| Revenue, Deferred Revenue and Commissions | Note 2: Revenue, Deferred Revenue and Commissions On February 1, 2018, the Company adopted Topic 606, Revenue from Contracts with Customers The new standard impacted revenue recognition timing on product sales made to certain channel partners, whereby revenue is now recognized when the Company delivers product to the channel partner (sell-in basis) rather than deferring recognition until resale by the partner to the end customer (sell-through basis). The adoption of the new standard also changed the treatment of sales commissions, whereby the Company now capitalizes its incremental costs of acquiring customer contracts and amortizes these deferred costs over the estimated customer life. Previously, all sales commissions were expensed as incurred. See below for further discussion of the Company’s updated significant accounting policies. As a result of adopting Topic 606, the February 1, 2018 beginning balance of accumulated deficit increased by $0.3 million, reflecting a net decrease to deferred revenue of approximately $1.0 million and corresponding adjustments to deferred inventory costs and other related accounts. Deferred commissions related to open contracts as of the adoption date were immaterial The following tables summarize the impact of adopting Topic 606 on the Company’s condensed consolidated statement of operations and balance sheet (in thousands, except per share amounts):
Statement of Operations:
Three Months Ended July 31, 2018
As Reported
Effect of Change
Balances without adoption of Topic 606
Total revenue
$
31,681
$
(218
)
$
31,463
Total cost of revenue
12,908
(189
)
12,719
Gross profit
18,773
(29
)
18,744
Sales and marketing expense
10,499
1,199
11,698
Net loss
(3,904
)
(1,228
)
(5,132
)
Net loss per share - basic and diluted
(0.20
)
(0.06
)
(0.26
)
Six Months Ended July 31, 2018
As Reported
Effect of Change
Balances without adoption of Topic 606
Total revenue
$
61,903
$
122
$
62,025
Total cost of revenue
25,192
113
25,305
Gross profit
36,711
9
36,720
Sales and marketing expense
19,394
2,261
21,655
Net loss
(7,589
)
(2,252
)
(9,841
)
Net loss per share - basic and diluted
(0.39
)
(0.11
)
(0.50
)
Balance Sheet:
As of July 31, 2018
As Reported
Effect of Change
Balances without adoption of Topic 606
Accounts receivable, net
$
3,103
$
407
$
3,510
Other current assets (1)
3,593
253
3,846
Other assets (2)
2,028
(1,719
)
309
Accrued expenses (3)
15,216
(162
)
15,054
Deferred revenue
15,117
1,050
16,167
Accumulated deficit
(98,812
)
(1,947
)
(100,759
) (1) Other current assets include deferred commissions and deferred inventory costs. (2) Other assets include non-current deferred commissions. (3) Accrued expenses include certain accrued sales incentives. The adoption of the new standard did not have any impact on net cash provided by or used in operating, investing and financing activities in the consolidated statements of cash flows. Revenue Recognition The Company derives its revenue from two sources: (1) subscription and services revenue, which are generated from sales of subscription plans for communications services and other connected services; and (2) product and other revenue. Subscriptions and services are sold directly to end-customers. Products are sold to end-customers through several channels, including but not limited to, distributors, retailers and resellers (collectively the “channel partners”), and Ooma sales representatives. Under Topic 606, the Company determines revenue recognition through the following steps:
•
identification of the contract(s) with a customer;
•
identification of the performance obligations in the contract;
•
determination of the transaction price;
•
allocation of the transaction price to the performance obligations in the contract; and
•
recognition of revenue when, or as, the Company satisfies a performance obligation Revenue is recorded net of any sales and telecommunications taxes collected from customers to be remitted to government authorities. Under Topic 606, the Company has maintained its policy to exclude these taxes from revenue. Revenue disaggregated by revenue source consisted of the following (in thousands):
Three Months Ended
Six Months Ended
July 31, 2018
July 31, 2017
July 31, 2018
July 31, 2017
Subscription and services revenue
$
28,426
$
25,206
$
55,738
$
49,306
Product and other revenue
3,255
2,981
6,165
6,459
Total revenue
$
31,681
$
28,187
$
61,903
$
55,765
No individual country outside of the United States represented 10% or more of total revenue for the periods presented. No single customer accounted for 10% or more of total revenue for the periods presented. Subscription and services revenue . Most of the Company’s revenue is derived from recurring subscription fees related to service plans such as Ooma Business, Ooma Residential and other communications services. All subscription revenue is recognized ratably over the contractual service term. The Company’s service plans are generally sold as monthly subscriptions; however, certain plans are also offered as annual subscriptions. The Company recognizes a small portion of its revenue on a point-in-time usage basis from services such as: prepaid international calls, directory assistance, and advertisements displayed through its Talkatone mobile application. Product and other revenue. Product and other revenue is generated from the sale of on-premise appliances and end-point devices, including shipping and handling fees for the Company’s direct customers, and to a lesser extent from porting fees that enable customers to transfer their existing phone numbers. The Company recognizes revenue from sales to direct end-customers and channel partners when it delivers the product or when all customer contractual provisions have been met, if any. The Company’s distribution agreements with channel partners typically contain clauses for price protection and right of return. Therefore, the amount of product revenue recognized is adjusted for any variable consideration, such as expected returns and customer sales incentives as described in “Sales allowances” below. Amounts billed to customers related to shipping and handling are classified as revenue. Shipping and handling costs are expensed as incurred and classified as cost of revenue . Multiple performance obligations. The Company’s contracts with customers typically contain multiple performance obligations that consist of product(s) and related communications services. For these contracts, the Company accounts for individual performance obligations separately if they are distinct. The contract transaction price is then allocated to the separate performance obligations on a relative stand-alone selling price (“SSP”) basis. The Company determines the SSP for its communications services based on observable historical stand-alone sales to customers, for which the Company requires that a substantial majority of selling prices fall within a reasonably narrow pricing range. The Company does not have a directly observable SSP for its on-premise appliance and end-point devices, and therefore establishes SSP based on its best estimates and judgments, considering company-specific factors such as pricing strategies, estimated product and other costs, and bundling and discounting practices. Sales allowances. Credits and/or rebates issued to customers for product returns and sales incentives are deemed to be variable consideration under Topic 606, which the Company estimates and records as a reduction to revenue at the point of sale. Product returns and customer sales incentives are estimated based on the Company’s historical experience, current trends and expectations regarding future experience. Trends are influenced by product life cycles, new product introductions, market acceptance of products, the type of customer, seasonality and other factors. Product return and sales incentive rates may fluctuate over time but are sufficiently predictable to allow the Company to estimate expected future amounts. If actual future returns and sales incentives differ from past experience, additional reserves may be required. As of July 31, 2018 and January 31, 2018, the Company had total reserves for product returns and customer sales incentives of $0.5 million and $0.6 million. Accounts Receivable Accounts receivable are stated at invoice value less estimated allowances for doubtful accounts, product returns and customer sales incentives. The Company records its allowances for doubtful accounts based upon assessment of several factors, including historical experience, aging of receivable balances and economic conditions. As of July 31, 2018 and January 31, 2018, the Company had allowances for doubtful accounts of $0.1 million. (See “Sales allowances” above regarding allowances for product returns and sales incentives.) Customers who represented 10% or more of the Company's net accounts receivable balance were as follows:
As of
July 31, 2018
January 31, 2018
Customer A
14
%
*
Customer B
*
10
%
*
Represented less than 10% of accounts receivable, net at the end of respective periods Customer Acquisition Costs T he Company recognizes an asset related to the costs incurred to obtain a contract if management expects to recover those costs and the Company would not have incurred those costs if the contract had not been obtained. Based on this policy, t he Company capitalizes its sales commissions and other costs paid to internal sales personnel, third-party sales entities and value-added resellers that are incremental to obtaining customer contracts. These deferred costs are then amortized on a systematic basis over the estimated customer life of five years, calculated based on both qualitative and quantitative factors, such as product life cycles and customer attrition. Amortization expense is included in sales and marketing expenses in the accompanying condensed consolidated statement of operations. As of July 31, 2018, total deferred commission costs on the Company’s consolidated balance sheet was approximately $2.2 million, of which the $0.5 million current portion was included in other current assets and the $1.7 million non-current portion was included in other assets. During the three and six months ended July 31, 2018, amortization expense was nd there was no impairment loss in relation to the costs capitalized Deferred Revenue Deferred revenue primarily consists of billings or payments received in advance of meeting revenue recognition criteria. The Company’s communications services are sold as monthly or annual subscriptions, payable in advance. The Company recognizes deferred services revenue on a ratable basis over the term of the contract as the services are provided. For all arrangements, any revenue that has been deferred and is expected to be recognized beyond one year is classified in long term liabilities on the consolidated balance sheets.
As of
July 31, 2018
January 31, 2018
Deferred revenue:
Subscription and services
$
15,427
$
14,568
Product and other
62
1,416
Total deferred revenue
15,489
15,984
Less: current deferred revenue
15,117
15,556
Noncurrent deferred revenue included in other long-term liabilities
$
372
$
428
During the three and six months ended July 31, 2018, the Company recognized revenue of approximately $2.7 million and $12.2 million, respectively, pertaining to amounts deferred as of January 31, 2018. As of July 31, 2018, the Company’s deferred revenue balance was primarily composed of subscription contracts that were invoiced during the first and second quarters of fiscal 2019, as well as amounts recorded during fiscal 2018 for annual contracts. Remaining Performance Obligations As of July 31, 2018, revenue of approximately $0.8 million is expected to be recognized from remaining performance obligations for open contracts with an original expected length of more than one year. This amount includes both long-term deferred revenue and non-cancelable contract amounts that will be invoiced and recognized as revenue in future periods. The Company expects to recognize revenue of approximately $0.4 million over the next 12 months and the remainder thereafter. |
