August 1, 2005
Via EDGAR
Mr. Craig Wilson
Securities and Exchange Commission
Division of Corporation Finance
100 F Street N. E.
Washington, D.C. 20549
RE: CONCURRENT COMPUTER CORPORATION
FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 30, 2004,
FILED SEPTEMBER 7, 2004 (FILE NO. 000-13150)
Dear Mr. Wilson:
This letter sets forth the responses of Concurrent Computer Corporation
(the "Company") to the comments of the staff (the "Staff") of the Securities and
Exchange Commission (the "Commission") with regard to the Form 10-K for the
fiscal year ended June 30, 2004. The Staff's comments were provided to the
Company in a letter dated June 16, 2005.
In connection with responding to these comments, the Company acknowledges
that:
- the Company is responsible for the adequacy and accuracy of the
disclosure in the filing;
- Staff comments or changes to disclosures in response to Staff
comments do not foreclose the Commission from taking any action
with respect to the filing; and
- the Company may not assert Staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
Revenue Recognition and Related Matters, page 52
- ------------------------------------------------
1. We note from disclosures within the filing that your customers include
government agencies. Considering this, tell us how you considered
paragraphs 32 - 33 of SOP 97-2
Concurrent Computer Corporation
Page 2
in accounting for fiscal funding clauses, if any, included in your software
arrangements. Also tell us how fiscal funding clauses or other government
contract contingencies impact your revenue recognition for other services
and products you provide.
Response: The Company's sales to governmental agencies relate entirely to
sales of its high-performance ("real-time") products. Government related
sales are primarily related to sales to government prime contractors,
rather than directly to governmental agencies. The contracts with the
government prime contractors do not contain fiscal funding clauses or other
contingencies. In fiscal 2004, the Company recorded $14.2 million in
revenues to U.S. government prime contractors and agencies of the U.S.
government. Approximately $2.0 million of this amount related directly to
U.S. governmental agencies. This revenue to U.S. governmental agencies was
primarily related to maintenance fees that are renewed on an annual basis.
Some of these annual maintenance contracts do include fiscal funding
clauses. In accordance with paragraphs 32 and 33 of SOP 97-2, "Software
Revenue Recognition" ("SOP 97-2"), the Company has determined that the
fiscal funding clauses are contingencies that raise a question as to
whether a fee is fixed or determinable or if collectibility is reasonably
assured. As a result, the Company defers recognizing revenue until the
Company receives notification that funding has been approved and that funds
have been released.
Additionally, with regard to any past or future real-time product sales
directly to U.S. governmental agencies, the Company defers recognizing
revenue until the funding has been approved and the funds have been
released.
2. Your revenue recognition policy does not appear to address all the revenue
streams of your Company which appear to include, but are not limited to,
long-term contracts involving customization, license fees, hardware,
software maintenance, hardware maintenance, other software sales and video
streams purchased. For example you disclose that you recognize revenue
pursuant to SOP 97-2 and SOP 98-9 but it is not evident from this
disclosure whether you recognize revenue for hardware, hardware
maintenance, other software sales and video streams "purchased" pursuant to
these standards. Tell us how you recognize revenue for each of your revenue
streams, the authoritative literature that applies, how you determine the
fair value of each element in multiple element arrangements and whether
software is integral to the functionality of hardware you sell. In your
response specifically address your consideration of EITF 00-21, FTB 90-1
and EITF 03-5 as they relate to your revenue recognition policy for
products and services.
Response: The Company provides computer and software systems for both the
on-demand market and the real-time market. The on-demand systems enable
cable systems that have two way capability to deliver movies and a large
variety of other content to subscribers with digital set-top boxes. The
real-time systems and software are specially designed to acquire, process,
store, analyze and display large amounts of rapidly changing information in
real-time. The Company's standard contractual arrangements
Concurrent Computer Corporation
Page 3
with its customers generally include the delivery of a hardware and
software system, certain professional services that typically involve
installation and training, and ongoing software and hardware maintenance.
The software component of the arrangement is considered to be essential to
the functionality of the hardware. This determination is based on the fact
that the Company modifies the hardware received from the hardware vendor in
order for the hardware to function correctly with the software component.
Additionally, the standard hardware received from the hardware vendor will
not function to the customer's specifications without the software
component or the modifications made by the Company prior to shipment.
Therefore, in accordance with EITF No. 03-5, "Applicability of AICPA
Statement of Position 97-2 to Non-Software Deliverables in an Arrangement
Containing More-Than-Incidental Software", the hardware and the hardware
maintenance components are considered software-related and the provisions
of SOP 97-2 apply to the sale of the hardware.
Consistent with the guidance in paragraph 4 a (i) of EITF 00-21, "Revenue
Arrangements with Multiple Deliverables" ("EITF 00-21"), the Company has
determined that EITF 00-21 does not apply to the customer arrangements as a
higher level of generally accepted accounting principles, SOP 97-2, applies
to all elements of the arrangement.
The Company does use the term "price per stream" in its Form 10-K. For its
on-demand product, the Company sometimes prices the hardware and software
sold to customers based on a price per stream basis. The number of streams
a system will process is an indication of volume or capacity of the system.
This is, however, only used as a pricing mechanism for the hardware and
software in some situations. The Company does not receive any additional
"per stream" fees based on volume used by customers.
The Company separates the elements of the customer arrangement based on the
principles embedded in SOP 97-2. The Company bifurcates the undelivered
elements related to professional services and hardware and software
maintenance based on vendor specific objective evidence ("VSOE") and
recognizes the revenue from the hardware and software elements based on the
residual method as more fully discussed below.
Software and Hardware Sales
---------------------------
In most cases these products include both hardware and software. Revenue
from hardware and software arrangements is recognized in accordance with
the guidance in SOP 97-2 and SOP 98-9, "Modification of SOP 97-2, Software
Revenue Recognition, with Respect to Certain Transactions." Revenue from
hardware and software sales is generally recognized after the software has
been installed on the hardware and the hardware has been shipped to the
customer's site or upon receipt by the customer, depending on the shipping
terms. Revenue is also only recognized if there are no significant
obligations remaining and collection of the related receivable is probable.
The Company's VSOE of fair value is determined based on the price charged
when the
Concurrent Computer Corporation
Page 4
same element is sold separately. If VSOE of fair value does not exist for
all elements in a multiple element arrangement, the Company recognizes
revenue using the residual method. Under the residual method, the fair
value of the undelivered elements is deferred and the remaining portion of
the arrangement is recognized as revenue. Therefore, the revenue associated
with the undelivered maintenance and professional services, if any, is
deferred until the services are performed as discussed more fully below.
Professional Services
---------------------
The Company's professional services revenue is primarily generated from
integration of third party software interfaces, training, and hardware
installation. These services are typically completed within 90 days from
the receipt of the order. Generally, as noted above, the hardware and
software products are recognized as revenue upon delivery, based on the
shipping terms. Additional service elements are recognized as revenue as
those services are rendered. In accordance with SOP 97-2, the Company has
determined that these service elements are to be accounted for separately
as these services are not essential to the functionality of the software.
This is evidenced by the fact that the hardware and software is not subject
to return if the services are not performed. Other factors that indicate
that these services qualify for accounting as a service element are that,
in some cases, the services may be available from other vendors, the
services do not carry a significant degree of risk or unique acceptance
criteria, and the Company is an experienced provider of the services. The
Company determines VSOE of fair value on the services based on the standard
rate per hour or fixed fee used when similar services are sold separately.
In limited situations, the Company has determined that the services that
will be performed are essential to the functionality of the software
primarily due to the customization requests of the individual client. When
the Company determines that the professional services that are being
performed do not qualify as a separate element of the arrangement under SOP
97-2, because they do not meet the criteria noted above, the Company
applies the provisions of SOP 81-1, "Accounting for Performance of
Construction-Type and Certain Production-Type Contracts" ("SOP 81-1"), and
records the value of the entire arrangement, excluding maintenance, as the
project progresses based on actual costs incurred compared to the total
costs expected to be incurred through completion. To date, the Company has
had very few contracts accounted for under SOP 81-1.
Hardware and Software Maintenance
---------------------------------
In some cases the Company will include a "free" warranty period for
hardware and software maintenance in the sales price. This warranty period
can be for up to three years. In accordance with SOP 97-2 and, depending
upon the specific terms of the customer agreement, the Company either
accrues the estimated costs to be incurred in performing maintenance
services at the time of revenue recognition and shipment of product, or the
Company defers revenue associated with the maintenance services to be
Concurrent Computer Corporation
Page 5
provided during the warranty period based upon the value for which the
Company has sold such services separately when they are renewed by existing
customers.
For those arrangements in which the warranty period is less than or equal
to one year, the Company, in accordance with meeting the criteria in
paragraph 59 of SOP 97-2, accrues the estimated costs to be incurred in
providing such services. In accordance with paragraph 59 of SOP 97-2, the
Company has determined that the warranty fee is part of the initial license
fee, the warranty period is for one year or less, the estimated cost of
providing the services are immaterial, and the customer is not granted the
rights to any upgrades and enhancements as defined in SOP 97-2. During the
warranty period, the Company provides for the repair or replacement of
defective equipment, provides telephone support, and provides software
patches/bug fixes. Therefore, in accordance with AICPA Technical Practice
Aid 43, "Corrections of Errors in Computer Software (Bug Fixes)", the
Company accrues for those costs under SFAS No. 5, "Accounting for
Contingencies". Actual costs are then charged against the warranty accrual
as they are incurred.
For those arrangements in which the warranty period is greater than one
year, the Company defers revenue based upon the value for which the Company
has sold such services separately. These services are available to
customers through annual renewal contracts at the end of the warranty
period. As such, the Company has determined that the maintenance is a
separate element of the arrangement under SOP 97-2 and therefore, is
recognized as revenue on a straight line basis over the warranty period.
In some cases the Company does not include a "free" warranty period for
hardware and software maintenance in the sales price and the customer will
typically purchase a maintenance contract. Typically the customer will pay
for the annual maintenance contract in advance. The Company determines VSOE
of fair value for these services based on renewal rates charged when the
service is sold separately. In these cases the Company will recognize the
revenue on a straight line basis over the warranty period as this most
closely estimates the earnings process of the services.
3. Your disclosure for multiple elements does not appear to fully comply with
the SAB 104, Topic 13.B Question 1, in regards to clearly stating the
accounting policy for each unit of accounting as well as how units of
accounting are determined and valued. Tell us how you plan to more fully
comply with this guidance.
Response: The Company will revise its future filings to include the
following disclosure with regards to its revenue recognition policy:
Revenue Recognition Policy
--------------------------
Concurrent Computer Corporation
Page 6
The Company recognizes revenue when persuasive evidence of an arrangement
exists, the system has been shipped, the fee is fixed or determinable and
collectibility of the fee is probable.
Software and Hardware Sales
---------------------------
On-demand (formerly "VOD") and real-time (formerly "Integrated Solutions")
product revenues are recognized based on the guidance in American Institute
of Certified Public Accountants Statement of Position ("SOP") 97-2,
"Software Revenue Recognition" ("SOP 97-2") and related amendments, SOP
98-4, "Deferral of the Effective Date of a Provision of SOP 97-2, Software
Revenue Recognition", and SOP 98-9, "Modification of SOP 97-2, Software
Revenue Recognition, With Respect to Certain Transactions". The Company's
standard contractual arrangements with its customers generally include the
delivery of a hardware and software system, certain professional services
that typically involve installation and training, and ongoing software and
hardware maintenance. The software component of the arrangement is
considered to be essential to the functionality of the hardware. Therefore,
in accordance with Emerging Issues Task Force No. 03-5, "Applicability of
AICPA Statement of Position 97-2 to Non-Software Deliverables in an
Arrangement Containing More-Than-Incidental Software", the hardware and the
hardware maintenance components are considered software related and the
provisions of SOP 97-2 apply to all elements of the arrangement. Under
multiple element arrangements, the Company allocates revenue to the various
elements based on vendor-specific objective evidence ("VSOE") of fair
value. The Company's VSOE of fair value is determined based on the price
charged when the same element is sold separately. If VSOE of fair value
does not exist for all elements in a multiple element arrangement, the
Company recognizes revenue using the residual method. Under the residual
method, the fair value of the undelivered elements is deferred and the
remaining portion of the arrangement is recognized as revenue.
Professional Services
---------------------
Professional services revenue is primarily generated from integration of
third party software interfaces, training, and hardware installation. These
services are typically completed within 90 days from the receipt of the
order. Under multiple element arrangements, the Company allocates revenue
to the various elements based on VSOE of fair value. The Company determines
VSOE of fair value for the services based on the standard rate per hour or
fixed fee used when similar services are sold separately. Revenues from
these services are recognized when the services are performed.
In certain instances, the Company's customers require significant
customization of both the software and hardware products. In these
situations, the services are considered essential to the functionality of
the software and, therefore, the revenue from the arrangement, with the
exception of maintenance, is recognized in conformity with Accounting
Research Bulletin ("ARB") No. 45, "Long Term Construction Type Contracts"
and SOP 81-1, "Accounting for Performance of Construction-Type and
Concurrent Computer Corporation
Page 7
Certain Production-Type Contracts." The Company records the value of the
entire arrangement (excluding maintenance) as the project progresses based
on actual costs incurred compared to the total costs expected to be
incurred through completion.
Hardware and Software Maintenance
---------------------------------
The Company recognizes revenue from maintenance services in accordance with
SOP 97-2. Depending upon the specific terms of the customer agreement, the
Company may include warranty as part of the purchase price. In accordance
with SOP 97-2 and, depending upon the specific terms of the customer
agreement, the Company either accrues the estimated costs to be incurred in
performing maintenance services at the time of revenue recognition and
shipment of product, or the Company defers revenue associated with the
maintenance services to be provided during the warranty period based upon
the value for which the Company has sold such services separately when they
are renewed by existing customers. For those arrangements in which the
warranty period is less than or equal to one year, the Company accrues the
estimated costs to be incurred in providing services. In accordance with
paragraph 59 of SOP 97-2, the Company has determined that the warranty fee
is part of the initial license fee, the warranty period is for one year or
less, the estimated cost of providing the services are immaterial, and
upgrades and enhancements offered during maintenance arrangements
historically have been and are expected to continue to be minimal and
infrequent. Actual costs are then charged against the warranty accrual as
they are incurred. For those arrangements in which the warranty period is
greater than one year, the Company defers revenue based upon the value for
which the Company has sold such services separately. This revenue is then
recognized on a straight line basis over the warranty period.
Please contact the undersigned at (678) 258-4052 with any questions
concerning this letter.
Sincerely,
/s/Greg Wilson
Greg Wilson
Chief Financial Officer
cc: Ms. Megan Akst - Securities and Exchange Commission
Mr. Tom Ferraro - Securities and Exchange Commission
Mr. Kirk L. Somers - Concurrent Computer Corporation
Ms. Pamela Blackburn - Deloitte & Touche LLP
Mr. Alan J. Prince - King & Spalding LLP