Revenue

Impacts from the Adoption of the New Revenue Standard

At the beginning of fiscal year 2019, the Company adopted the new revenue recognition standard on a modified retrospective basis, with the cumulative effect recognized in retained earnings at the date of adoption. The Company elected to apply the new revenue standard retrospectively to all contracts that are not completed contracts at the date of the initial adoption. Based on the Company’s assessment of this new accounting standard, a change in revenue recognition timing on its component sales made to distributors was made in the first quarter of fiscal year 2019 and the Company started to recognize revenue when the Company transfers control to the distributor rather than deferring recognition until the distributor sells the components. In addition, the Company established accruals for the variable consideration aspect of sales, estimated based on historical experience, which include estimates for price discounts, price protection, rebates, returns and stock rotation programs. On the date of initial adoption, the Company removed the deferred income on component sales made to distributors and recorded estimates of the accruals for variable consideration through a cumulative adjustment to retained earnings. The net impact to the opening balance of retained earnings related to the adoption of the new standard was an increase of $34.2 million.

The following tables summarize financial statement line items that are affected in the current reporting period by the application of the new revenue recognition policy as compared with the previous revenue recognition policy which was in effect in prior periods in accordance with ASC 605, Revenue Recognition:



	May 5, 2018
(In thousands)	As currently reported		Adjustments			Balances without adoption of new revenue standard
Consolidated balance sheet:
Assets
Accounts receivable, net	$	329,650	$	(5,837	)	$	323,813
Inventory	169,556		(2,486		)	167,070
Other non-current assets	209,261		(58,717		)	150,544
Liabilities and shareholders' equity:
Accrued liabilities	180,117		(97,983		)	82,134
Deferred income	1,880		77,368			79,248
Retained earnings	$	1,542,437	$	(46,425	)	$	1,496,012



	Three Months Ended May 5, 2018
(In thousands, except per share amounts)	As currently reported		Adjustments			Balances without adoption of new revenue standard
Consolidated statement of operation:
Net revenue	$	604,631	$	(15,529	)	$	589,102
Cost of goods sold	228,938		(3,396		)	225,542
Net income (loss)	128,612		(12,133		)	116,479
Net income (loss) per share - Basic	0.26		(0.03		)	0.23
Net income (loss) per share - Diluted	$	0.25	$	(0.02	)	$	0.23

Adoption of the new revenue standard had no impact to cash from or used in operating, financing, or investing activities on the condensed consolidated statements of cash flow.

New Revenue Recognition Policy Including Significant Judgments and Estimates

Through the fiscal year ended February 3, 2018, in accordance with ASC 605, Revenue Recognition, the Company recognized revenue when there was persuasive evidence of an arrangement, delivery had occurred, the fee was fixed or determinable, and collection was reasonably assured. If the Company granted extended payment terms greater than its standard terms for a customer such that collectability was not assured, the revenue was deferred upon shipment and would be recognized when the payment became due provided all other revenue recognition criteria had been satisfied.

Product revenue was generally recognized upon shipment of product to customers, net of accruals for estimated sales returns and rebates. However, some of the Company’s sales were made through distributors under agreements allowing for price protection and limited rights of stock rotation on products unsold by the distributors. Product revenue on sales made through distributors were deferred until the distributors sold the product to end customers. Deferred revenue less the related cost of the inventories was reported as deferred income. The Company did not believe that there was any significant exposure related to impairment of deferred cost of sales, as its historical returns had been minimal and inventory turnover for its distributors generally ranged from 60 to 90 days. The Company’s sales to direct customers were made primarily pursuant to standard purchase orders for delivery of products.

As a result of the adoption of the new revenue standard on February 4, 2018, at the beginning of the first quarter of fiscal year 2019, the Company revised its revenue recognition policy. The Company now recognizes revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. Under the new revenue recognition standard, the Company applies the following five step approach: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when a performance obligation is satisfied.

The Company enters into contracts that may include various combinations of products and services that are capable of being distinct and accounted for as separate performance obligations. To date, the majority of the revenue has been generated by sales associated with storage, networking and connectivity products. Revenue from services has been insignificant. Performance obligations associated with product sales transactions are generally satisfied when control passes to customers upon shipment. Accordingly, product revenue is recognized at a point in time when control of the asset is transferred to the customer. The Company recognizes revenue when it satisfies a performance obligation by transferring control of a product to a customer in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. For product revenue, the performance obligation is deemed to be the delivery of the product and therefore, the revenue is generally recognized upon shipment to customers, net of accruals for estimated sales returns and rebates. These estimates are based on historical returns, analysis of credit memo data and other known factors. Actual returns could differ from these estimates. The Company accounts for rebates by recording reductions to revenue for rebates in the same period that the related revenue is recorded. The amount of these reductions is based upon the terms agreed to with the customer. Some of the Company’s sales are made to distributors under agreements allowing for price protection, price discounts and limited rights of stock rotation on products unsold by the distributors. Control passes to the distributor upon shipment, and terms and payment by the Company’s distributors is not contingent on resale of the product. Product revenue on sales made to distributors with price protection and stock rotation rights is recognized upon shipment to distributors, with an accrual for the variable consideration aspect of sales to distributors, estimated based on historical experience, including estimates for price discounts, price protection, rebates, and stock rotation programs.

The Company’s products are generally subject to warranty, which provides for the estimated future costs of replacement upon shipment of the product. The Company’s products carry a standard one-year warranty, with certain exceptions in which the warranty period can extend to more than one year based on contractual agreements. The warranty accrual is estimated primarily based on historical claims compared to historical revenues and assumes that the Company will have to replace products subject to a claim. From time to time, the Company becomes aware of specific warranty situations, and it records specific accruals to cover these exposures. Warranty expenses were not material for the periods presented.

Disaggregation of Revenue

The majority of the Company's revenue is generated from sales of the Company’s products.

The following table summarizes net revenue disaggregated by product group (in thousands, except percentages):



	Three Months Ended
		May 5, 2018		% of Total
Net revenue by product group:
Storage (1)		$	317,069	52	%
Networking (2)		153,734		26	%
Connectivity (3)		90,494		15	%
Other (4)		43,334		7	%
		$	604,631


1)	Storage products are comprised primarily of HDD, SSD Controllers and Data Center Storage Solutions.


2)	Networking products are comprised primarily of Ethernet Switches, Ethernet Transceivers, Embedded ARM Processors and Automotive Ethernet, as well as a few legacy product lines in which the Company no longer invests, but will generate revenue for several years.


3)	Connectivity products are comprised primarily of Wi-Fi solutions including Wi-Fi only, Wi-Fi/Bluetooth combos and Wi-Fi Microcontroller combos.


4)	Other products comprised of printer specific standard SoC products, as well as full-custom, application-specific integrated circuits and application processors.

The following table summarizes net revenue disaggregated by primary geographical market (in thousands, except percentages):



	Three Months Ended
		May 5, 2018		% of Total
Net revenue based on destination of shipment:
China		$	276,622	46	%
Malaysia		90,623		15	%
Philippines		57,767		9	%
Thailand		41,534		7	%
United States		16,030		3	%
Other		122,055		20	%
		$	604,631

The following table summarizes net revenue disaggregated by customer type (in thousands, except percentages):



	Three Months Ended
		May 5, 2018		% of Total
Net revenue by customer type:
Direct customers		$	470,476	78	%
Distributors		134,155		22	%
		$	604,631

Contract Liabilities

Contract liabilities consist of the Company’s obligation to transfer goods or services to a customer for which the Company has received consideration or the amount is due from the customer. As of May 5, 2018, contract liability balances are comprised of variable consideration estimated based on a portfolio basis using the expected value methodology based on analysis of historical data, current economic conditions, and contractual terms. Variable consideration estimates consist of the estimated returns, price discounts, price protection, rebates, and stock rotation programs and deferred income for the prepayments made by the customers. As of the end of a reporting period, some of the performance obligations associated with contracts will have been unsatisfied or only partially satisfied. In accordance with the practical expedients available in the guidance, the Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected duration of one year or less. Contract liabilities are included in accrued liabilities in the condensed consolidated balance sheets.

The opening balance of contract liabilities at the beginning of the first quarter of fiscal year 2019 was $79.6 million. During the three months ended May 5, 2018, contract liabilities increased by $198.8 million associated with variable consideration estimates for additional shipments in the quarter, offset by $173.4 million decrease in such reserves primarily due to credit memos issued to customers. The ending balance of contract liabilities as of the first quarter ended in fiscal year 2019 was $105.0 million.

Sales Commissions

Sales commissions are generally earned by the salespersons based on shipments to customers. The Company expenses these costs when incurred because the Company's sales commissions do not directly relate to any individual contract. These costs are recorded within selling and marketing expenses.