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REVENUE, DEFERRED REVENUE AND DEFERRED COMMISSIONS | 3 Months Ended
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Oct. 31, 2017
Revenue Recognition and Deferred Revenue [Abstract] |
REVENUE, DEFERRED REVENUE AND DEFERRED COMMISSIONS | REVENUE, DEFERRED REVENUE AND DEFERRED COMMISSIONS Revenue Recognition—Effective August 1, 2017, we adopted ASC 606 using the full retrospective method, which required us to restate our historical financial information to be consistent with the standard. The most significant impact of the standard related to the timing of revenue recognition for certain software licenses sold with post contract customer support, or PCS, for which we did not have vendor specific objective evidence, or VSOE, of fair value under the previous revenue recognition guidance. Under the new standard, 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 has also resulted in differences in the timing of recognition of contract costs, such as sales commissions, as well as the corresponding impacts to provision for income taxes. The adoption of the standard had no significant impact to the provision for income taxes and had no impact to the net cash from or used in operating, investing, or financing on our condensed consolidated statements of cash flows. See ASC 606 Adoption Impact to Reported Results below for the impact of adoption of the standard on our condensed consolidated balance sheets 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. Select condensed consolidated balance sheet line items, which reflects the adoption of ASC 606, are as follows:
Balance Sheet: | 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 Select unaudited condensed consolidated statement of operations line items, which reflects the adoption of ASC 606, are as follows:
| Three Months Ended October 31, 2016
| As Previously Reported |  | Impact of Adoption |  | As Adjusted
Revenue | (in thousands, except per share data)
Product | $ | 129,657 |  |  | $ | 23,879 |  |  | $ | 153,536 |
Support and other services | 37,152 |  |  | (2,127 | ) |  | 35,025 |
Total revenue | $ | 166,809 |  |  | $ | 21,752 |  |  | $ | 188,561 |
Gross profit | $ | 97,047 |  |  | $ | 21,752 |  |  | $ | 118,799 |
Operating expenses |  |  |  |  |
Sales and marketing expenses | $ | 128,775 |  |  | $ | (150 | ) |  | $ | 128,625 |
Loss from operations | $ | (136,381 | ) |  | $ | 21,902 |  |  | $ | (114,479 | )
Net Loss | $ | (162,169 | ) |  | $ | 21,867 |  |  | $ | (140,302 | )
Basic and diluted net loss per share | $ | (2.18 | ) |  | $ | 0.29 |  |  | $ | (1.89 | )
Unaudited revenue by geographic location based on bill-to location, which reflects the adoption of ASC 606, are as follows:
| Three Months Ended October 31, 2016
| As Previously Reported |  | Impact of Adoption |  | As Adjusted
| (in thousands)
U.S. | $ | 102,871 |  |  | $ | 3,297 |  |  | $ | 106,168 |
Europe, the Middle East and Africa | 24,248 |  |  | 1,168 |  |  | 25,416 |
Asia-Pacific | 28,908 |  |  | 16,939 |  |  | 45,847 |
Other Americas | 10,782 |  |  | 348 |  |  | 11,130 |
Total revenue | $ | 166,809 |  |  | $ | 21,752 |  |  | $ | 188,561 |
The adoption impacted certain line items in the cash flows from operating activities as follows:
| Three Months Ended October 31, 2016
| As Previously Reported |  | Impact of Adoption |  | As Adjusted
Cash flows from operating activities: | (in thousands)
Net loss | $ | (162,169 | ) |  | $ | 21,867 |  |  | $ | (140,302 | )
Adjustments to reconcile net loss to net cash provided by operating activities: |  |  |  |  |
Deferred commissions | $ | (4,630 | ) |  | $ | (150 | ) |  | $ | (4,780 | )
Accrued expenses and other liabilities | $ | 682 |  |  | $ | 35 |  |  | $ | 717 |
Deferred revenue | $ | 72,958 |  |  | $ | (21,752 | ) |  | $ | 51,206 |
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 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 service either on its 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, or SSP, 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.
• | 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 by transferring 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 stand-alone basis, PCS and professional services. A substantial portion of our revenue is generated via channel partners. We also sell our software solution through our OEM partners, Dell Technologies and Lenovo Group Ltd. These OEMs embed our software in their own hardware and we provide limited PCS on these transactions. All revenue recognized in the condensed consolidated statement of operations is considered to be revenue from contracts with customers. The following table depicts the disaggregation of revenue according to revenue type and is consistent with how we evaluate our financial performance:
| Three Months Ended October 31,
| 2016 |  | 2017
| (in thousands)
Software revenue | $ | 104,745 |  |  | $ | 138,214 |
Hardware revenue | 48,791 |  |  | 80,838 |
Support and other services revenue | 35,025 |  |  | 56,500 |
Total revenue | $ | 188,561 |  |  | $ | 275,552 |
Software revenue —A substantial majority of our product revenue is generated from the sale of our software operating system, which is typically delivered on a hardware appliance that is configured to order, and can also be sold as stand-alone software, which is installed into our customers' separately procured hardware appliance. 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 our customers. 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. In transactions where our customers procure hardware from another source, such as through our OEM partners, directly from our contract manufacturers, or from other manufacturers of Nutanix compatible hardware, we consider ourselves to be an agent for the hardware appliance. 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 our customers. Support and other services revenue—We generate our support 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 our 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 stand-alone 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 October 31, 2017 is presented in the accompanying consolidated balance sheets. Costs to obtain and fulfill a contract—We capitalize certain contract acquisition costs consisting primarily of commissions paid and the related payroll taxes when customer contracts are signed. Commission expenses paid to sales personnel and the related payroll taxes that are incremental to obtaining customer contracts are capitalized. The deferred sales commission amounts are amortized based on the expected future revenue streams under the customer contracts. Amortization of deferred sales commissions is included in sales and marketing expense in the accompanying consolidated statements of operations. We classify deferred commissions as current or non-current based on the timing of when we expect to recognize the expense. The short-term portion of these costs is deferred and shown as "Deferred commissions -current" and the long-term portion is shown as "Deferred commissions-non-current" in the condensed consolidated balance sheets. These costs are periodically reviewed for impairment. Significant changes in the balance of total deferred commissions (contract asset) during the three months ended October 31, 2017 are as follows:
| As of July 31, 2017 *As Adjusted |  | Additions |  | Commissions Recognized |  | As of October 31, 2017
| (in thousands)
Deferred commissions | $ | 73,527 |  |  | $ | 33,807 |  |  | $ | (25,350 | ) |  | $ | 81,984 |
Of the $82.0 million total deferred commissions balance as of October 31, 2017, we expect to recognize approximately 32% as commission expense over the next 12 months and the remainder thereafter. 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 total deferred revenue (contract liability) during the three months ended October 31, 2017 are as follows:
| As of July 31, 2017 *As Adjusted |  | Additions |  | Revenue Recognized |  | As of October 31, 2017
| (in thousands)
Deferred revenue | $ | 369,056 |  |  | $ | 96,288 |  |  | $ | (56,500 | ) |  | $ | 408,844 |
* See details above for the summary of adjustments to deferred commission and deferred revenue as a result of the adoption of ASC 606. During the three months ended October 31, 2017, we recognized $49.6 million pertaining to amounts deferred as of July 31, 2017. During the three months ended October 31, 2016, we recognized $29.6 million pertaining to amounts deferred as of July 31, 2016. The majority of our contracted but not invoiced performance obligations are subject to cancellation terms. Revenue allocated to remaining performance obligations represent 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 $442.4 million as of October 31, 2017, of which we expect to recognize approximately 49% of the revenue over the next 12 months and the remainder thereafter.

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- Definition The entire disclosure for deferred revenues at the end of the reporting period, and description and amounts of significant changes that occurred during the reporting period. Deferred revenue is a liability as of the balance sheet date related to a revenue producing activity for which revenue has not yet been recognized. Generally, an entity records deferred revenue when it receives consideration from a customer before achieving certain criteria that must be met for revenue to be recognized in conformity with GAAP. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 430 -URI http://asc.fasb.org/topic&trid=2122452 + Details
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