Note 3. Revenue from Contracts with Customers

On January 1, 2018, the Company adopted the new accounting standard Revenue from Contracts with Customers using the modified retrospective transition method. The Company has elected to apply the new standard to contracts that were considered “open” as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under the new accounting standard, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under previous guidance. Upon adoption, an initial cumulative effect adjustment of $1.8 million increase was recorded to opening accumulated deficit and a $2.7 million increase in shareholder’s equity attributable to noncontrolling interest.

Revenue Recognition

ARRIS generates revenue from varying activities, including the delivery of stand-alone equipment, custom design and installation services, and bundled sales arrangements inclusive of equipment, software and services. Revenue is recognized when performance obligations in a contract are satisfied through the transfer of control of the good or service at an amount of consideration expected to receive. The following are required before revenue is recognized.

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Identify the contract with the customer. A variety of arrangements are considered contracts; however, these are usually the Master Purchase Agreement and amendments or customer purchase orders.

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Identify the performance obligations in the contract. Performance obligations are identified as promised goods or services in an arrangement that are distinct.

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Determine the transaction price. Transaction price is the amount of consideration the Company expects in exchange for transferring the promised goods or services. The consideration may include fixed or variable amounts or both.

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Allocate the transaction price to the performance obligations. The transaction price is allocated to the performance obligations on a relative standalone selling price basis.

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Recognize revenue as the performance obligations are satisfied. Revenue is recognized when transfer of control of the promised goods or services has occurred. This is either at a point in time or over time.

Revenue is deferred for any performance obligations in which payment is received or due prior to the transfer of control of the good or service.

Equipment – For the N&C and CPE segments, the Company provides customers with equipment that can be placed within various stages of a broadband system that enable delivery of telephony, video and high-speed data as well as outside plant construction and maintenance equipment. For the Enterprise segment, equipment sales include products for wireless and wired connections to data networks. For equipment sales, revenue is recognized when control of the product has transferred to the customer. This is generally at a point in time when products have been shipped, right to payment has normally been obtained, and risk of loss has been transferred. Additionally, based on historical experience, ARRIS has established reliable estimates related to sales returns and other allowances for discounts. These estimates are recorded as a reduction to revenue at the time the revenue is recognized.

ARRIS’s equipment deliverables typically include proprietary operating system software, which isn’t considered separately identifiable. Therefore, ARRIS’s equipment deliverables are considered one distinct performance obligation.

Multiple Performance Obligation Arrangements – Certain customer transactions may include multiple performance obligations based on the bundling of equipment, software and services. When a multiple performance obligation arrangement exists, the transaction price is allocated to the performance obligations, and revenue is recognized on a relative standalone selling price basis upon transfer of control.

To determine the standalone selling price (“SSP”), the Company first looks to establish SSP through an observable price when the good or service is sold separately in similar circumstances. If SSP cannot be established through an observable price, the Company will estimate the SSP considering market conditions, customer specific factors, and customer class. The Company typically uses a combination of approaches to estimate SSP.

Software Sold Without Tangible Equipment – ARRIS sells functional intellectual property (“IP”) licenses that typically do not meet the criteria to be recognized over time. Revenue from a functional IP license is most commonly recognized upon delivery of the license/software to the customer.

Standalone Services – Installation, training, and professional and support services are recognized as control of the services transfer to the customer. This is either over time or at a point in time depending on the details of the arrangement and the timing of when the customer can direct the use of and obtain substantially all the remaining benefits from the services provided. Each performance obligation that is recognized over time will be measured based on progress to complete satisfaction of the performance obligation. The objective, when measuring progress, is to depict our performance in transferring control of the goods or services. Based on specific facts and circumstances, we use output methods (milestones reached, time elapsed, units produced) or input methods (resources consumed, labor hours expended, costs incurred relevant to the entire project) to measure our progress toward satisfying the performance obligation. The support services will be recognized over time using a time elapsed method (i.e. ratably).

Incentives – Customer incentive programs that include consideration, primarily rebates/credits to be used against future product purchases and certain volume discounts, are classified as variable consideration and reduce the overall transaction price.

Value Added Resellers (VAR), Distribution Channels and Retail – ARRIS recognizes revenue upon transfer of control of the goods or services to the VAR, Distributors and Retail customers. Sales through retail and distribution channels are made primarily under agreements or commitments allowing for limited rights of return, primarily for stock rotation purposes, and include various sales incentive programs, such as back-end rebates, discounts, marketing development funds, price protection, and volume incentives.

Enterprise sales distributors are granted rights of stock rotation that are limited to contractually specified percentage of the distributors aggregate purchase volume. These stock rotation rights are subject to expiration 180 days from the time of product shipment by us to the distributor. Upon shipment of the product, ARRIS reduces revenue for an estimate of potential future stock rotation returns related to the current period product revenue. ARRIS analyzes historical returns, channel inventory levels, current economic trends and changes in customer demand for our products when evaluating the adequacy of the allowance for sales returns, namely stock rotation returns.

Regarding the various sales incentive programs, the Company can reasonably estimate its backend rebates, discounts and similar incentives due to an established sales history with its customers and records the estimated reserves and allowances at the time the related revenue is recognized. The Company recognizes marketing development funds at the later of when the related revenue is recognized, or the program is offered to the channel partner. ARRIS’s sales incentives to its channel partners are recorded as a reduction to revenue.

ARRIS’s estimated allowances for returns due to stock rotation and various sales incentive programs can vary from actual results that could materially impact our financial position and results of operations. Based on the relevant facts and circumstances, the Company believes the methodologies applied to calculate these reserves fairly represents our expected results at the point in time in which they are made.

Disaggregation of Revenue

The following table summarizes the revenues from contracts with customers by major product line for the three and six months ended June 30, 2018 (in thousands):


	Three months ended June 30, 2018			Six months ended June 30, 2018
CPE:
Broadband CPE	$	405,082		$	728,367
Video CPE		603,049			1,154,990

Sub-total		1,008,131			1,883,357

Network & Cloud:
Networks		479,386			932,387
Software and services		70,110			155,373

Sub-total		549,496			1,087,760

Enterprise Networks:
Enterprise Networks		172,240			342,154
Other:
Other		(3,327	)		(9,021	)

Total net sales	$	1,726,540		$	3,304,250

Customer Premises Equipment — The CPE segment’s product solutions include Broadband products, such as DSL and DOCSIS gateways and modems, and Video products, such as video gateways, clients and set-tops, that enable service providers to offer voice, video and high-speed data services to residential and business subscribers.

Network & Cloud — The N&C segment’s product solutions include cable modem termination system, video infrastructure, distribution and transmission equipment and cloud solutions that enable facility-based service providers to construct a state-of-the-art residential and metro distribution network. The portfolio also includes a full suite of global services that offer technical support, professional services and system integration offerings to enable solution sales of ARRIS’s end-to-end product portfolio.

Enterprise Networks — The Enterprise Networks segment focuses on enabling constant, wireless and wired connectivity across complex and varied networking environments. It offers dedicated engineering, sales and marketing resources to serve customers across a spectrum of enterprises—including hospitality, education, smart cities, government, venues, service providers and more.

The following table summarizes the revenues from contracts with customers by geographic areas for the three and six months ended June 30, 2018 (in thousands):


	For the three months ended June 30, 2018
	CPE		N&C		Enterprise		Other ⁽¹⁾			Total
Domestic – U.S.	$	540,452	$	345,828	$	111,967	$	(4,404	)	$	993,843
Americas, excluding U.S.		220,350		105,981		1,770		(8	)		328,093
Asia Pacific		29,081		39,578		23,477		(39	)		92,097
EMEA		218,248		58,109		35,026		1,124			312,507

Total international		467,679		203,668		60,273		1,077			732,697

Total net revenues	$	1,008,131	$	549,496	$	172,240	$	(3,327	)	$	1,726,540


	For the six months ended June 30, 2018
	CPE		N&C		Enterprise		Other ⁽¹⁾			Total
Domestic – U.S.	$	1,014,614	$	672,311	$	207,682	$	(7,606	)	$	1,887,001
Americas, excluding U.S.		376,213		199,881		7,622		(5	)		583,711
Asia Pacific		51,205		95,343		53,102		(39	)		199,611
EMEA		441,325		120,225		73,748		(1,371	)		633,927

Total international		868,743		415,449		134,472		(1,415	)		1,417,249

Total net revenues	$	1,883,357	$	1,087,760	$	342,154	$	(9,021	)	$	3,304,250

(1)

Adjustments include acquisition accounting impacts related to deferred revenue

Impact of New Revenue Guidance on Financial Statement Line Items

The following table compares the reported condensed balance sheet and statement of operations, as of and for the three and six months ended June 30, 2018, to the pro-forma amounts had the previous guidance been in effect (in thousands):


	As reported June 30, 2018		Pro forma – as if previous accounting guidance was in effect
Assets
Accounts receivable	$	1,183,360	$	1,163,234
Other current assets		196,014		195,950
Deferred income taxes		146,443		140,831
Liabilities
Deferred revenue (current and non-current)	$	181,823	$	190,220


	Three Months Ended June 30, 2018						Six Months Ended June 30, 2018
	As reported			Pro-forma			As reported			Pro-forma
Revenues
Net sales	$	1,726,540		$	1,714,584		$	3,304,250		$	3,275,727
Costs and expenses
Cost of sales	$	1,227,785		$	1,227,785		$	2,329,812		$	2,329,876
Income tax (benefit) expense		(9,944	)		(6,964	)		(6,454	)		(843	)
Consolidated net income (loss)		34,799			19,863			17,766			(16,432	)
Net loss attributable to non-controlling interest		(955	)		(1,540	)		(4,388	)		(5,130	)
Net income (loss) attributable to ARRIS International plc		35,754			21,403			22,154			(11,302	)
Net income (loss) per ordinary share:
Basic	$	0.19		$	0.12		$	0.12		$	(0.06	)
Diluted	$	0.19		$	0.12		$	0.12		$	(0.06	)

Pro-forma net sales were $12.0 million and $28.5 lower than actual net sales in the statements of operations for the three and six months ended June 30, 2018, respectively, largely due to license revenue that is currently being recognized upon delivery of the license as opposed to recognizing ratably over the license term.

Other

Contract Assets and Liabilities – When payments from customers are received in advance of performance, the Company records a contract liability (deferred revenue). When the Company fulfills performance obligations prior to being able to invoice the customer, a contract asset (unbilled receivables) is recorded. Additionally, the balances for these are calculated at the contract level on a net basis.

The unbilled receivables are included in Accounts Receivable on the unaudited Consolidated Balance Sheets. As of June 30, 2018, the Company has unbilled receivables of $37.2 million.

The changes in the contract asset account relate to license revenue is now being recognized upon delivery instead of being recognized ratably over the license term.

The following table summarizes the changes in deferred revenue for the six months ended of June 30, 2018 (in thousands)


Opening balance at January 1, 2018	$	168,757
Deferral of revenue		106,506
Recognition of unearned revenue		(92,470	)
Other		(970	)

Balance at June 30, 2018	$	181,823

As of the end of the current reporting period, the aggregate amount of the transaction price allocated to performance obligations that are unsatisfied that have a duration of one year or more was $64.8 million. The majority of ARRIS’ contracts that have performance obligations that are unsatisfied are part of contracts have a duration of one year or less.

Practical Expedients

Sales commissions are incremental contract acquisition costs which are expected to be recovered. The Company has elected to recognize these expenses as incurred due to the amortization period of these costs being one year or less.

Costs to obtain or fulfill a contract are incremental costs that are expected to be recovered. The Company has elected to recognize these expenses as incurred due to the amortization period of these costs being one year or less. Costs to obtain a contract that would have been incurred regardless of whether the contract was obtained are recognized in expense when incurred.

The Company has elected not to adjust the promised amount of consideration for the effects of a significant financing component when it expects, at contract inception, that the period between when ARRIS transfers a promised good or service to a customer, and when the customer pays will be one year or less.

The Company has elected the expedient that states an entity does not need to evaluate whether shipping and handling activities are promised services to its customers. If revenue is recognized for the related good before the shipping and handling activities occur, the related costs of those shipping and handling activities are accrued.

The Company has also elected to exclude from the transaction price certain types of taxes collected from a customer and remitted to a third-party (e.g., governmental agency), including sales, use and value-added taxes. As a result, revenue is presented net of these taxes.

Additionally, the Company has elected for contracts that were modified before the beginning of the earliest reporting period to reflect the aggregate effect of all modifications when identifying the satisfied and unsatisfied performance obligations, determining the transaction price, and allocating the transaction price.