Revenue, Deferred Revenue and Deferred Commissions | Revenue, Deferred Revenue and Deferred Commissions The Company adopted ASC 606 effective January 1, 2018 using the full retrospective method, which required the Company to restate each prior reporting period presented to be consistent with the standard. The most significant impact to revenue recognized related to the accounting for the sale of ForeScout Extended Modules and to a lesser extent the sale of ForeScout CounterACT. ForeScout’s software products include ForeScout CounterACT, ForeScout Extended Modules, CounterACT Virtual Appliances, and CounterACT Enterprise Manager Virtual Appliance ("Software Products"). ForeScout’s hardware products include hardware that is sold separately that is used with ForeScout CounterACT, CounterACT Appliance which are hardware appliances that are embedded with ForeScout CounterACT, and CounterACT Enterprise Manager Appliance (“Hardware Products”). Under previously reported GAAP, the Company established Vendor Specific Objective Evidence (“VSOE”) for professional services, and support and maintenance on Software Products, except Extended Modules, beginning January 1, 2016. Under previously reported GAAP, Software Product related revenue was recognized ratably over the contractually committed support and maintenance period when VSOE was not established. Professional services sold in conjunction with such Software Products were also recognized ratably over the contractually committed support and maintenance period. Under ASC 606, the requirement to have VSOE for undelivered elements is eliminated and the Company now generally recognizes Software Product revenue at the time of delivery, and any related professional services revenue as services are provided to the customers. Further, revenue allocated from future deliverables (primarily support and maintenance) to Hardware Products is now recognized upon delivery under ASC 606 when the standalone selling price is different from the contract price. Under previously reported GAAP, such differences were recognized over the contractual support and maintenance period. Additionally, ASC 606 requires the capitalization of costs to obtain a contract, primarily sales commissions, and the amortization of these costs over the contract period or estimated customer life, which resulted in the recognition of a deferred charge on the Company's condensed consolidated balance sheets. Under previously reported GAAP, the Company expensed all sales commissions and other incremental costs to acquire contracts as they were incurred. Impacts on Financial Statements The Company adjusted its 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 (in thousands): December 31, 2017 As Previously Reported Impact of Adoption As Adjusted Assets Accounts receivable $ 65,428 $ (742 ) $ 64,686 Deferred commission - current $ — $ 10,957 $ 10,957 Prepaid expenses and other current assets $ 8,655 $ 558 $ 9,213 Deferred commission - non-current $ — $ 21,795 $ 21,795 Other assets $ 2,002 $ 488 $ 2,490 Liabilities and stockholders' equity (deficit) Deferred revenue - current $ 98,027 $ (18,396 ) $ 79,631 Deferred revenue - non-current $ 64,731 $ (9,503 ) $ 55,228 Accumulated deficit $ (497,376 ) $ 60,955 $ (436,421 ) Select condensed consolidated statement of operations line items, which reflect the adoption of ASC 606, are as follows (in thousands): March 31, 2017 As Previously Reported Impact of Adoption As Adjusted Revenue: Product $ 22,105 $ (1,797 ) $ 20,308 Maintenance and professional services $ 22,248 $ (380 ) $ 21,868 Cost of revenue: Product $ 4,411 $ (319 ) $ 4,092 Operating expenses: Sales and marketing $ 34,454 $ 591 $ 35,045 Loss from operations $ (23,105 ) $ (2,449 ) $ (25,554 ) Net loss $ (24,621 ) $ (2,449 ) $ (27,070 ) Net loss per share attributable to common stockholders, basic and diluted $ (4.16 ) $ (0.41 ) $ (4.57 ) Unaudited revenue by geographic area based on the billing address of the customer, which reflects the adoption of ASC 606, is as follows (in thousands): Three Months Ended March 31, 2017 As Previously Reported Impact of Adoption As Adjusted Revenue: Americas United States $ 34,337 $ (889 ) $ 33,448 Other Americas 1,322 (123 ) 1,199 Total Americas 35,659 (1,012 ) 34,647 Europe, Middle East, and Africa (“EMEA”) 6,063 (848 ) 5,215 Asia Pacific and Japan (“APJ”) 2,631 (317 ) 2,314 Total revenue $ 44,353 $ (2,177 ) $ 42,176 The adoption of ASC 606 impacted certain line items in the cash flows from operating activities as follows (in thousands): Three Months Ended March 31, 2017 As Previously Reported Impact of Adoption As Adjusted Cash flows from operating activities: Net loss $ (24,621 ) $ (2,449 ) $ (27,070 ) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Deferred commission $ — $ 382 $ 382 Prepaid expenses and other current assets $ (1,519 ) $ (272 ) $ (1,791 ) Other assets $ 69 $ 163 $ 232 Deferred revenue $ 325 $ 2,176 $ 2,501 For each significant customer, both of which are distributors, accounts receivable as a percentage of total accounts receivable, which reflects the adoption of ASC 606, is as follows: December 31, 2017 As Previously Reported Impact of Adoption As Adjusted Customers Customer A 32 % 1 % 33 % Customer B 17 % — % 17 % Revenue Recognition The Company derives its revenue from sales of products and associated maintenance and professional services. The Company offers its solution across two product groups: ForeScout CounterACT and ForeScout Extended Modules. The Company’s portfolio of Extended Modules are sold as software add-ons to ForeScout CounterACT. ForeScout’s software products include ForeScout CounterACT, ForeScout Extended Modules, CounterACT Virtual Appliances, and CounterACT Enterprise Manager Virtual Appliance. ForeScout’s hardware products include hardware that is sold separately that is used with ForeScout CounterACT, CounterACT Appliance, which are hardware appliances that are embedded with ForeScout CounterACT, and CounterACT Enterprise Manager Appliance. All of the Company’s products are sold with a perpetual license. Following the adoption of ASC 606, the Company determines revenue recognition through the following steps, which are described in more detail below: • Identification of the contract, or contracts, with a customer — A contract with a customer exists when (i) the Company enters 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) the Company determines 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. The Company applies 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. The Company’s payment terms typically range between 30 to 90 days. • Identification of the performance obligation(s) 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 services either on their own or together with other resources that are readily available from third parties or from the Company, 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, the Company applies judgment to determine whether promised goods or services are capable of being distinct, and are 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 that the Company will be entitled to in exchange for transferring goods or services to the customer. In determining the transaction price, the Company considers uncertainties such as historical rates of product returns and/or concessions. • Allocation of the transaction price to the performance obligation(s) 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 ("SSP") basis. The Company determines 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, the Company estimates 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, a performance obligation is satisfied — The Company satisfies 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. The following describes the nature of the Company’s primary types of revenue and the revenue recognition policies as they pertain to the types of transactions the Company enters into with its customers. Product Revenue Product revenue consists of sales of ForeScout CounterACT, which are sold as Software Products and Hardware Products, and ForeScout Extended Modules, and are recognized at the time of transfer of control, which is generally upon shipment, provided that all other revenue recognition criteria have been met. Support and Maintenance Revenue The majority of the products are sold with a support and maintenance contract. Support and maintenance contracts are generally offered as renewable, fixed fee contracts where payments are typically due in advance and generally have a term of one or three years, but can be up to five years. Support and maintenance revenue is recognized ratably over the term of the support and maintenance contract and any unearned support and maintenance revenue is included in deferred revenue. Professional Services Revenue Professional services revenue is derived primarily from customer fees for optional installation of the Company's products or training. Generally, the Company recognizes revenue for professional services as the services are performed. Contract Costs The Company capitalizes contract origination costs that are incremental and recoverable costs of obtaining a contract with a customer. The Company expects that sales commissions and associated payroll taxes and third-party referral fees related to customer contracts are both incremental and recoverable. The contract origination costs are capitalized and amortized to sales and marketing expense when the related performance obligations are met. Incremental contract origination costs relating to products are expensed as the related products are delivered. Incremental contract origination costs relating to support and maintenance contracts are capitalized and amortized over either the contractual performance period or on a straight-line basis over the average customer life of five years, depending on whether the costs relate to a specific support and maintenance contract or the customer relationship. The Company determines its average customer life by taking into consideration its customer contracts, technology, and other factors. Capitalized costs are periodically reviewed for impairment. Capitalized contract costs were $33.3 million and $33.8 million as of March 31, 2018 and December 31, 2017 , respectively. For the three months ended March 31, 2018 , amortization expense for the contract costs was $4.2 million , and there was no impairment loss in relation to the costs capitalized. For the three months ended March 31, 2017 , amortization expense for the contract costs was $3.2 million , and there was no impairment loss in relation to the costs capitalized. Revenue from Contracts with Customers Contract Assets and Contract Liabilities A contract asset is a right to consideration in exchange for products or services that the Company has transferred to a customer when that right is conditional and is not just subject to the passage of time. The Company has no material contract assets. A receivable will be recorded on the condensed consolidated balance sheets when the Company has unconditional rights to consideration. A contract liability is an obligation to transfer products or services for which the Company has received consideration, or for which an amount of consideration is due from the customer. Contract liabilities include customer deposits under cancelable contracts and current and non-current deferred revenue balances. The Company’s contract balances are reported in a net contract asset or liability position on a contract-by-contract basis at the end of each reporting period. Significant changes in contract liabilities during the period are as follows (in thousands): Contract Liabilities January 1, 2018 $ 135,866 Additions 94,133 Revenue recognized (59,834 ) March 31, 2018 $ 170,165 During the three months ended March 31, 2018 , the Company recognized $27.6 million pertaining to amounts deferred as of December 31, 2017 . During the three months ended March 31, 2017 , the Company recognized $17.5 million pertaining to amounts deferred as of December 31, 2016 . Contract modifications entered into during the three months ended March 31, 2018 did not have a significant impact on the Company’s contract assets or contract liabilities. Performance Obligations The majority of the 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, certain customer deposits, 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 $176.1 million as of March 31, 2018 , of which the Company expects to recognize approximately 61% of the revenue over the next 12 months and the remainder thereafter. Practical Expedients The Company does not disclose the value of consideration associated with unsatisfied or partially unsatisfied performance obligations for contracts for which the Company recognizes revenue at the amount to which it will have the right to invoice for services performed. The Company also reflects the aggregate effect of all modifications to a contract that occurred before the earliest period presented instead of retrospectively restating contracts for all previous contract modifications. Disaggregation of Revenue The Company generates revenue from the sale of Software Products, Hardware Products, support and maintenance, and professional services. 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 the Company evaluates its financial performance (in thousands): Three Months Ended March 31, Revenue: 2018 2017 Software products $ 15,802 $ 6,748 Hardware products 13,978 13,560 Support and maintenance 26,359 18,876 Professional services 3,558 2,992 Total revenue $ 59,697 $ 42,176 |