REVENUE, DEFERRED REVENUE AND DEFERRED COMMISSIONS

Wireless Revenue

Wireless revenue consists of two primary components: paging revenue and product and other revenue. Paging revenue consists primarily of recurring fees associated with the provision of messaging services and fees for paging devices and is net of a provision for service credits. Product and other revenue reflects system sales, the sale of devices and charges for paging devices that are not returned and are net of anticipated credits. Our core offering includes subscriptions to one-way or two-way messaging services for a periodic (monthly, quarterly, semiannual, or annual) service fee. This is generally based upon the type of service provided, the geographic area covered, the number of devices provided to the customer and the period of commitment. A subscriber to one-way messaging services may select coverage on a local, regional or nationwide basis to best meet their messaging needs. Two-way messaging is generally offered on a nationwide basis. In addition, subscribers either contract for a messaging device from us for an additional fixed monthly fee or they own a device, having purchased it either from us or from another vendor. We also sell devices to resellers who lease or resell devices to their subscribers and then sell messaging services utilizing our networks. We offer ancillary services, such as voicemail and equipment loss or maintenance protection, which help increase the monthly recurring revenue we receive along with these traditional messaging services. In 2015 and 2016 we launched new and exclusive one-way (T5) and two-way (T52) alphanumeric pagers, respectively. Both pagers are configurable to support un-encrypted or encrypted operation. When configured for encryption, they utilize AES-128 bit encryption, screen locking and remote wipe capabilities. With encryption enabled these new secure paging devices enhance our service offerings to the healthcare community by adding Health Insurance Portability and Accountability Act ("HIPAA") security capabilities to the low cost, highly reliable and availability benefits of paging. (See Item 1. “Business,” for more details.)

Software Revenue

Software revenue consists of two primary components: operations revenue and maintenance revenue. Operations revenue consists primarily of license revenues for our healthcare communications solutions, equipment revenues that facilitate the use of our software solutions, and professional services revenue related to the implementation of our solutions. Maintenance revenue is for ongoing support of our software solutions or related equipment (typically for one year). Our software licenses and hardware are generally recognized at a point in time when we have transferred control to the customer. For software licenses, revenue is not recognized until the related license(s) has been made available to the customer and the customer can begin to benefit from its right to use the license(s). Our software licenses represent a right to use Spok’s IP as it exists at a point in time at which the license is granted. Many of our software licenses have significant standalone functionality due to their ability to process a transaction or perform a function or task, and we do not need to maintain those products, once provided to the customer, for value to exist. While the functionality of IP that we license may substantively change during the license period, customers are not contractually or practically required to update their license as a result of those changes. Our wireless, professional and maintenance services are generally recognized over time due to a customer's simultaneous receipt and consumption of the benefit as we perform the work. As we transfer control over time, we recognize revenue based on the extent of progress towards completion of the performance obligation. The selection of the method to measure progress towards completion requires significant judgment and is based on the nature of the products or services to be provided. Generally, we use the time-elapsed measure of progress for performance obligations which include wireless or maintenance services. We believe this method best depicts the simultaneous transfer and consumption of the benefit based on our performance as these services are generally considered standby services. For professional services, we leverage an input methodology based on the number of hours worked on a project versus the total expected hours necessary to complete the project. Revenues are recognized proportionally as hours are incurred.

Revenue Recognition

Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.

The following table presents our revenues disaggregated by revenue type:



	For the Twelve Months Ended December 31,
(Dollars in thousands)	2018		2017⁽¹⁾		2016⁽¹⁾
Wireless products and services	$	94,277	$	101,188	$	109,590
License	13,042		9,541		8,832
Professional services	18,091		17,630		18,594
Equipment	4,995		4,147		5,472
Maintenance	39,069		38,669		37,073
Total revenue	$	169,474	$	171,175	$	179,561

⁽¹⁾Prior period amounts have not been adjusted under the modified retrospective method for the adoption of ASC 606.

The Company is currently structured as a single operating (and reportable) segment, a clinical communication and collaboration business. The U.S. was the only country that accounted for more than 10% of the Company’s total revenue for the years ended December 31, 2018, 2017 and 2016. Revenue generated in the U.S. and internationally consisted of the following for the periods stated:



	For the Twelve Months Ended December 31,
(Dollars in thousands)	2018		2017⁽¹⁾		2016⁽¹⁾
Revenue
United States	$	164,558	$	166,790	$	173,852
International	4,916		4,385		5,709
Total revenue	$	169,474	$	171,175	$	179,561

⁽¹⁾Prior period amounts have not been adjusted under the modified retrospective method for the adoption of ASC 606.

Deferred Revenues

Our deferred revenues represent payments made to, or due from, customers in advance of our performance. Changes in the balance of total deferred revenue during the twelve months ended December 31, 2018 are as follows:



(Dollars in thousands)	December 31, 2017⁽²⁾		Additions		Revenue Recognized⁽¹⁾			December 31, 2018
Deferred Revenue	$	29,920	$	67,914	$	(71,073	)	$	26,761

⁽¹⁾Includes $4.6 million which went to retained earnings and was not recognized as revenue resulting from the adoption of ASC 606.

⁽²⁾Includes a $2.6 million adjustment to deferred revenue. Refer to Note 1, "Organization and Significant Accounting Policies", for additional details.

During the twelve months ended December 31, 2018, the Company recognized $20.4 million of revenue related to amounts deferred as of December 31, 2017.

Deferred Commissions

Our deferred commissions represent payments made to employees in advance of our performance on the related underlying contracts. These costs have been incurred directly in relation with obtaining a contract. As such, these costs are amortized over the estimated period of benefit. Changes in the balance of total deferred commissions during the twelve months ended December 31, 2018 are as follows:



(Dollars in thousands)	December 31, 2017		Additions⁽¹⁾			Commissions Recognized		December 31, 2018
Deferred Commissions	$	1,676	$	(5,434	)	$	6,152	$	2,394

⁽¹⁾Includes $0.7 million in previously recognized commissions expense which was removed from retained earnings and included in deferred commissions resulting from the adoption of ASC 606.

Deferred commissions are included within prepaid assets on the Consolidated Balance Sheets and commissions expense is included within Selling and marketing on the Consolidated Statement of Operations.

Remaining Performance Obligations

We have elected not to disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less and for variable consideration which is allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied promise to transfer a distinct good or service that forms part of a single performance obligation. The remaining backlog is immaterial to our Consolidated Financial Statements.