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	December 29, 2018		December 29, 2018		December 30, 2017
	(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.