  |  | $ | 57,249 |  |  | $ | 53,473 |
Accrued expenses and other current liabilities (5) | 83,721 |  |  | 56,897 |  |  | 74,388 |
Accrued compensation and benefits | 74,483 |  |  | 74,483 |  |  | 101,784 |
Accrued income taxes (3) | 405 |  |  | 4,958 |  |  | 18,044 |
Deferred revenue (6) | 325,111 |  |  | 484,613 |  |  | 487,590 |
Total current liabilities | 540,969 |  |  | 678,200 |  |  | 735,279 |
Long-term debt | 778,484 |  |  | 778,484 |  |  | 643,268 |
Deferred tax liabilities (3) | 36,261 |  |  | 5,731 |  |  | 5,589 |
Deferred revenue (6) | 10,197 |  |  | 8,324 |  |  | 11,852 |
Other liabilities | 65,889 |  |  | 65,889 |  |  | 58,445 |
Total liabilities | 1,431,800 |  |  | 1,536,628 |  |  | 1,454,433 |
Stockholders’ equity: |  |  |  |  |
Preferred stock | — |  |  | — |  |  | — |
Common stock | 1,187 |  |  | 1,187 |  |  | 1,180 |
Additional paid-in capital | 1,553,875 |  |  | 1,553,875 |  |  | 1,558,403 |
Accumulated deficit | (138,785 | ) |  | (507,900 | ) |  | (599,409 | )
Accumulated other comprehensive loss | (95,108 | ) |  | (93,780 | ) |  | (85,585 | )
Total stockholders’ equity | 1,321,169 |  |  | 953,382 |  |  | 874,589 |
Total liabilities and stockholders’ equity | $ | 2,752,969 |  |  | $ | 2,490,010 |  |  | $ | 2,329,022 |
The changes in balance sheet accounts due to the adoption of 606 are due primarily to the following:
(1) | Up front license recognition under our subscription contracts and billed but uncollected support and subscription receivables that had corresponding deferred revenue, which were included in other current assets prior to our adoption of 606.
(2) Contract assets and capitalized commission costs.
(3) | The tax effect of the accumulated deficit impact related to the acceleration of revenue and deferral of costs (primarily commissions).
(4) The long-term portion of unbilled receivables due to the acceleration of license revenue on multi-year subscription contracts and the long-term portion of capitalized commission costs. (5) Refund liability, primarily associated with the annual right to exchange on-premise subscription software described above in Judgments and Estimates. (6) The decrease in deferred revenue recorded to accumulated deficit upon adoption of ASC 606 primarily related to on-premise subscription software licenses.
| Three months ended
| As Reported ASC 606 |  | ASC 605 |  | As Reported ASC 605
| December 29, 2018 |  | December 29, 2018 |  | December 30, 2017
Revenue: |  |  |  |  |
License (1) | $ | 105,322 |  |  | $ | 173,905 |  |  | $ | 119,518 |
Support and cloud services (1) | 187,921 |  |  | 125,483 |  |  | 145,672 |
Total software revenue | 293,243 |  |  | 299,388 |  |  | 265,190 |
Professional services | 41,446 |  |  | 39,369 |  |  | 41,454 |
Total revenue | 334,689 |  |  | 338,757 |  |  | 306,644 |
Cost of revenue: |  |  |  |  |
Cost of license revenue | 12,563 |  |  | 12,347 |  |  | 12,114 |
Cost of support and cloud services revenue | 31,197 |  |  | 30,630 |  |  | 34,502 |
Total cost of software revenue | 43,760 |  |  | 42,977 |  |  | 46,616 |
Cost of professional services revenue | 33,592 |  |  | 32,219 |  |  | 36,419 |
Total cost of revenue (2) | 77,352 |  |  | 75,196 |  |  | 83,035 |
Gross margin | 257,337 |  |  | 263,561 |  |  | 223,609 |
Operating expenses: |  |  |  |  |  |  |
Sales and marketing (3) | 104,218 |  |  | 107,304 |  |  | 99,375 |
Research and development | 60,782 |  |  | 60,782 |  |  | 63,972 |
General and administrative | 37,864 |  |  | 37,864 |  |  | 35,020 |
Amortization of acquired intangible assets | 5,936 |  |  | 5,936 |  |  | 7,821 |
Restructuring and other charges, net | 18,493 |  |  | 18,493 |  |  | 105 |
Total operating expenses | 227,293 |  |  | 230,379 |  |  | 206,293 |
Operating income | 30,044 |  |  | 33,182 |  |  | 17,316 |
Interest expense | (10,276 | ) |  | (10,276 | ) |  | (10,047 | )
Other income (expense), net | 655 |  |  | 548 |  |  | (798 | )
Income before income taxes | 20,423 |  |  | 23,454 |  |  | 6,471 |
Provision (benefit) for income taxes (4) | (562 | ) |  | 4,206 |  |  | (7,406 | )
Net income | $ | 20,985 |  |  | $ | 19,248 |  |  | $ | 13,877 |
(1) | The reduction in license revenue and increase in support revenue is a result of the support component of subscription licenses which is included in license revenue under ASC 605. Additionally, license revenue decreased by approximately $65 million as a result of the revenue recorded to accumulated deficit, which would have been recognized during the quarter, partially offset by approximately $59 million of upfront license revenue recognition on new and renewal bookings.
(2) Cost of revenue under ASC 606 is higher under ASC 606 due to the treatment of deferred professional services costs under the new accounting guidance, partially offset by the timing of revenue recognition under ASC 606 resulting in lower associated royalty costs. (3) Sales and marketing costs are lower under ASC 606 due to the amortization of commissions costs capitalized upon adoption of ASC 606, offset by the deferral of ongoing commission expenses under the new accounting guidance. (4) The benefit for income taxes under ASC 606 includes indirect effects of the adoption.

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- Definition The entire disclosure of revenue from contract with customer to transfer good or service and to transfer nonfinancial asset. Includes, but is not limited to, disaggregation of revenue, credit loss recognized from contract with customer, judgment and change in judgment related to contract with customer, and asset recognized from cost incurred to obtain or fulfill contract with customer. Excludes insurance and lease contracts. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -URI http://asc.fasb.org/topic&trid=2122369 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 606 -URI http://asc.fasb.org/topic&trid=49130388 + Details
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