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Revenue | 3 Months Ended
--- | ---
Jul. 27, 2018
Revenue From Contract With Customer [Abstract] |
Revenue | 6. Revenue Effective our first quarter of fiscal 2019, we adopted ASC 606 using the full retrospective method and have restated each prior reporting period presented to conform to the new rules. The most significant impact of the new standard relates to our accounting for arrangements containing software. For our enterprise software license agreements (ELAs), we now recognize the license fee component of such arrangements up front. Under the prior rules, the software license fee was recognized over the term of the enterprise license based on our inability to establish vendor specific objective evidence of fair value for the undelivered software support element of these arrangements. In addition, for other software arrangements, revenue deferred for the undelivered elements that was previously allocated based on the residual method is now allocated based on relative fair value, which generally results in more software arrangement revenue being recognized earlier. The new standard also impacts our estimation of variable consideration for certain arrangements with contract terms such as rights of return, potential penalties and acceptance clauses. The following table presents the impacts of adoption of ASC 606 to select line items of our condensed consolidated balance sheet as of the end of fiscal 2018:
|  | As of April 27, 2018 |
|  | As Previously Reported |  |  | Impact of ASC 606 Adoption |  | As Adjusted |
ASSETS |  |  |  |  |  |  |  |  |  |  |  |  |  |
Accounts receivable |  | $ | 1,009 |  |  | $ | 38 |  |  | (1 | ) | $ | 1,047 |
Inventories |  |  | 126 |  |  |  | (4 | ) |  |  |  |  | 122 |
Other current assets |  |  | 330 |  |  |  | 62 |  |  | (2 | ) |  | 392 |
Other non-current assets |  |  | 420 |  |  |  | 30 |  |  | (2 | ) |  | 450 |
LIABILITIES AND STOCKHOLDERS' EQUITY |  |  |  |  |  |  |  |  |  |  |  |  |  |
Short-term deferred revenue and financed unearned services revenue |  | $ | 1,804 |  |  | $ | (92 | ) |  | (3 | ) | $ | 1,712 |
Other long-term liabilities |  |  | 961 |  |  |  | 31 |  |  | (4 | ) |  | 992 |
Long-term deferred revenue and financed unearned services revenue |  |  | 1,673 |  |  |  | (22 | ) |  | (3 | ) |  | 1,651 |
Accumulated deficit |  |  | (218 | ) |  |  | 209 |  |  | (5 | ) |  | (9 | )
| (1) | Netting of accounts receivable and deferred revenue balances for certain customer arrangements has been updated to reflect the impact of adoption
| (2) | Reflects capitalization of commissions and reduction of long-term deferred tax assets
| (3) | Reflects cumulative change in revenue and the impact of adoption to the netting of accounts receivable and deferred revenue balances for certain customer arrangements
| (4) | Reflects increase in long-term deferred tax liabilities
| (5) | Reflects cumulative impact to net income (loss)
The following table presents the impacts of adoption of ASC 606 to our statement of operations for the first quarter of fiscal 2018:
|  | Three Months Ended |
|  | July 28, 2017 |
|  | As Previously Reported |  |  | Impact of ASC 606 Adoption | As Adjusted |
Revenues: |  |  |  |  |  |  |  |  |  |  |  |
Product |  | $ | 723 |  |  | $ | 4 |  |  | $ | 727 |
Software maintenance |  |  | 234 |  |  |  | (11 | ) |  |  | 223 |
Hardware maintenance and other services |  |  | 368 |  |  |  | 3 |  |  |  | 371 |
Net revenues |  |  | 1,325 |  |  |  | (4 | ) |  |  | 1,321 |
Cost of revenues: |  |  |  |  |  |  |  |  |  |  |  |
Cost of product |  |  | 371 |  |  |  | 5 |  |  |  | 376 |
Cost of software maintenance |  |  | 7 |  |  |  | — |  |  |  | 7 |
Cost of hardware maintenance and other services |  |  | 113 |  |  |  | 1 |  |  |  | 114 |
Total cost of revenues |  |  | 491 |  |  |  | 6 |  |  |  | 497 |
Gross profit |  |  | 834 |  |  |  | (10 | ) |  |  | 824 |
Operating expenses: |  |  |  |  |  |  |  |  |  |  |  |
Sales and marketing |  |  | 425 |  |  |  | (2 | ) |  |  | 423 |
Research and development |  |  | 193 |  |  |  | — |  |  |  | 193 |
General and administrative |  |  | 68 |  |  |  | — |  |  |  | 68 |
Total operating expenses |  |  | 686 |  |  |  | (2 | ) |  |  | 684 |
Income from operations |  |  | 148 |  |  |  | (8 | ) |  |  | 140 |
Other income, net |  |  | 5 |  |  |  | — |  |  |  | 5 |
Income before income taxes |  |  | 153 |  |  |  | (8 | ) |  |  | 145 |
Provision for income taxes |  |  | 17 |  |  |  | (3 | ) |  |  | 14 |
Net income |  | $ | 136 |  |  | $ | (5 | ) |  | $ | 131 |
Net income per share: |  |  |  |  |  |  |  |  |  |  |  |
Basic |  | $ | 0.50 |  |  | $ | (0.01 | ) |  | $ | 0.49 |
Diluted |  | $ | 0.49 |  |  | $ | (0.02 | ) |  | $ | 0.47 |
Shares used in net income per share calculations: |  |  |  |  |  |  |  |  |  |  |  |
Basic |  |  | 270 |  |  |  | 270 |  |  |  | 270 |
Diluted |  |  | 278 |  |  |  | 278 |  |  |  | 278 |
The adoption of ASC 606 had no impact to cash provided by or used in operating, investing or financing activities as presented on our condensed consolidated statement of cash flows. 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 in exchange for those goods or services. This principle is achieved through 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 (ii) defines each party’s rights regarding the goods or services to be transferred and (iii) identifies the payment terms related to these goods or services. Additionally, (iv) the contract has commercial substance and, (v) 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. We also combine two or more contracts entered into at or near the same time with the same customer as a single contract if the contracts are negotiated as one package with a single commercial objective, the amount of consideration to be paid on one contract depends on the price or performance of the other contract or if the goods and services promised in each of the contracts are a single performance obligation.
| • | Identification of the performance obligations in the contract — Performance obligations promised in a contract are identified based on the goods or services (or a bundle of goods and services) that will be transferred to the customer that are distinct. A good or service is distinct if it is capable of being distinct, where the customer can benefit from the goods or service either on its own or together with other resources that are readily available from third parties or from us, and is distinct in the context of the contract, meaning 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, we combine the goods and services until we have a distinct 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. Consideration promised may include fixed amounts, variable amounts or both. We use judgment in determining variable consideration, particularly if consideration is contingent on the occurrence or nonoccurrence of a future event. We use the expected value, primarily relying on our history, to estimate variable consideration. We may also use, in certain situations, the most likely amount as the basis of our estimate. In either case, we consider variable consideration only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. Reassessments of our variable consideration may occur as historical information changes. Transaction prices should also be adjusted for the effects of time value of money if the timing of payments provides either the customer or ourselves a significant benefit of financing.
| • | 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 basis. We determine standalone selling price based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, we estimate the standalone selling price taking into account available information such as market conditions and internally approved pricing guidelines related to the performance obligations. Variable consideration is also allocated to the performance obligations. If the terms of variable consideration relate to one performance obligation, it is entirely allocated to that obligation. Otherwise, it is allocated to all the performance obligations in the contract.
| • | Recognition of revenue when, or as, we satisfy a performance obligation — We satisfy performance obligations either over time or at a point in time. We typically recognize revenue at a point in time for promises to transfer goods to a customer. Services are typically transferred over time based on an appropriate method for measuring our progress toward completion of that performance obligation. Our stand-ready services, including both hardware and software maintenance support, are transferred ratably over the period of the contract. For other services such as our fixed professional services contract, we use an input method to determine the percentage of completion. That is, we estimate the effort to date versus the expected effort required over the life of the contract.
Disaggregation of revenue To provide visibility into our transition from older products to our newer, higher growth products and clarity into the dynamics of our product revenue, we group our products by “Strategic” and “Mature” solutions. Strategic solutions include Clustered ONTAP, branded E-Series, SolidFire, converged and hyper-converged infrastructure, ELAs and other optional add-on software products. Mature solutions include 7-mode ONTAP, add-on hardware and related operating system (OS) software and original equipment manufacturers (OEM) products. Both our Mature and Strategic product lines include a mix of disk, hybrid and all flash storage media. Additionally, we provide a variety of services including software maintenance, hardware maintenance and other services including professional services, global support solutions, and customer education and training. The following table depicts the disaggregation of revenue by our products and services (in millions):
|  | Three Months Ended |
|  | July 27, 2018 |  |  | July 28, 2017 |
Product revenues |  | $ | 875 |  |  | $ | 727 |
Strategic |  |  | 612 |  |  |  | 498 |
Mature |  |  | 263 |  |  |  | 229 |
Software maintenance revenues |  | 229 |  |  | 223 |
Hardware maintenance and other services revenues |  | 370 |  |  | 371 |
Hardware maintenance support contracts |  |  | 303 |  |  |  | 298 |
Professional and other services |  |  | 67 |  |  |  | 73 |
Net revenues |  | $ | 1,474 |  |  | $ | 1,321 |
Revenues by geographic region are presented in Note 15 – Segment, Geographic, and Significant Customer Information. Deferred revenue and financed unearned services revenue The following table summarizes the components of our deferred revenue and financed unearned services balance as reported in our condensed consolidated balance sheets (in millions):
|  | July 27, 2018 |  |  | April 27, 2018 |
Deferred product revenue |  | $ | 102 |  |  | $ | 107 |
Deferred services revenue |  |  | 3,046 |  |  |  | 3,134 |
Financed unearned services revenue |  |  | 112 |  |  |  | 122 |
Total |  | $ | 3,260 |  |  | $ | 3,363 |
Reported as: |  |  |  |  |  |  |  |
Short-term |  | $ | 1,623 |  |  | $ | 1,712 |
Long-term |  |  | 1,637 |  |  |  | 1,651 |
Total |  | $ | 3,260 |  |  | $ | 3,363 |
Deferred product revenue represents unrecognized revenue related to undelivered product commitments and other product deliveries that have not met all revenue recognition criteria. Deferred services revenue represents customer payments made in advance for services, which include software and hardware maintenance contracts and other services. Financed unearned services revenue represents undelivered services for which cash has been received under certain third-party financing arrangements. See Note 16 – Commitments and Contingencies for additional information related to these arrangements. The following tables summarize the activity related to deferred revenue and financed unearned services revenue (in millions):
|  | Three Months Ended |
|  | July 27, 2018 |  |  | July 28, 2017 |
Balance at beginning of period |  | $ | 3,363 |  |  | $ | 3,213 |
Additions |  |  | 511 |  |  |  | 497 |
Revenue recognized during the period |  |  | (614 | ) |  |  | (583 | )
Balance at end of period |  | $ | 3,260 |  |  | $ | 3,127 |
During the three months ended July 27, 2018 and July 28, 2017, we recognized $561 million and $528 million, respectively, that was included in the deferred revenue and financed unearned services revenue balance at the beginning of the respective periods. As of July 27, 2018, the aggregate amount of the transaction price allocated to the remaining performance obligations related to customer contracts that are unsatisfied or partially unsatisfied was $3,260 million, which is equivalent to our deferred revenue and unearned services revenue balance. Because customer orders are typically placed on an as-needed basis, and cancellable without penalty prior to shipment, orders in backlog may not be a meaningful indicator of future revenue and have not been included in this amount. We expect to recognize as revenue approximately 50% of our deferred revenue and financed unearned services revenue balance in the next 12 months, approximately 26% in the next 13 to 24 months, and the remainder thereafter. Deferred commissions As a result of our adoption of ASC 606 in the first quarter of fiscal 2019, we capitalize sales commissions that are incremental direct costs of obtaining customer contracts for which revenue is not immediately recognized and classify them as current or non-current based on the terms of the related contracts. Capitalized commissions are amortized based on the transfer of goods or services to which they relate, typically over one to three years, and are also periodically reviewed for impairment. Amortization expense is recorded to sales and marketing expense in our condensed consolidated statements of operations. The following tables summarize the activity related to deferred commissions and their balances as reported in our condensed consolidated balance sheets (in millions):
|  | Three Months Ended |
|  | July 27, 2018 |  |  | July 28, 2017 |
Balance at beginning of period |  | $ | 137 |  |  | $ | 113 |
Additions |  |  | 19 |  |  |  | 18 |
Expense recognized during the period |  |  | (21 | ) |  |  | (15 | )
Balance at end of period |  | $ | 135 |  |  | $ | 116 |
|  | July 27, 2018 |  |  | April 27, 2018 |
Other current assets |  | $ | 64 |  |  | $ | 66 |
Other non-current assets |  |  | 71 |  |  |  | 71 |
Total deferred commissions |  | $ | 135 |  |  | $ | 137 |

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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://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 606 -URI http://asc.fasb.org/topic&trid=49130388 Reference 2: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -URI http://asc.fasb.org/topic&trid=2122369 + Details
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