SEC Filing | Broadcom Inc.

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(MARK ONE)



þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended May 5, 2019



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to



	Broadcom Inc.
	(Exact name of registrant as specified in its charter)

Delaware	001-38449	35-2617337
(State or other jurisdiction of incorporation or organization)	(Commission file Number)	(I.R.S. Employer Identification No.)
	1320 Ridder Park Drive San Jose, CA 95131-2313 (408) 433-8000
	(Address, including zip code, of principal executive offices and registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES þ NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer	þ	Accelerated filer	o	Non-accelerated filer	o	Smaller reporting company	o	Emerging growth company	o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO þ

Securities registered pursuant to Section 12(b) of the Act:



Title of Each Class	Trading Symbol(s)	Name of Each Exchange on Which Registered
Common Stock, $0.001 par value	AVGO	The Nasdaq Global Select Market

As of May 31, 2019, there were 398,073,576 shares of our common stock, $0.001 par value per share, outstanding.

BROADCOM INC.

Quarterly Report on Form 10-Q

For the Quarterly Period Ended May 5, 2019

TABLE OF CONTENTS



	Page
PART I — FINANCIAL INFORMATION	1
Item 1. Condensed Consolidated Financial Statements — Unaudited	1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	41
Item 3. Quantitative and Qualitative Disclosures About Market Risk	50
Item 4. Controls and Procedures	50
PART II — OTHER INFORMATION	51
Item 1. Legal Proceedings	51
Item 1A. Risk Factors	51
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	72
Item 3. Defaults Upon Senior Securities	72
Item 4. Mine Safety Disclosures	72
Item 5. Other Information	72
Item 6. Exhibits	73
SIGNATURES	74

Table of Contents

PART I — FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements — Unaudited

BROADCOM INC.

INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED



	Page
Condensed Consolidated Balance Sheets — Unaudited	2
Condensed Consolidated Statements of Operations - Unaudited	3
Condensed Consolidated Statements of Comprehensive Income — Unaudited	4
Condensed Consolidated Statements of Cash Flows — Unaudited	5
Condensed Consolidated Statements of Stockholders’ Equity — Unaudited	6
Notes to Unaudited Condensed Consolidated Financial Statements	8

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BROADCOM INC.

CONDENSED CONSOLIDATED BALANCE SHEETS — UNAUDITED



	May 5, 2019			November 4, 2018

	(In millions, except par value)
ASSETS
Current assets:
Cash and cash equivalents	$	5,328		$	4,292
Trade accounts receivable, net	3,484			3,325
Inventory	1,034			1,124
Other current assets	831			366
Total current assets	10,677			9,107
Long-term assets:
Property, plant and equipment, net	2,654			2,635
Goodwill	36,662			26,913
Intangible assets, net	20,188			10,762
Other long-term assets	735			707
Total assets	$	70,916		$	50,124
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	759		$	811
Employee compensation and benefits	478			715
Current portion of long-term debt	3,537			—
Other current liabilities	3,729			812
Total current liabilities	8,503			2,338
Long-term liabilities:
Long-term debt	34,011			17,493
Other long-term liabilities	6,230			3,636
Total liabilities	48,744			23,467
Commitments and contingencies (Note 11)
Stockholders’ equity:
Preferred stock, $0.001 par value; 100 shares authorized; no shares issued or outstanding as of May 5, 2019 or November 4, 2018	—			—
Common stock and additional paid-in capital, $0.001 par value; 2,900 shares authorized; 399 and 408 shares issued and outstanding as of May 5, 2019 and November 4, 2018, respectively	22,288			23,285
Retained earnings	—			3,487
Accumulated other comprehensive loss	(116		)	(115		)
Total stockholders’ equity	22,172			26,657
Total liabilities and stockholders’ equity	$	70,916		$	50,124

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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BROADCOM INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS — UNAUDITED



	Fiscal Quarter Ended						Two Fiscal Quarters Ended
	May 5, 2019			May 6, 2018			May 5, 2019			May 6, 2018

	(In millions, except per share data)
Net revenue:
Products	$	4,418		$	4,749		$	9,057		$	9,857
Subscriptions and services	1,099			265			2,249			484
Total net revenue	5,517			5,014			11,306			10,341
Cost of revenue:
Cost of products sold	1,457			1,672			3,011			3,548
Cost of subscriptions and services	135			24			273			47
Purchase accounting effect on inventory	—			—			—			70
Amortization of acquisition-related intangible assets	826			765			1,659			1,480
Restructuring charges	10			2			66			17
Total cost of revenue	2,428			2,463			5,009			5,162
Gross margin	3,089			2,551			6,297			5,179
Research and development	1,151			936			2,284			1,861
Selling, general and administrative	419			294			890			585
Amortization of acquisition-related intangible assets	473			67			949			406
Restructuring, impairment and disposal charges	76			53			649			183
Total operating expenses	2,119			1,350			4,772			3,035
Operating income	970			1,201			1,525			2,144
Interest expense	(376		)	(148		)	(721		)	(331		)
Other income, net	63			46			131			81
Income from continuing operations before income taxes	657			1,099			935			1,894
Benefit from income taxes	(36		)	(2,637		)	(239		)	(8,423		)
Income from continuing operations	693			3,736			1,174			10,317
Loss from discontinued operations, net of income taxes	(2		)	(3		)	(12		)	(18		)
Net income	691			3,733			1,162			10,299
Net income attributable to noncontrolling interest	—			15			—			351
Net income attributable to common stock	$	691		$	3,718		$	1,162		$	9,948

Basic income (loss) per share:
Income per share from continuing operations	$	1.75		$	8.84		$	2.94		$	24.01
Loss per share from discontinued operations	(0.01		)	(0.01		)	(0.03		)	(0.04		)
Net income per share	$	1.74		$	8.83		$	2.91		$	23.97

Diluted income (loss) per share:
Income per share from continuing operations	$	1.64		$	8.34		$	2.80		$	23.03
Loss per share from discontinued operations	—			(0.01		)	(0.03		)	(0.04		)
Net income per share	$	1.64		$	8.33		$	2.77		$	22.99

Weighted-average shares:
Basic	397			421			399			415
Diluted	422			448			420			448

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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BROADCOM INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME — UNAUDITED



	Fiscal Quarter Ended					Two Fiscal Quarters Ended
	May 5, 2019		May 6, 2018			May 5, 2019		May 6, 2018

	(In millions)
Net income	$	691	$	3,733		$	1,162	$	10,299
Other comprehensive income (loss), net of tax:
Change in unrealized gain on available-for-sale investments	—		(9		)	—		—
Change in actuarial loss and prior service costs associated with defined benefit pension plans and post-retirement benefit plans	—		1			—		1
Other comprehensive income (loss)	—		(8		)	—		1
Comprehensive income	691		3,725			1,162		10,300
Comprehensive income attributable to noncontrolling interest	—		15			—		351
Comprehensive income attributable to common stock	$	691	$	3,710		$	1,162	$	9,949

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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BROADCOM INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED



	Two Fiscal Quarters Ended
	May 5, 2019			May 6, 2018

	(In millions)
Cash flows from operating activities:
Net income	$	1,162		$	10,299
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of intangible assets	2,621			1,894
Depreciation	285			254
Stock-based compensation	1,009			595
Deferred taxes and other non-cash taxes	(473		)	(8,534		)
Non-cash restructuring, impairment and disposal charges	98			10
Non-cash interest expense	27			12
Other	(60		)	17
Changes in assets and liabilities, net of acquisitions and disposals:
Trade accounts receivable, net	261			(78		)
Inventory	90			306
Accounts payable	(139		)	(312		)
Employee compensation and benefits	(464		)	(292		)
Contributions to defined benefit pension plans	—			(129		)
Other current assets and current liabilities	469			354
Other long-term assets and long-term liabilities	(87		)	(398		)
Net cash provided by operating activities	4,799			3,998
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired	(16,027		)	(4,786		)
Proceeds from sales of businesses	957			782
Purchases of property, plant and equipment	(224		)	(409		)
Proceeds from disposals of property, plant and equipment	—			238
Purchases of investments	(5		)	(249		)
Proceeds from sales of investments	3			54
Other	(3		)	(12		)
Net cash used in investing activities	(15,299		)	(4,382		)
Cash flows from financing activities:
Proceeds from long-term borrowings	28,793			—
Repayment of debt	(12,000		)	(856		)
Payment of debt issuance costs	(46		)	—
Other borrowings	1,575			—
Dividend and distribution payments	(2,124		)	(1,521		)
Repurchases of common stock - repurchase program	(4,266		)	(347		)
Shares repurchased for tax withholdings on vesting of equity awards	(577		)	(2		)
Issuance of common stock	183			114
Other	(2		)	(21		)
Net cash provided by (used in) financing activities	11,536			(2,633		)
Net change in cash and cash equivalents	1,036			(3,017		)
Cash and cash equivalents at beginning of period	4,292			11,204
Cash and cash equivalents at end of period	$	5,328		$	8,187

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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BROADCOM INC. CONDENSED CONSOLIDATED STATEMENTS OF EQUITY — UNAUDITED Two Fiscal Quarters Ended May 5, 2019

		Common Stock and Additional Paid-in Capital					Retained Earnings			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity
		Shares		Amount			Retained Earnings			Accumulated Other Comprehensive Loss			Total Stockholders’ Equity

	(In millions)
Balance as of November 4, 2018		408		$	23,285		$	3,487		$	(115	)	$	26,657
Net income		—		—			471			—			471
Cumulative effect of accounting changes		—		—			8			(1		)	7
Fair value of partially vested equity awards assumed in connection with the acquisition of CA, Inc.		—		67			—			—			67
Cash dividends declared and paid to stockholders		—		—			(1,067		)	—			(1,067		)
Common stock issued		2		62			—			—			62
Stock-based compensation		—		540			—			—			540
Repurchases of common stock		(14	)	(796		)	(2,640		)	—			(3,436		)
Shares repurchased for tax withholdings on vesting of equity awards		—		(77		)	—			—			(77		)
Balance as of February 3, 2019		396		23,081			259			(116		)	23,224
Net income		—		—			691			—			691
Cash dividends declared and paid to stockholders		—		(331		)	(726		)	—			(1,057		)
Common stock issued		8		121			—			—			121
Stock-based compensation		—		544			—			—			544
Repurchases of common stock		(3	)	(606		)	(224		)	—			(830		)
Shares repurchased for tax withholdings on vesting of equity awards		(2	)	(521		)	—			—			(521		)
Balance as of May 5, 2019		399		$	22,288		$	—		$	(116	)	$	22,172

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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BROADCOM INC. CONDENSED CONSOLIDATED STATEMENTS OF EQUITY — UNAUDITED Two Fiscal Quarters Ended May 6, 2018

	Preferred Stock				Common Stock and Additional Paid-in Capital					Retained Earnings/(Accumulated Deficit)			Accumulated Other Comprehensive Loss			Total Broadcom Inc. Stockholders’ Equity			Noncontrolling Interest			Total Equity
	Shares		Amount		Shares		Amount			Retained Earnings/(Accumulated Deficit)			Accumulated Other Comprehensive Loss			Total Broadcom Inc. Stockholders’ Equity			Noncontrolling Interest			Total Equity

	(In millions)
Balance as of October 29, 2017	22		$	—	409		$	20,505		$	(129	)	$	(91	)	$	20,285		$	2,901		$	23,186
Net income	—		—		—		—			6,230			—			6,230			336			6,566
Other comprehensive income	—		—		—		—			—			9			9			—			9
Cumulative effect of accounting changes	—		—		—		—			(252		)	—			(252		)	(14		)	(266		)
Fair value of partially vested equity awards assumed in connection with the acquisition of Brocade Communications Systems, Inc.	—		—		—		8			—			—			8			—			8
Cash dividends declared and paid to stockholders	—		—		—		—			(717		)	—			(717		)	—			(717		)
Cash distribution declared and paid by Broadcom Cayman L.P. on exchangeable limited partnership units	—		—		—		—			—			—			—			(38		)	(38		)
Exchange of exchangeable limited partnership units for common stock	—		—		—		5			—			—			5			(5		)	—
Common stock issued	—		—		1		34			—			—			34			—			34
Stock-based compensation	—		—		—		299			—			—			299			—			299
Balance as of February 4, 2018	22		—		410		20,851			5,132			(82		)	25,901			3,180			29,081
Net income	—		—		—		—			3,718			—			3,718			15			3,733
Other comprehensive loss	—		—		—		—			—			(8		)	(8		)	—			(8		)
Cumulative effect of accounting changes	—		—		—		—			15			(16		)	(1		)	1			—
Cash dividends declared and paid to stockholders	—		—		—		—			(727		)	—			(727		)	—			(727		)
Cash distribution declared and paid by Broadcom Cayman L.P. on exchangeable limited partnership units	—		—		—		—			—			—			—			(39		)	(39		)
Exchange of exchangeable limited partnership units for common stock and redemption of preferred stock due to the Redomiciliation Transaction	(22	)	—		22		3,157			—			—			3,157			(3,157		)	—
Common stock issued	—		—		6		80			—			—			80			—			80
Stock-based compensation	—		—		—		296			—			—			296			—			296
Repurchases of common stock	—		—		(2	)	(77		)	(270		)	—			(347		)	—			(347		)
Shares repurchased for tax withholdings on vesting of equity awards	—		—		—		(2		)	—			—			(2		)	—			(2		)
Balance as of May 6, 2018	—		$	—	436		$	24,305		$	7,868		$	(106	)	$	32,067		$	—		$	32,067

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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BROADCOM INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Overview, Basis of Presentation and Significant Accounting Policies

Overview

Broadcom Inc. (“Broadcom”), a Delaware corporation, is the successor to Broadcom Limited (now Broadcom Pte. Ltd.), a Singapore company (“Broadcom-Singapore”). On April 4, 2018, all Broadcom-Singapore outstanding ordinary shares were exchanged for newly issued shares of Broadcom common stock (the “Redomiciliation Transaction”). As a result, Broadcom-Singapore became a wholly-owned subsidiary of Broadcom. In addition, all outstanding exchangeable limited partnership units (“LP Units”) of Broadcom Cayman L.P. (the “Partnership”) were mandatorily exchanged (the “Mandatory Exchange”) for newly issued shares of Broadcom common stock and all limited partners of the Partnership became common stockholders of Broadcom. Also, all related outstanding special preference shares of Broadcom-Singapore were automatically redeemed upon the Mandatory Exchange. The limited partners no longer hold a noncontrolling interest and we deregistered the Partnership.

The Redomiciliation Transaction was accounted for as an exchange of equity interests among entities under common control and the historical basis of accounting was retained as if the entities had always been combined for financial reporting purposes.

The financial statements relate to Broadcom-Singapore for periods prior to April 4, 2018, the effective date of the Redomiciliation Transaction, and relate to Broadcom for periods after April 4, 2018. Unless stated otherwise or the context otherwise requires, references to “Broadcom,” “we,” “our” and “us” mean Broadcom and its consolidated subsidiaries from and after the effective time of the Redomiciliation Transaction and, prior to that time, to our predecessor, Broadcom-Singapore.

We are a global technology leader that designs, develops and supplies a broad range of semiconductor and infrastructure software solutions. We develop semiconductor devices with a focus on complex digital and mixed signal complementary metal oxide semiconductor based devices and analog III-V based products. We have a history of innovation and offer thousands of products that are used in end products such as enterprise and data center networking, home connectivity, set-top boxes, broadband access, telecommunication equipment, smartphones and base stations, data center servers and storage systems, factory automation, power generation and alternative energy systems, and electronic displays. Our infrastructure software solutions enable customers to plan, develop, automate, manage and secure applications across mobile, cloud, distributed and mainframe platforms.

On November 5, 2018, we acquired CA, Inc. (“CA”) for $16.1 billion, net of cash acquired (the “CA Merger”). CA was a leading provider of information technology management software and solutions. The results of operations of CA are included in the unaudited condensed consolidated financial statements commencing as of November 5, 2018 (the “CA Acquisition Date”). See Note 3. “Acquisitions” for additional information.

Subsequent to the CA Merger, we changed our organizational structure, resulting in three reportable segments: semiconductor solutions, infrastructure software and intellectual property (“IP”) licensing. Prior period segment results have been recast to conform to the current presentation. See Note 10. “Segment Information” for additional information.

Basis of Presentation

We operate on a 52- or 53-week fiscal year ending on the Sunday closest to October 31 in a 52-week year and the first Sunday in November in a 53-week year. Our fiscal year ending November 3, 2019 (“fiscal year 2019”) is a 52-week fiscal year. The first quarter of our fiscal year 2019 ended on February 3, 2019, the second quarter ended on May 5, 2019 and the third quarter ends on August 4, 2019. Our fiscal year ended November 4, 2018 (“fiscal year 2018”) was a 53-week fiscal year, with the first fiscal quarter containing 14 weeks.

The accompanying condensed consolidated financial statements include the accounts of Broadcom and our subsidiaries, and have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information. The financial information included herein is unaudited, and reflects all adjustments which are, in the opinion of our management, of a normal recurring nature and necessary for a fair statement of the results for the periods presented. The November 4, 2018 condensed consolidated balance sheet data were derived from Broadcom’s audited consolidated financial statements included in its Annual Report on Form 10-K for fiscal year 2018 as filed with the Securities and Exchange Commission (“SEC”). All intercompany transactions and balances have been eliminated in consolidation. The operating results for the fiscal quarter and two fiscal quarters ended May 5, 2019 are not necessarily indicative of the results that may be expected for fiscal year 2019, or for any other future period.

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Significant Accounting Policies

Use of estimates. The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates, and such differences could affect the results of operations reported in future periods.

Reclassifications. Certain reclassifications have been made to the prior period condensed consolidated statement of operations and statement of cash flows to conform to current period presentation. These reclassifications had no impact on previously reported net income or net cash activities.

Recently Adopted Accounting Guidance

In the first quarter of fiscal year 2019, we adopted the Financial Accounting Standards Board (“FASB”) guidance issued in March 2017 that requires an employer to present the service cost component of net periodic benefit cost in the same income statement line item as other employee compensation costs arising from services rendered during the period. Other components of the net periodic benefit cost are presented separately from the service cost component. We adopted the guidance using a permitted practical expedient that uses the amounts disclosed in the pension and other post-retirement benefit plans note for the prior comparative periods as the estimation basis for applying the retrospective presentation requirements. The adoption did not have a material impact on the condensed consolidated statements of operations presented herein.

In the first quarter of fiscal year 2019, we adopted the guidance issued in January 2016 that changes the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. This guidance requires the remeasurement of equity investments not accounted for under the equity method to be measured at fair value and any changes in fair value recognized in net income. The guidance allows for election of a measurement alternative for equity securities without readily determinable fair values to be measured at cost less impairment, adjusted for observable price changes. We adopted this guidance using the modified retrospective method for our marketable equity securities and a prospective approach for non-marketable equity securities using the measurement alternative. Upon adoption, we recognized an $8 million increase to retained earnings and a $1 million increase to accumulated other comprehensive loss. During the fiscal quarter and two fiscal quarters ended May 5, 2019, we also recognized $40 million and $67 million, respectively, of unrealized gains on equity securities within other income, net in our condensed consolidated statements of operations.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“Topic 606”). We adopted Topic 606 effective November 5, 2018 using the modified retrospective method. Reporting periods prior to the adoption of the new revenue standard are presented in accordance with Accounting Standards Codification 605, Revenue Recognition (“Topic 605”), while reporting periods after adoption are presented in accordance with the new revenue standard. The cumulative effect adjustment as of November 5, 2018 to retained earnings was not significant. See Note 2. “Revenue from Contracts with Customers” for further information related to adoption of the new revenue standard, including our updated revenue accounting policies and accounting policies for costs to obtain and fulfill a contract with a customer. Refer to our Annual Report on Form 10-K for our accounting policies in accordance with Topic 605.

Recent Accounting Guidance Not Yet Adopted

In February 2016, the FASB issued guidance related to the accounting for leases, which among other things, requires a lessee to recognize lease assets and lease liabilities on the balance sheet for operating leases. This guidance will be effective for the first quarter of our fiscal year 2020. The new guidance is required to be applied using a modified retrospective approach. We are evaluating the impact this guidance will have on our condensed consolidated financial statements.

2. Revenue from Contracts with Customers

We account for a contract with a customer when both parties have approved the contract and are committed to perform their respective obligations, each party’s rights can be identified, payment terms can be identified, the contract has commercial substance, and it is probable we will collect substantially all of the consideration we are entitled to. Revenue is recognized when, or as, performance obligations are satisfied by transferring control of a promised product or service to a customer.

Nature of Products and Services

Our products and services can be broadly categorized as sales of products and subscriptions and services. The following is a description of the principal activities from which we generate revenue.

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Products. Under Topic 606, we recognize revenue from sales to direct customers and distributors when control transfers to the customer. Rebates and incentives offered to distributors, which are earned when sales to end customers are completed, are estimated at the point of revenue recognition. We have elected to exclude from the transaction price any taxes collected from a customer and to account for shipping and handling activities performed after a customer obtains control of the product as activities to fulfill the promise to transfer the product.

Subscriptions and services. Our subscriptions and services revenue consists of sales and royalties from software arrangements, support services, professional services, transfer of IP, and non-recurring engineering (“NRE”) arrangements.

Revenue from software arrangements primarily consists of fees, which may be paid either at contract inception or in installments over the contract term, that provide customers with a right to use the software, access general support and maintenance, and utilize our professional services.

Our software licenses have standalone functionality from which customers derive benefit, and the customer obtains control of the software when it is delivered or made available for download. We believe that for the majority of software arrangements, customers derive significant benefit from the ongoing support we provide. Our CA-related subscriptions and services arrangements permit our customers to unilaterally terminate or cancel these arrangements at any time at the customer’s convenience, referred to as termination for convenience provisions, without substantive termination penalty and receive a pro-rata refund of any prepaid fees. Accordingly, we account for arrangements with these termination for convenience provisions as a series of daily contracts, resulting in a ratable revenue recognition of software revenue over the contractual period.

Support services consist primarily of telephone support and the provision of unspecified updates and upgrades on a when-and-if-available basis. Support services represent stand-ready obligations for which revenue is recognized ratably over the term of the arrangement.

Professional services consist of implementation, consulting, customer education and customer training services. The obligation to provide professional services is generally satisfied over time, with the customer simultaneously receiving and consuming the benefits as we satisfy our performance obligations.

Rights to our IP are either sold or licensed to a customer. IP revenue recognition is dependent on the nature and terms of each agreement. We recognize IP revenue upon delivery of the IP if there are no substantive future obligations to perform under the arrangement. Sales-based or usage-based royalties from the license of IP are recognized at the later of the period the sales or usages occur or the satisfaction of the performance obligation to which some or all of the sales-based or usage-based royalties have been allocated.

There are two main categories of NRE contracts which we enter into with our customers: (a) NRE contracts in which we develop a custom chip and (b) NRE contracts in which we accelerate our development of a new chip upon the customer’s request. The majority of our NRE contract revenues meet the over time criteria under Topic 606. As such, revenue is recognized over the development period with the measure of progress using the input method based on costs incurred to total cost (“cost-to-cost”) as the services are provided. For NRE contracts that do not meet the over time criteria under Topic 606, revenue is recognized at a point in time when the NRE services are complete.

Material rights. Contracts with customers may also include material rights that are also performance obligations. These include the right to renew or receive products or services at a discounted price in the future. Revenue allocated to material rights is recognized when the customer exercises the right or the right expires.

Arrangements with Multiple Performance Obligations

Our contracts may contain more than one of the products and services listed above, each of which is separately accounted for as a distinct performance obligation.

Allocation of consideration. We allocate total contract consideration to each distinct performance obligation in a bundled arrangement on a relative standalone selling price basis. The standalone selling price reflects the price we would charge for a specific product or service if it were sold separately in similar circumstances and to similar customers.

Standalone selling price. When available, we use directly observable transactions to determine the standalone selling prices for performance obligations. Our estimates of standalone selling price for each performance obligation require judgment that considers multiple factors, including, but not limited to, historical discounting trends for products and services and pricing practices through different sales channels, gross margin objectives, internal costs, competitor pricing strategies, technology lifecycles and market conditions.

We separately determine the standalone selling prices by product or service type. Additionally, we segment the standalone selling prices for products where the pricing strategies differ, and where there are differences in customers and circumstances that warrant segmentation.

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We also estimate the standalone selling price of our material rights. Lastly, we estimate the value of the customer’s option to purchase or receive additional products or services at a discounted price by estimating the incremental discount the customer would obtain when exercising the option and the likelihood that the option would be exercised.

Other Policies and Judgments

Contract modifications. We may modify contracts to offer customers additional products or services. Each of the additional products and services are generally considered distinct from those products or services transferred to the customer before the modification. We evaluate whether the contract price for the additional products and services reflects the standalone selling price as adjusted for facts and circumstances applicable to that contract. In these cases, we account for the additional products or services as a separate contract. In other cases where the pricing in the modification does not reflect the standalone selling price as adjusted for facts and circumstances applicable to that contract, we account for the additional products or services as part of the existing contract on a prospective basis, on a cumulative catch-up basis, or on a combination of both based on the nature of modification. In instances where the pricing in the modification offers the customer a credit for a prior arrangement, we adjust our variable consideration reserves for returns and other concessions.

Right of return. Certain contracts contain a right of return that allows the customer to cancel all or a portion of the product or service and receive a credit. We estimate returns based on historical returns data which is constrained to an amount for which a material revenue reversal is not probable. We do not recognize revenue for products or services that are expected to be returned.

Transition practical expedient elected. We do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed. For contracts that were modified before the beginning of the earliest reporting period presented, we have not retrospectively restated the contract for those modifications in accordance with Topic 606. We have disclosed the aggregate effect of all modifications when identifying the satisfied and unsatisfied performance obligations for purposes of determining the transaction price and allocating the transaction price at transition.

Disaggregation

We have considered (1) information that is regularly reviewed by our Chief Executive Officer, who has been identified as the Chief Operating Decision Maker (the “CODM”) as defined by the authoritative guidance on segment reporting, in evaluating financial performance and (2) disclosures presented outside of our financial statements in our earnings releases and used in investor presentations to disaggregate revenues. The principal category we use to disaggregate revenues is the nature of our products and subscriptions and services, as presented in our condensed consolidated statements of operations. In addition, revenues by reportable segment are presented in Note 10. “Segment Information”.

The following tables present revenue disaggregated by type of revenue and by region for the periods presented:



	Fiscal Quarter Ended May 5, 2019
	Americas		Asia Pacific		Europe, the Middle East and Africa		Total

	(In millions)
Products	$	608	$	3,372	$	438	$	4,418
Subscriptions and services*	749		101		249