GUIDEWIRE SOFTWARE, INC. The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and the Risk Factors included in Item 1A of Part II of this Quarterly Report on Form 10-Q. All information presented herein is based on our fiscal calendar. Unless otherwise stated, references in this report to particular years or quarters refer to our fiscal years ended in July and the associated quarters of those fiscal years. We assume no obligation to revise or update any forward-looking statements for any reason, except as required by law.
Overview
Guidewire delivers a leading platform that property and casualty ("P&C")
insurers trust to engage, innovate, and grow efficiently. Guidewire's platform
combines core operations, digital engagement, analytics, and artificial
intelligence ("AI") applications delivered as a cloud service or self-managed
software. As a partner to our customers, we continually evolve to enable their
success and assist them in navigating a rapidly changing insurance market.
Our core operational services and products are InsuranceSuite via Guidewire
Cloud, InsuranceNow, and InsuranceSuite for self-managed installations. These
services and products are transactional systems of record that support the
entire insurance lifecycle, including insurance product definition,
distribution, underwriting, policyholder services, and claims management.
InsuranceSuite via Guidewire Cloud is a highly configurable and scalable
product, delivered as a service and primarily comprised of three core
applications (PolicyCenter, BillingCenter, and ClaimCenter) that can be
subscribed to separately or together. These applications are built on and
optimized for our Guidewire Cloud Platform ("GWCP") architecture and leverage
our in-house Guidewire cloud operations team. InsuranceSuite via Guidewire Cloud
is designed to support multiple releases each year to ensure that cloud
customers remain on the latest version and gain fast access to our innovation
efforts. Additionally, InsuranceSuite via Guidewire Cloud embeds digital and
analytics capabilities natively into our platform. Most new sales and
implementations are for InsuranceSuite via Guidewire Cloud. InsuranceNow is a
complete, cloud-based application that offers policy, billing, and claims
management functionality to insurers. InsuranceSuite for self-managed
installations is comprised of three core applications (PolicyCenter,
BillingCenter, and ClaimCenter) that can be licensed separately or together and
can be deployed and updated by our customers and their implementation partners.
Our digital engagement applications enable digital sales, omni-channel service,
and enhanced claims experiences for policyholders, agents, vendor partners, and
field personnel. Our Analytics and AI offerings enable insurers to manage data
more effectively, gain insights into their business, drive operational
efficiencies, and underwrite new and evolving risks. To support P&C insurers
globally, we have localized, and will continue to localize, our platform for use
in a variety of international regulatory, language, and currency environments.
Our customers range from some of the largest global insurance companies or their
subsidiaries to predominantly national or local insurers that serve specific
states and/or regions. Our customer engagement is led by our direct sales team
and supported by our system integrator ("SI") partners. We maintain and continue
to grow our sales and marketing efforts globally, and maintain regional sales
centers throughout the world.
Because our platform is critical to our new and existing customers' businesses,
their decision-making and product evaluation process is long, which results in
an extended sales cycle. These evaluation periods can extend further if a
customer purchases multiple products or is considering a move to a cloud-based
subscription. Sales to new customers also involve extensive customer due
diligence and reference checks. The success of our sales efforts relies on
continued improvements and enhancements to our current services and products,
the introduction of new services and products, efficient operation of our cloud
infrastructure, continued development of relevant local content and automated
tools for updating content, and successful implementations.
We sell our cloud-delivered offerings through subscription services and our
self-managed products through term licenses. We generally price our services and
products based on the amount of DWP that will be managed by our platform. Our
subscription, term license, and support fees are typically invoiced annually in
advance. Subscription services are generally sold with an initial term of
between three and five years with optional annual renewals commencing after the
initial term. Subscription revenue is recognized on a ratable basis over the
committed term, once all revenue recognition criteria is met including providing
access to the service. Term licenses are primarily sold with an initial two-year
committed term with optional annual renewals commencing after the initial term.
We may enter into term license arrangements with our customers that have an
initial term of more than two years or may renew license arrangements for longer
than one year. A small portion of our revenue is derived from perpetual
licenses. Term and perpetual license revenue are typically recognized when
software is made available to the customer, provided that all other revenue
recognition criteria have been met. Our support revenue is generally recognized
ratably over the committed support term of the licensed software. Our support
fees are typically priced as a fixed percentage of the associated license fees.
We also offer professional services, both directly and through SI partners, to
help our customers deploy, migrate, and utilize our platform, services, and
products. A majority of our services revenue is billed monthly on a time and
materials basis.
Over the past few years, we have primarily been entering into cloud-based subscription arrangements with our new and existing customers and we anticipate that subscription arrangements will be a majority of annual new sales going forward. As this sales model
35--------------------------------------------------------------------------------
Table of Contents
matures, we may decide to change certain contract terms in new arrangements to remain competitive or otherwise meet market demands.
To extend our technology leadership in the global market and to drive operating efficiency, we continue to invest in product development and cloud operations to enhance and improve our current services and products, introduce new services and products, and advance our ability to securely and cost-effectively deliver our services in the cloud. Continued investment is critical as we seek to assist our customers in achieving their technology goals, maintain our competitive advantage, grow our revenue, expand internationally, and meet evolving customer demands. In certain cases, we may also acquire skills and technologies to manage our cloud infrastructure and accelerate our time to market for new products, solutions, and upgrades. Our track record of success with customers and their implementations is central to maintaining our strong competitive position. We rely on our global services team and SI partners to ensure that teams with the right combination of product, business, and language skills are used in the most efficient way to meet our customers' implementation and migration needs. We have extensive relationships with SI, consulting, technology, and other industry partners. Our network of partners has expanded as interest in and adoption of our platform has grown. We encourage our partners to co-market, pursue joint sales initiatives, and drive broader adoption of our technology, helping us grow our business more efficiently and enabling us to focus our resources on continued innovation and further enhancement of our solutions. We work closely with our network of third-party SI partners to facilitate new sales and implementations of both our subscription services and self-managed products. Our partnership with leading SI partners allows us to increase efficiency and scale while reducing customer implementation and migration costs. We continue to invest time and resources to increase the number of qualified consultants employed by our SI partners, develop relationships with new partners in existing and new markets, and ensure that all SI partners are qualified to assist with implementing our services and products. We believe this model will continue to serve us well, and we intend to continue to expand our network of partners and the number of certified consultants with whom we work so we can leverage our SI partners more effectively, especially for future subscription migrations and implementations. We face a number of risks in the execution of our strategy, including risks related to expanding to new markets, managing lengthy sales cycles, competing effectively in the global market, relying on sales to a relatively small number of large customers, developing new or acquiring existing services and products successfully, migrating our business towards a subscription model with ratable revenue recognition, increasing the overall adoption of our services and products, and cost-effectively managing the infrastructure of our cloud-based customers. In response to these and other risks we might face, we continue to invest in many areas of our business, including product development, cloud operations, implementation services and sales and marketing.
Seasonality
We have experienced seasonal variations in our license revenue and, to a lesser extent, in our subscription revenue as a result of increased customer orders in our fourth fiscal quarter. We generally see significantly increased orders in our fourth fiscal quarter, which is the quarter endingJuly 31 , due to efforts by our sales team to achieve annual incentives. Because we recognize revenue upfront for new term licenses and multi-year renewals compared to over time for subscription services, changes in the mix between term license and subscription services may impact our quarterly results. Additionally, any quarter in which a significant multi-year term license or multi-year term license renewal or non-renewal occurs could be impacted. For example, in the first quarter of fiscal year 2021, we experienced license revenue growth due to a five-year term license renewal under which revenue was recognized upfront, which overshadowed the comparison with our second quarter of fiscal year 2021 and created a challenging comparable period for the first quarter of fiscal year 2022. Additionally, as subscriptions increase as a percentage of total sales, the revenue we can recognize in the initial fiscal year of an order will be reduced, deferred revenue will increase, and our reported revenue growth will be adversely affected in the near term due to the ratable nature of these arrangements. The concentration of our sales in our fiscal fourth quarter increases this impact as the revenue impact of most fiscal fourth quarter subscription sales will not be realized until the following fiscal year. Our services revenue is also subject to seasonal fluctuations, though to a lesser degree than our license revenue and subscription revenue. Our services revenue is impacted by the number of billable days in a given fiscal quarter. The fiscal quarter endingJanuary 31 usually has fewer billable days due to the impact of theThanksgiving , Christmas, andNew Year's holidays. The fiscal quarter endingJuly 31 usually has fewer billable days due to the impact of vacations taken by our services professionals. Because we pay our services professionals the same amount throughout the year, our gross margins on our services revenue are usually lower in these quarters. This seasonal pattern, however, may be absent in any given year.
COVID-19 Impact
InMarch 2020 , theWorld Health Organization declared the outbreak of COVID-19 a pandemic, which has continued to spread throughoutthe United States and the world and has resulted in authorities implementing numerous measures to contain the virus, including travel bans and restrictions, quarantines, shelter-in-place orders, and business limitations and shutdowns. While we are 36
--------------------------------------------------------------------------------
Table of Contents
unable to accurately predict the full impact that COVID-19 will have on our
results of operations, financial condition, liquidity, and cash flows due to
numerous uncertainties, including the duration and severity of the pandemic and
containment measures and if there are any periods of increases in the number of
COVID-19 cases or future variants of the virus in areas in which we operate, our
compliance with containment measures has impacted our day-to-day operations and
could continue to disrupt our business and operations, as well as that of our
key customers, SI partners, vendors, and other counterparties, for an indefinite
period of time. To support the health and well-being of our employees,
customers, SI partners and communities, a vast majority of our employees are
working remotely. In addition, many of our existing and potential customers are
working remotely, which may continue to extend our sales cycle, delay the timing
of new orders, and increase the time to complete professional services
engagements in the future.
Our business and financial results since the third quarter of fiscal year 2020
have been impacted due to these disruptions, including decreases in annual
recurring revenue ("ARR") growth rates, services revenue and margins, operating
cash flow, potentially higher employee attrition, challenges in hiring necessary
personnel, and the change in fair value of strategic investments. ARR and
revenue, especially services revenue, continued to be impacted in fiscal year
2022 as a result of the challenges related to our compliance with
government-mandated or recommended shelter-in-place orders in jurisdictions in
which we, our customers, SI partners and vendors operate. Additionally, in
recent quarters, inflation has reached levels that have not been seen for
decades which is impacting the global economy and magnifying the impact of these
and other disruptions.
Although vaccines are making progress against the COVID-19 pandemic in the
United States and certain other parts of the world where vaccinations are widely
available, the economic impact of the pandemic on our business and the
businesses of our customers, SI partners, and vendors may continue through
fiscal year 2022, if not longer. We believe that new sales activities are being
delayed, not cancelled, and implementation engagements are being rescheduled to
later periods or being completed over a longer period of time. Certain marketing
events have been cancelled or postponed, while others are being hosted both
in-person and virtually, like our customer conference, Connections. Our
customers may be unable to pay or may request amended payment terms for their
outstanding invoices due to the economic impacts from COVID-19 and inflation,
and we may need to increase our accounts receivable allowances. A decrease in
orders in a given period could negatively affect our revenues and ARR in future
periods, particularly if experienced on a sustained basis, because a substantial
proportion of our new software subscription services orders is recognized as
revenue over time. Also, the pandemic's global economic impact could affect our
customers' DWP, which could ultimately impact our revenue as we generally price
our services and products based on the amount of DWP that will be managed by our
platform. Additionally, we may be required to record impairment related to our
operating lease assets, investments, long-lived assets, or goodwill.
We will continue to evaluate the nature and extent of the impact of COVID-19 on our business.
Key Business Metrics
We use certain key metrics and financial measures not prepared in accordance
with United States Generally Accepted Accounting Principles ("GAAP") to evaluate
and manage our business, including ARR and Free Cash Flow. For a further
discussion of how we use key metrics and certain non-GAAP financial measures,
see "Non-GAAP Financial Measures" in this Quarterly Report on Form 10-Q.
Annual Recurring Revenue ("ARR")
We use ARR to quantify the annualized recurring value outlined in active customer contracts at the end of a reporting period. ARR includes the annualized recurring value of term licenses, subscription agreements, support contracts, and hosting agreements based on customer contracts, which may not be the same as the timing and amount of revenue recognized. All components of the licensing and other arrangements that are not expected to recur (primarily perpetual licenses and professional services) are excluded. In some arrangements with multiple performance obligations, a portion of recurring license and support or subscription contract value is allocated to services revenue for revenue recognition purposes, but does not get allocated for purposes of calculating ARR. This revenue allocation only impacts the initial term of the contract. This means that as we increase arrangements with multiple performance obligations that include services at discounted rates, more of the total contract value will be recognized as services revenue, but our reported ARR amount will not be impacted. During the nine months endedApril 30, 2022 , the recurring license and support or subscription contract value recognized as services revenue was$16.1 million . If a customer contract contains invoicing amounts that increase over the contract term, then ARR reflects the annualized invoicing amount outlined in the contract for the current reporting period. For example, given a contract with annual invoicing of$1.0 million at the beginning of year one,$2.0 million at the beginning of year two, and$3.0 million at the beginning of year three, and the reporting period is subsequent to year two invoicing and prior to year three invoicing, the reported ARR for that contract would be$2.0 million . As ofApril 30, 2022 , ARR was$637 million , compared to$582 million as ofJuly 31, 2021 . InMarch 2022 , we announced that we will stop doing business and terminated all customer contracts inRussia . The impact of this decision resulted in the removal of$3.1 million in ARR. ARR results for interim quarterly periods in fiscal year 2022 are measured on a constant currency basis, using the actual currency rates at the end of fiscal year 2021 throughout the year. 37
--------------------------------------------------------------------------------
Table of Contents Free Cash Flow We monitor our free cash flow, as a key measure of our overall business performance, which enables us to analyze our financial performance without the effects of certain non-cash items such as depreciation, amortization, and stock-based compensation expenses. Additionally, free cash flow takes into account the impact of changes in deferred revenue, which reflects the receipt of cash payment for products before they are recognized as revenue, and unbilled accounts receivable, which reflects revenue that has been recognized that has yet to be invoiced to our customers. Our net cash provided by (used in) operating activities is significantly impacted by the timing of invoicing and collections of accounts receivable, the timing and amount of annual bonus payments, as well as payroll and tax payments. Our capital expenditures consists of purchases of property and equipment, primarily computer hardware, software, and leasehold improvements, and capitalized software development costs. In the first quarter of fiscal year 2022, we paid the entire bonus amount for fiscal year 2021 along with accrued vacation for employees in countries where we adopted a non-accrued vacation policy effectiveSeptember 2021 . For a further discussion of our operating cash flows, see "Liquidity and Capital Resources - Cash Flows" in this Quarterly Report on Form 10-Q. Nine
Months Ended
2022 2021
Net cash provided by (used in) operating activities
$ 3,233 Purchases of property and equipment (7,976) (12,412) Capitalized software development costs (9,187) (7,619) Free cash flow$ (138,695) $ (16,798)
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in accordance with GAAP. Accounting policies, methods, and estimates are an integral part of the preparation of condensed consolidated financial statements in accordance with GAAP and, in part, are based upon management's current judgments. Those judgments are normally based on knowledge and experience with regard to past and current events and assumptions about future events. Certain accounting policies, methods, and estimates are particularly sensitive because of their significance to the condensed consolidated financial statements and because of the possibility that future events affecting them may differ markedly from management's current judgments. While there are a number of significant accounting policies, methods, and estimates affecting our condensed consolidated financial statements, which are described in Note 1 "The Company and Summary of Significant Accounting Policies and Estimates" to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, our revenue recognition policies are critical to the periods presented. There have been no material changes to our significant and critical accounting policies as described in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates" in our Annual Report on Form 10-K for the fiscal year endedJuly 31, 2021 except for the addition of business combinations as a significant accounting policy, which is described in Note 1 "The Company and Summary of Significant Accounting Policies and Estimates" to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
Recent Accounting Pronouncements
See Note 1 "The Company and Summary of Significant Accounting Policies and Estimates" to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for a full description of recent accounting pronouncements adopted, including the dates of adoption, and recent account pronouncements not yet adopted.
Results of Operations
The following table sets forth our results of operations for the periods presented. The data has been derived from the condensed consolidated financial statements contained in this Quarterly Report on Form 10-Q which, in the opinion of our management, reflect all adjustments, consisting only of normal recurring adjustments, necessary to fairly present the financial position and results of operations for the interim periods presented. The results of operations for any period should not be considered indicative of results for any future period. This information should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year endedJuly 31, 2021 . 38
--------------------------------------------------------------------------------
Table of Contents
Three Months Ended April 30,
As a % of As a % of
2022 total revenue 2021 total revenue
(in thousands, except percentages)Revenue: Subscription and support$ 86,851 44 %$ 64,836 40 % License 53,894 27 50,937 31 Services 56,703 29 48,195 29 Total revenue 197,448 100 163,968 100 Cost of revenue: Subscription and support 54,758 28 41,284 25 License 1,951 1 1,991 1 Services 63,779 32 48,790 30 Total cost of revenue 120,488 61 92,065 56 Gross profit: Subscription and support 32,093 16 23,552 15 License 51,943 26 48,946 30 Services (7,076) (4) (595) (1) Total gross profit 76,960 38 71,903 44 Operating expenses: Research and development 64,049 32 54,155 33 Sales and marketing 48,142 24 40,879 25 General and administrative 27,173 14 23,695 14 Total operating expenses 139,364 70 118,729 72 Income (loss) from operations (62,404) (32) (46,826) (28) Interest income 1,000 1 1,559 1 Interest expense (4,885) (2) (4,698) (3) Other income (expense), net (6,932) (4) 5,259 3
Income (loss) before provision for (benefit from) income taxes
(73,221) (37) (44,706) (27)
Provision for (benefit from) income taxes (15,777) (8) (8,073) (5)
Net income (loss) $ (57,444) (29) % $ (36,633) (22) %
39--------------------------------------------------------------------------------
Table of Contents
Nine Months Ended April 30,
As a % of As a % of
2022 total revenue 2021 total revenue
(in thousands, except percentages)Revenue: Subscription and support$ 250,138 44 %$ 182,365 35 % License 163,845 29 194,132 38 Services 154,032 27 137,335 27 Total revenue 568,015 100 513,832 100 Cost of revenue: Subscription and support 155,654 27 118,448 23 License 6,544 1 7,762 2 Services 169,453 30 148,724 29 Total cost of revenue 331,651 58 274,934 54 Gross profit: Subscription and support 94,484 17 63,917 12 License 157,301 28 186,370 36 Services (15,421) (3) (11,389) (2) Total gross profit 236,364 42 238,898 46 Operating expenses: Research and development 184,378 32 159,964 31 Sales and marketing 142,940 25 116,739 23 General and administrative 76,284 13 67,695 13 Total operating expenses 403,602 70 344,398 67 Income (loss) from operations (167,238) (28) (105,500) (21) Interest income 2,373 - 6,363 1 Interest expense (14,512) (3) (13,969) (3) Other income (expense), net (13,794) (2) 14,632 3
Income (loss) before provision for (benefit from) income taxes
(193,171) (33) (98,474) (20)
Provision for (benefit from) income taxes (43,770) (8) (32,999) (6)
Net income (loss) $ (149,401) (25) % $ (65,475) (14) %
Revenue
We derive our revenue primarily from delivering cloud-based services, licensing our software applications, providing support, and delivering professional services.
Subscription and Support
A growing portion of our revenue consists of fees for our subscription services,
which are generally priced based on the amount of DWP that is managed by our
subscription services. Subscription revenue is recognized ratably over the term
of the arrangement, beginning at the point in time our provisioning process has
been completed and access has been made available to the customer. The initial
term of such arrangements is generally from three to five years. Subscription
agreements contain optional annual renewals commencing upon the expiration of
the initial contract term. A majority of our subscription customers are billed
annually in advance. In some arrangements with multiple performance obligations,
a portion of recurring subscription contract value may be allocated to license
revenue or services revenue for revenue recognition purposes. For example, in
arrangements with multiple performance obligations that include services at
discounted rates, a portion of the total contract value related to subscription
services will be allocated and recognized as services revenue. Additionally,
agreements to migrate an existing term license customer to subscription services
contain multiple performance obligations, including a provision to continue
using the term license during the subscription
40--------------------------------------------------------------------------------
Table of Contents
service implementation period. Under these migration agreements, a portion of the total contract value related to subscription services could be allocated and recognized as term license and support revenue in the period renewed or delivered. Our support revenue is generally recognized ratably over the committed support term of the licensed software. Our support fees are typically priced as a fixed percentage of the associated term license fees. We generally invoice support annually in advance. License A substantial majority of our license revenue consists of term license fees. Our term license revenue is primarily generated through license fees that are billed annually in advance during the term of the contract, including any renewals. Our term license fees are generally priced based on the amount of DWP that will be managed by our licensed software. Our term licenses have generally been sold under a two-year initial term with optional annual renewals after the initial term. However, we do enter into license arrangements that have an initial term of more than two years and renewal terms of more than one year. Term license revenue for the committed term of the customer agreement is generally fully recognized upon delivery of the software or at the beginning of the renewal term.
In a limited number of cases, we license our software on a perpetual basis. Perpetual license revenue is generally recognized upon delivery. We invoice our perpetual license customers either in full at contract signing or on an installment basis.
Services
Our services revenue is primarily derived from implementation and migration services performed for our customers, reimbursable travel expenses, and training fees. A majority of our services engagements are billed and revenue is recognized on a time and materials basis upon providing our services.
Three Months Ended April 30,
2022 2021 Change
As a % of total As a % of total
Amount revenue Amount revenue ($) (%)
(in thousands, except percentages)
Revenue:
Subscription and support:
Subscription $ 66,419 34 % $ 44,553 27 % $ 21,866 49 %
Support 20,432 10 20,283 13 149 1 %
License:
Term license 53,848 27 50,688 31 3,160 6 %
Perpetual license 46 - 249 - (203) (82) %
Services 56,703 29 48,195 29 8,508 18 %
Total revenue $ 197,448 100 % $ 163,968 100 % $ 33,480 20 %
41--------------------------------------------------------------------------------
Table of Contents
Nine Months Ended April 30,
2022 2021 Change
As a % of total As a % of total
Amount revenue Amount revenue ($) (%)
(in thousands, except percentages)
Revenue:
Subscription and support:
Subscription $ 186,419 33 % $ 120,061 23 % $ 66,358 55 %
Support 63,719 11 62,304 12 1,415 2 %
License:
Term license 163,703 29 193,777 38 (30,074) (16) %
Perpetual license 142 - 355 - (213) (60) %
Services 154,032 27 137,335 27 16,697 12 %
Total revenue $ 568,015 100 % $ 513,832 100 % $ 54,183 11 %
Subscription and Support
We anticipate subscriptions will continue to represent a majority of new
arrangements, including customers migrating from existing term license
arrangements to subscription services, in future periods. Due to the ratable
recognition of subscription revenue, growth in subscription revenue will lag
behind the growth of subscription orders and will impact the comparative growth
of our reported revenue on a year-over-year basis. If we complete a higher
percentage of subscription arrangements in a given period, our short-term growth
rates will be negatively impacted. Due to the seasonal nature of our business,
the impact of new subscription orders in the fourth fiscal quarter, our
historically largest quarter for new orders, is not reflected in revenues until
the following fiscal year.
Subscription revenue increased by $21.9 million and $66.4 million during the
three and nine months ended April 30, 2022 , respectively, compared to the same
periods a year ago, primarily due to the impact of cloud transition and new
subscription agreements for InsuranceSuite via Guidewire Cloud entered into and
provisioned since April 30, 2021 .
Support revenue increased by $0.1 million and $1.4 million during the three and
nine months ended April 30, 2022 , respectively, compared to the same periods a
year ago.
Support related to subscription arrangements is included in subscription
revenue, as support is not quoted or priced separately from the subscription
services. As customers enter into a subscription agreement to migrate from an
existing term license agreement, the timing and amount of revenue recognized
will be impacted by allocations of the total contract value between the license,
subscription, and support performance obligations. As a result, we expect the
increase in subscription orders as a percentage of total new sales and customers
migrating from term licenses to subscription services will continue to reduce
the growth in, or result in lower, support revenue in the future.
License
Revenue related to new term licenses and multi-year term license renewals is generally recognized upfront and, as a result, no additional license revenue is recognized until after the committed term expires. As a customer enters into a subscription agreement to migrate from an existing term license agreement, the timing and amount of revenue recognition will be impacted by allocations of total contract value between license, subscription, and support performance obligations. License revenue growth will be negatively impacted as subscription sales increase as a percentage of total new sales and as customers migrate from term licenses to subscription services instead of renewing their term licenses. Term license revenue increased by$3.2 million during the three months endedApril 30, 2022 , compared to the prior year period, primarily due to annual term license renewals of multi-year arrangements that did not have a renewal in the same period a year ago and multi-year term license renewals during the three months endedApril 30, 2022 compared to the same period a year ago. The impact on term license revenue from contracts with an initial term of greater than two years or a renewal term of greater than one year was$1.2 million during the three months endedApril 30, 2022 compared with$0.5 million in the prior year period. 42
--------------------------------------------------------------------------------
Table of Contents
Term license revenue decreased by$30.1 million during the nine months endedApril 30, 2022 , compared to the prior year period, primarily due to fewer multi-year term license renewals in the nine months endedApril 30, 2022 compared to the prior year period. The impact on term license revenue from contracts with an initial term of greater than two years or a renewal term of greater than one year was$2.3 million during the nine months endedApril 30, 2022 compared with$20.0 million in the prior year period. Additionally,$7.1 million of term license revenue in the prior year period was from agreements that migrated from a term license to a subscription service. Ongoing revenue related to these agreements is recorded as subscription revenue. Perpetual license revenue accounted for less than 1% of total revenue during the three and nine months endedApril 30, 2022 . We expect perpetual license revenue to continue to represent a small percentage of our total license revenue. We also expect perpetual license revenue to potentially be volatile across quarters due to the large amount of perpetual revenue that may be generated from a single customer order. Services Services revenue increased by$8.5 million and$16.7 million during the three and nine months endedApril 30, 2022 , respectively, compared to the same periods a year ago. The increase is primarily driven by an increase in the number and size of subscription implementation and migration projects, but services revenue overall continues to be impacted by contracts with lower average services billing rates and increased investments in customer implementations, including fixed fee or capped arrangements, to accelerate their transition to the cloud. In these arrangements when a project extends longer than originally anticipated, the average billing rate we recognize may decrease which can result in revenue adjustments and lower gross profit. We expect some level of variability in our services revenue in future periods. As we successfully leverage our SI partners to lead more implementations, our services revenue could decrease. We expect challenges related to COVID-19, inflation, and our ability to hire additional services professionals will also continue to negatively impact services revenue. As we continue to expand into new markets and develop new services and products, we have, and may continue to, enter into contracts with lower average billing rates, make investments in customer implementation and migration engagements, and enter into fixed price contracts, which may impact services revenue and services margins.
Cost of Revenue and Gross Profit
Our cost of subscription and support revenue consists of personnel costs for our cloud operations and technical support teams, cloud infrastructure costs, development of online training curriculum, amortization of intangible assets, and royalty fees paid to third parties. Our cost of license revenue primarily consists of development of online training curriculum, royalty fees paid to third parties, and amortization of intangible assets. Our cost of services revenue primarily consists of personnel costs for our professional service employees, third-party subcontractors or consultants, and travel costs. In instances where we have primary responsibility for the delivery of services, subcontractor fees are expensed as cost of services revenue. In each case, personnel costs include salaries, bonuses, benefits, and stock-based compensation.
We allocate overhead such as information technology support, information security, facilities, and other administrative costs to all functional departments based on headcount. As such, these general overhead expenses are reflected in cost of revenue and each functional operating expense.
Cost of Revenue:
43--------------------------------------------------------------------------------
Table of Contents
Three Months Ended April 30,
2022 2021 Change
Amount Amount ($) (%)
(in thousands, except percentages)
Cost of revenue:
Subscription and support $ 54,758 $ 41,284 $ 13,474 33 %
License 1,951 1,991 (40) (2)
Services 63,779 48,790 14,989 31
Total cost of revenue $ 120,488 $ 92,065 $ 28,423 31
Includes stock-based compensation of:
Cost of subscription and support revenue $ 4,051 $ 2,780 $ 1,271
Cost of license revenue 170 183 (13)
Cost of services revenue 5,879 5,395 484
Total $ 10,100 $ 8,358 $ 1,742
Nine Months Ended April 30,
2022 2021 Change
Amount Amount ($) (%)
(in thousands, except percentages)
Cost of revenue:
Subscription and support $ 155,654 $ 118,448 $ 37,206 31 %
License 6,544 7,762 (1,218) (16)
Services 169,453 148,724 20,729 14
Total cost of revenue $ 331,651 $ 274,934 $ 56,717 21
Includes stock-based compensation of:
Cost of subscription and support revenue $ 11,172 $ 8,336 $ 2,836
Cost of license revenue 541 579 (38)
Cost of services revenue 17,597 16,516 1,081
Total $ 29,310 $ 25,431 $ 3,879
Cost of subscription and support revenue during the three months ended April 30,
2022 increased by $13.5 million , compared to the same period a year ago. The
increase is primarily due to increases in personnel costs of $8.1 million due to
our continued investment in our cloud operations to increase operational
efficiency and scale, cloud infrastructure expense of $5.0 million for our
growing cloud customer base, higher amortization of previously capitalized
software development costs of $0.6 million , and royalties of $0.3 million . These
increases were partially offset by a decrease in professional services of $0.4
million due to the hiring of cloud operations employees to positions that were
previously filled by third parties.
Cost of subscription and support revenue during the nine months ended April 30,
2022 increased by $37.2 million , compared to the same period a year ago. The
increase is primarily due to increases in personnel costs of $23.9 million due
to our continued investment in our cloud operations to increase operational
efficiency and scale, cloud infrastructure expense of $15.3 million for our
growing cloud customer base, higher amortization of previously capitalized
software development costs of $1.7 million , and royalties of $0.8 million . These
increases were partially offset by a decrease in amortization of acquired
intangibles of $4.5 million due to certain acquired intangible assets being
fully amortized.
44--------------------------------------------------------------------------------
Table of Contents
Due to our continued investment in cloud-based operations, increase in new cloud-based customers, and increased usage from existing cloud-based customers, the costs to provide our subscription and support services has increased. We expect our cost of subscription and support revenue to increase as we continue to invest in our cloud operations, more customers migrate from term licenses to subscription services, and we incur higher cloud infrastructure costs to support our growing cloud customer base, to improve efficiencies, and to continuously improve and maintain secure environments. However, we believe that the cost of subscription and support revenue will grow at a slower rate than subscription and support revenue in future years as we achieve economies of scale and other efficiencies. The short-term impact of these trends along with mix within subscription and support revenue may result in a decline in subscription and support gross margin even though subscription and support gross profit increases in absolute dollars.
Cost of license revenue was relatively flat during the three months ended
The$1.2 million decrease in cost of license revenue during the nine months endedApril 30, 2022 , compared to the same period a year ago, was primarily due to decreases in amortization of acquired intangible assets of$1.1 million due to certain acquired intangible assets being fully amortized and lower costs associated with the development of online training curriculum included with the latest releases of InsuranceSuite of$0.6 million . These decreases were partially offset by an increase in royalties of$0.5 million .
We continue to anticipate lower cost of license revenue over time as our term license customers transition to cloud subscription agreements.
The$15.0 million increase in cost of services revenue during the three months endedApril 30, 2022 , compared to the same period a year ago, was primarily due to increases of$14.7 million in subcontractor and personnel expenses for InsuranceSuite implementations and$0.2 million in professional services expenses. The$20.7 million increase in cost of services revenue during the nine months endedApril 30, 2022 , compared to the same period a year ago, was primarily due to an increase of$19.8 million in subcontractor and personnel expenses for InsuranceSuite implementations and, to a lesser extent, increases of$0.4 in software subscriptions,$0.3 million in professional services, and$0.2 million in web hosting services. We had 689 cloud operations and technical support employees and 699 professional services employees atApril 30, 2022 , compared to 562 cloud operations and technical support employees and 658 professional services employees atApril 30, 2021 . Gross Profit: Three Months Ended April 30, 2022 2021 Change Amount Margin % Amount Margin % ($) (%) (in thousands, except percentages) Gross profit: Subscription and support$ 32,093 37 %$ 23,552 36 %$ 8,541 36 % License 51,943 96 48,946 96 2,997 6 Services (7,076) (12) (595) (1) (6,481) (1,089) Total gross profit$ 76,960 39 %$ 71,903 44 %$ 5,057 7 Our gross profit increased$5.1 million during the three months endedApril 30, 2022 , compared to the same period a year ago. Gross profit was impacted by the increase in subscription and support gross profit from subscription revenue increasing faster than cost of subscription and support revenue as we begin to see economies of scale in our cloud operations and, to a lesser extent, the increase in term license revenue. These increases were partially offset by a decrease in services gross profit due to the investment that we are making in our customers' transition to subscription services. Our gross margin decreased to 39% during the three months endedApril 30, 2022 from 44% during the same period a year ago. Gross margin was primarily impacted by the increased percentage of subscription and support revenue to total revenue as subscription and support revenue has lower gross margin compared to license revenue and the lower services margin due to the investment that we are making in our customers' transition to subscription services. 45
--------------------------------------------------------------------------------
Table of Contents
Nine Months Ended April 30,
2022 2021 Change
Amount Margin % Amount Margin % ($) (%)
(in thousands, except percentages)
Gross profit:
Subscription and support $ 94,484 38 % $ 63,917 35 %$ 30,567 48 % License 157,301 96 186,370 96 (29,069) (16) Services (15,421) (10) (11,389) (8) (4,032) (35) Total gross profit$ 236,364 42 %$ 238,898 46 %$ (2,534) (1) Our gross profit decreased$2.5 million during the nine months endedApril 30, 2022 , compared to the same period a year ago. Gross profit was impacted by a decrease in term license revenue due to the impact of multi-year term license arrangements entered into during the first half of fiscal year 2022 being significantly lower than the impact of multi-year term license arrangements in the same period a year ago and, to a lesser extent, a decrease in services gross profit due to the investment that we are making in our customers' transition to subscription services. These decreases were partially offset by an increase in subscription and support gross profit due to the increase in subscription revenue, which has a lower gross margin compared to license revenue. Our gross margin decreased to 42% during the nine months endedApril 30, 2022 from 46% during the same period a year ago. Gross margin was primarily impacted by the increase as a percentage of total revenue of subscription and support revenue, which has a lower gross margin compared to license revenue. We expect subscription and support gross margins will fluctuate as our subscription revenue increases and we continue to invest in our cloud operations. However, as we gain efficiencies and increase the number of cloud customers, we expect subscription gross margins to improve over the next several years. In addition to the impact of our investment in customer migrations and implementations, challenges related to COVID-19 and inflation may negatively impact services gross margin for at least the remainder of this fiscal year and next fiscal year. We expect license gross margin will fluctuate based on changes in revenue due to the timing of delivery of new multi-year term licenses and the execution of multi-year term license renewals, as cost of license revenue is expected to be relatively consistent from period to period in the future. Overall, we expect gross margins to decline in the short-term primarily due to the mix between license revenue and subscription and support revenue.
Operating Expenses
Our operating expenses consist of research and development, sales and marketing,
and general and administrative expenses. The largest components of our operating
expenses are personnel costs for our employees and, to a lesser extent,
professional services. In each case, personnel costs include salaries, bonuses,
commissions, benefits, and stock-based compensation. We allocate overhead such
as information technology support, information security, facilities, and other
administrative costs to all functional departments based on headcount. As a
result, general overhead expenses are reflected in cost of revenue and each
functional operating expense.
Three Months Ended April 30,
2022 2021 Change
As a % of
Amount As a % of total revenue Amount total revenue ($) (%)
(in thousands, except percentages)
Operating expenses:
Research and development $ 64,049 32% $ 54,155 33 % $ 9,894 18 %
Sales and marketing 48,142 24 40,879 25 7,263 18
General and administrative 27,173 14 23,695 14 3,478 15
Total operating expenses $ 139,364 70 $ 118,729 72 $ 20,635 17
Includes stock-based compensation of:
Research and development$ 9,293 $ 6,930 $ 2,363 Sales and marketing 7,529 6,587 942 General and administrative 6,006 6,348 (342) Total$ 22,828 $ 19,865 $ 2,963 46
--------------------------------------------------------------------------------
Table of Contents
Nine Months Ended April 30,
2022 2021 Change
As a % of As a % of
Amount total revenue Amount total revenue ($) (%)
(in thousands, except percentages)
Operating expenses:
Research and development $ 184,378 32 % $ 159,964 31 % $ 24,414 15 %
Sales and marketing 142,940 25 116,739 23 26,201 22
General and administrative 76,284 13 67,695 13 8,589 13
Total operating expenses $ 403,602 70 $ 344,398 67 $ 59,204 17
Includes stock-based compensation of:
Research and development$ 27,340 $ 21,781 $ 5,559 Sales and marketing 25,843 19,370 6,473 General and administrative 20,540 19,621 919 Total$ 73,723 $ 60,772 $ 12,951 Research and Development
Our research and development expenses primarily consist of personnel costs for our technical staff and consultants providing professional services.
The$9.9 million increase in research and development expenses during the three months endedApril 30, 2022 , compared to the same period a year ago, was primarily due to increases of$8.0 million in personnel costs associated with higher headcount,$1.0 million in cloud infrastructure costs for our development environments,$0.8 million in acquisition consideration holdback costs recognized over a service period relating to the Hazard Hub acquisition, and$0.5 million in software subscription costs. The increases were partially offset by a decrease of$0.5 million in professional services. The$24.4 million increase in research and development expenses during the nine months endedApril 30, 2022 , compared to the same period a year ago, was primarily due to increases of$17.6 million in personnel costs associated with higher headcount,$3.5 million in cloud infrastructure costs for our development environments,$2.3 million in acquisition consideration holdback costs recognized over a service period relating to the HazardHub acquisition, and$1.2 million in software subscription costs. These increases were partially offset by a decrease of$0.2 million in professional services.
Our research and development headcount was 888 at
We expect our research and development expenses to increase in absolute dollars as we continue to hire and dedicate internal resources to develop, improve, and expand the functionality of our solutions and migrate our solutions to the cloud. Research and development expenses may also increase if we pursue additional acquisitions.
Sales and Marketing
Our sales and marketing expenses primarily consist of personnel costs for our sales and marketing employees. Included in our personnel costs are commissions, which are considered contract acquisition costs and are capitalized when earned and expensed over the anticipated period of time that goods and services are expected to be provided to a customer, which we estimate to be approximately five years. Sales and marketing expenses also includes travel expenses, professional services for marketing activities, and amortization of certain acquired intangibles. The$7.3 million increase in sales and marketing expenses during the three months endedApril 30, 2022 , compared to the same period a year ago, was primarily due to increases of$5.4 million in personnel costs due to higher headcount to sell and market our services and products,$1.1 million in travel expenses as in-person client interactions resumed,$0.5 million in marketing and advertising expense, and$0.2 million related to the amortization of previously acquired intangible assets. 47
--------------------------------------------------------------------------------
Table of Contents
The$26.2 million increase in sales and marketing expenses during the nine months endedApril 30, 2022 , compared to the same period a year ago, was primarily due to increases of$20.3 million in personnel costs due to higher headcount to sell and market our services and products;$3.0 million in travel expenses as in-person client interactions resumed;$2.2 million in marketing and advertising expense associated with Connections Reimagined, our annual sales conference which was a hybrid event held inNovember 2021 , compared to a fully virtual event held during the same period last year;$0.3 million related to the amortization of previously acquired intangibles; and$0.3 million in web hosting costs.
Our sales and marketing headcount was 474 at
We expect our sales and marketing expenses to continue to increase in absolute dollars as we continue to invest in sales and marketing activities and resume business travel to support our growth and objectives.
General and Administrative
Our general and administrative expenses include executive, finance, human resources, legal, and corporate development and strategy functions, and primarily consist of personnel costs, as well as professional services.
The$3.5 million increase in general and administrative during the three months endedApril 30, 2022 , compared to the same period a year ago, was primarily due to increases of$3.0 million of bad debt expense related to a contract termination as a result ofUnited States government sanctions onRussia ,$1.7 million in personnel costs due to higher headcount, and$1.4 million in software subscription and web hosting costs. These increases were partially offset by a decrease of$2.5 million in professional services. The$8.6 million increase in general and administrative during the nine months endedApril 30, 2022 , compared to the same period a year ago, was primarily due to increases of$5.3 million in personnel costs due to higher headcount,$3.7 million in software subscription and web hosting costs, and$3.0 million of bad debt expense related to a contract termination as a result ofUnited States government sanctions onRussia . These increases were partially offset by a decrease of$3.3 million in professional services.
Our general and administrative headcount was 458 at
We expect that our general and administrative expenses will increase in absolute
dollars as we continue to invest in personnel, corporate infrastructure, and
systems required to support our strategic initiatives, the growth of our
business, and our compliance and reporting obligations.
Other Income (Expense)
Three Months Ended April 30,
2022 2021 Change
Amount Amount ($) (%)
(in thousands, except percentages)
Interest income $ 1,000 $ 1,559 $ (559) (36) %
Interest expense $ (4,885) $ (4,698) $ (187) 4 %
Other income (expense), net $ (6,932) $ 5,259 $ (12,191) (232) %
Nine Months Ended April 30,
2022 2021 Change
Amount Amount ($) (%)
(in thousands, except percentages)
Interest income $ 2,373 $ 6,363 $ (3,990) (63) %
Interest expense $ (14,512) $ (13,969) $ (543) 4 %
Other income (expense), net $ (13,794) $ 14,632 $ (28,426) (194) %
Interest Income
Interest income represents interest earned on our cash, cash equivalents, and investments.
Interest income decreased$0.6 million and$4.0 million during the three and nine months endedApril 30, 2022 , respectively, compared to the same periods a year ago, primarily due to lower yields on invested funds and lower funds available for investment. 48
--------------------------------------------------------------------------------
Table of Contents
Interest Expense
Interest expense includes both stated interest and the amortization of debt discount and issuance costs associated with our Convertible Senior Notes. The amortization of debt discount and issuance costs are recognized on an effective interest basis. Stated interest expense is consistent in the comparative periods as the outstanding principal and stated interest rate have not changed.
Interest expense for the three months ended
Interest expense for the nine months ended
Other Income (Expense), Net
Other income (expense), net includes foreign exchange gains and losses resulting from fluctuations in foreign exchange rates on monetary asset and monetary liability balances that are denominated in currencies other than the functional currency of the entity in which they are recorded. Our monetary assets and liabilities denominated in currencies other than the functional currency of the entity in which they are recorded consist primarily of trade accounts receivable, unbilled accounts receivable, trade accounts payable, and intercompany receivables and payables. We currently are entering into transactions in the following currencies: the Argentine Peso, Australian Dollar, Brazilian Real, British Pound, Canadian Dollar, Chinese Yuan,Danish Krone , Euro, Hong Kong Dollar, Indian Rupee, Japanese Yen, Malaysian Ringgit, Mexican Peso, New Zealand Dollar, Polish Zloty, Russian Ruble, South African Rand, and Swiss Franc. Other income (expense), net during the three and nine months endedApril 30, 2022 was expense of$6.9 million and$13.8 million , respectively, as compared to income of$5.3 million and$14.6 million during the same periods a year ago, due to fluctuations in foreign currency exchange rates in those periods.
Provision for (benefit from) Income Taxes
We are subject to taxes inthe United States as well as other tax jurisdictions and countries in which we conduct business. Earnings from our non-U.S. activities are subject to local country income tax and may also be subject toU.S. income tax. Three Months Ended April 30, 2022 2021 Change Amount Amount ($) (%) (in thousands, except percentages) Provision for (benefit from) income taxes$ (15,777) $ (8,073) $ (7,704) 95 % Effective tax rate 22 % 18 % Nine Months Ended April 30, 2022 2021 Change Amount Amount ($) (%) (in thousands, except percentages) Provision for (benefit from) income taxes$ (43,770) $ (32,999) $ (10,771) 33 % Effective tax rate 23 % 34 % We recognized an income tax benefit of$15.8 million and$8.1 million for the three months endedApril 30, 2022 and 2021, respectively, and an income tax benefit of$43.8 million and$33.0 million for the nine months endedApril 30, 2022 and 2021, respectively. The change in the amount of income taxes recorded for the three months endedApril 30, 2022 , compared to the same period a year ago, was primarily due to the increase in the loss before taxes. The change in the amount of income taxes recorded for the nine months endedApril 30, 2022 , compared to the same period a year ago, was primarily due to the increase in the loss before taxes, offset by the decrease in excess tax benefits related to stock-based compensation and the release of uncertain tax positions in the prior year. The effective tax rate of 22% and 23% for the three and nine months endedApril 30, 2022 , respectively, differs from the statutoryU.S. federal income tax rate of 21% mainly due to permanent differences for stock-based compensation including excess tax benefits, research and development credits, and certain non-deductible expenses including executive compensation. 49
--------------------------------------------------------------------------------
Table of Contents
During the three and nine months endedApril 30, 2022 , unrecognized tax benefits increased by$0.4 million and$1.3 million , respectively. As ofApril 30, 2022 , we had unrecognized tax benefits of$11.6 million that, if recognized, would affect our effective tax rate.
Non-GAAP Financial Measures
In addition to the key business metrics presented above, we believe that the following non-GAAP financial measures provide useful information to management and investors regarding certain financial and business trends relating to our financial condition and results of operations. Management uses these non-GAAP measures to compare our performance to that of prior periods for trend analysis, for purposes of determining executive and senior management incentive compensation, and for budgeting and planning purposes. We believe that the use of these non-GAAP financial measures provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing our financial results with other software companies because it provides consistency and comparability with past financial performance and assists in comparisons with other companies, many of which present similar non-GAAP financial measures to investors. However, our management does not consider these non-GAAP measures in isolation or as an alternative to financial measures determined in accordance with GAAP. The non-GAAP financial information is presented for supplemental informational purposes only, should not be considered a substitute for financial information presented in accordance with GAAP, and may be different from similarly-titled non-GAAP measures used by other companies. The principal limitation of these non-GAAP financial measures is that they exclude significant expenses and income that are required by GAAP to be recorded in our financial statements. In addition, they are subject to inherent limitations as they reflect the exercise of judgment by management about which expenses and income are excluded or included in determining these non-GAAP financial measures. We urge investors to review the reconciliation of non-GAAP financial measures to the comparable GAAP financial measures included herein and not to rely on any single financial measure to evaluate the Company's business.
The following table reconciles the specific items excluded from GAAP in the calculation of non-GAAP financial measures for the periods indicated below.
50--------------------------------------------------------------------------------
Table of Contents
Three Months Ended April 30, Nine Months Ended April 30,
2022 2021 2022 2021
Gross profit reconciliation:
GAAP gross profit $ 76,960 $ 71,903 $ 236,364 $ 238,898
Non-GAAP adjustments:
Stock-based compensation 10,100 8,358 29,310 25,431
Amortization of intangibles 1,905 2,303 5,754 11,355
COVID-19 Canada Emergency Wage Subsidy benefit(1) - (951) - (1,919)
Non-GAAP gross profit $ 88,965 Income (loss) from operations reconciliation: GAAP income (loss) from operations$ (62,404) $ (46,826) $ (167,238) $ (105,500) Non-GAAP adjustments: Stock-based compensation 32,928 28,223 103,033 86,203 Amortization of intangibles 3,770 3,921 11,294 16,567 COVID-19 Canada Emergency Wage Subsidy benefit(1) - (1,623) - (3,309) Acquisition consideration holdback(2) 809 - 2,318 - Non-GAAP income (loss) from operations$ (24,897)
Net income (loss) reconciliation: GAAP net income (loss)$ (57,444) $ (36,633) $ (149,401) $ (65,475) Non-GAAP adjustments: Stock-based compensation 32,928 28,223 103,033 86,203 Amortization of intangibles 3,770 3,921 11,294 16,567 Amortization of debt discount and issuance costs 3,623 3,429 10,719 10,143 COVID-19 Canada Emergency Wage Subsidy benefit(1) - (1,623) - (3,309) Acquisition consideration holdback(2) 809 - 2,318 - Tax impact of non-GAAP adjustments(3) (5,510) (10,532) (22,641) (33,907) Non-GAAP net income (loss)$ (21,824)
Tax provision (benefit) reconciliation: GAAP tax provision (benefit)$ (15,777)
10,534 (5,566) 27,429 (19,719)
Amortization of intangibles 1,206 (773) 3,083 (4,071)
Amortization of debt discount and issuance costs 1,159 (676) 2,925 (2,403)
COVID-19 Canada Emergency Wage Subsidy benefit(1) - 320 - (139)
Acquisition consideration holdback(2) 259 - 618 -
Tax impact of non-GAAP adjustments(3) (7,648) 17,227 (11,414) 60,239
Non-GAAP tax provision (benefit) $ (10,267) Net income (loss) per share reconciliation: GAAP net income (loss) per share - diluted $ (0.69)$ (0.44) $ (1.79)$ (0.78) Non-GAAP adjustments: Stock-based compensation 0.39 0.34 1.23 1.04 Amortization of intangibles 0.05 0.05 0.15 0.21 Amortization of debt discount and issuance costs 0.04 0.04 0.12 0.12 COVID-19 Canada Emergency Wage Subsidy benefit(1) - (0.02) - (0.04) Acquisition consideration holdback(2) 0.01 - 0.03 - Tax impact of non-GAAP adjustments(3) (0.06) (0.13) (0.27) (0.41)
Non-GAAP dilutive shares excluded from GAAP net income (loss) per share calculation(4)
- - - (0.02)
Non-GAAP net income (loss) per share - diluted $ (0.26)
Shares used in computing Non-GAAP income (loss) per share amounts: GAAP weighted average shares - diluted
83,689,429 83,600,327 83,440,231 83,693,045
Non-GAAP dilutive shares excluded from GAAP income (loss) per share calculation(4)
- - - 807,361
Pro forma weighted average shares - diluted 83,689,429 83,600,327 83,440,231 84,500,406
51
--------------------------------------------------------------------------------
Table of Contents
(1) Effective the second quarter of fiscal year 2021, the COVID-19 Canada
Emergency Wage Subsidy benefit has been included as a non-GAAP adjustment. Prior
to the second quarter of fiscal year 2021, this program was unavailable.
Beginning with the first quarter of fiscal year 2022, we have not and do not
expect to receive a subsidy under the COVID-19 Canada Emergency Wage Subsidy.
(2) Effective the first quarter of fiscal year 2022, the acquisition
consideration holdback that is earned and recognized as expense over a
post-acquisition service period has been included as a non-GAAP adjustment.
Prior to the first quarter of fiscal year 2022, there was no acquisition
consideration holdback in any periods presented.
(3) Adjustments reflect the impact on the tax benefit (provision) from all
non-GAAP adjustments.
(4) Due to the occurrence of a net loss on a GAAP basis, potentially dilutive
securities were excluded from the calculation of GAAP net income (loss) per
share, as they would have an anti-dilutive effect. However, these shares have a
dilutive effect on non-GAAP net income (loss) per share and, therefore, are
included in the non-GAAP net income (loss) per share calculation.
Liquidity and Capital Resources
Our principal sources of liquidity are as follows (in thousands)
April 30, 2022 July 31 ,
2021
Cash, cash equivalents, and investments
$ 819,171 $ 1,054,971
Cash, Cash Equivalents, and Investments
Our cash and cash equivalents are comprised of cash and liquid investments with remaining maturities of 90 days or less from the date of purchase, primarily commercial paper and money market funds. Our investments primarily consist of corporate debt securities,U.S. government and agency debt securities, commercial paper, asset-backed securities, and non-U.S. government securities, which include state, municipal, and foreign government securities. As ofApril 30, 2022 , approximately$38.0 million of our cash and cash equivalents were domiciled in foreign jurisdictions. We may repatriate foreign earnings tothe United States in the future to the extent that the repatriation is not restricted by local laws or there are no substantial incremental costs associated with such repatriation.
Share Repurchase Program
InOctober 2020 , our board of directors authorized and approved a stock repurchase program of up to$200.0 million of our outstanding common stock. The stock repurchase program was completed in the second quarter of fiscal year 2022. During the nine months endedApril 30, 2022 , the Company repurchased 322,545 shares of common stock at an average price of$116.11 per share, for an aggregate purchase price of$37.5 million .
Cash Flows
Our cash flows from operations are significantly impacted by timing of invoicing and collections of accounts receivable, annual bonus payments, as well as payments of payroll, commissions, payroll taxes, and other taxes. We expect that we will continue to generate positive cash flows from operations on an annual basis, although this may fluctuate significantly on a quarterly basis. In particular, we typically use more cash during the first fiscal quarter, which endsOctober 31 , as we generally pay cash bonuses to our employees for the prior fiscal year and seasonally higher sales commissions from increased customer orders booked in our fourth fiscal quarter of the prior year. Additionally, our capital expenditures may fluctuate depending on future office build outs and development activities subject to capitalization. We believe that our existing cash and cash equivalents and sources of liquidity will be sufficient to fund our operations for at least the next 12 months. Our future cash requirements will depend on many factors, including our rate of revenue growth, the expansion of our sales and marketing activities, the timing and extent of our spending to support our research and development efforts, investments in cloud infrastructure and operating costs, and expansion into other markets. We also may invest in or acquire complementary businesses, applications or technologies, or may expand our board-authorized stock repurchase program, which may require the use of significant cash resources and/or additional financing. The following summary of cash flows for the periods indicated has been derived from our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q (in thousands): Nine
Months Ended
2022 2021
Net cash provided by (used in) operating activities $ (121,532) $ 3,233
Net cash provided by (used in) investing activities $ 114,753 $ 32,637
Net cash provided by (used in) financing activities $ (37,335) $ (120,655)
52--------------------------------------------------------------------------------
Table of Contents
Cash Flows from Operating Activities
Net cash used in operating activities was$121.5 million for the nine months endedApril 30, 2022 compared to net cash provided by operating activities of$3.2 million during the nine months endedApril 30, 2021 . This$124.8 million increase in operating cash used was attributable to a$83.9 million increase in net loss after excluding the impact of non-cash charges such as deferred taxes, stock-based compensation expense, depreciation and amortization expense, and other non-cash items along with$40.9 million in cash used by working capital activities. Changes in working capital include payments of$69.1 million related to our fiscal year 2021 corporate bonus and accrued vacation balances in countries in which we adopted a non-accrual vacation policy in the first quarter of fiscal year 2022, which was$47.8 million higher than the bonus payment during the same period a year ago. A portion of the fiscal year 2020 bonus, which would have been paid in the first quarter of fiscal year 2021, was accelerated due to COVID-19 and paid in fiscal year 2020.
Cash Flows from Investing Activities
Net cash provided by investing activities was$114.8 million for the nine months endedApril 30, 2022 compared to$32.6 million for the nine months endedApril 30, 2021 . The$82.1 million increase in cash provided by investing activities was primarily due to decreased net purchases of available-for-sale securities of$131.6 million and lower capital expenditures and capitalized software development costs of$2.9 million . These were offset by$43.8 million paid as purchase consideration for the acquisition of HazardHub and an$8.5 million increase in amounts paid for strategic investments.
Cash Flows from Financing Activities
Net cash used in financing activities for the nine months endedApril 30, 2022 was$37.3 million compared to$120.7 million for the nine months endedApril 30, 2021 . This$83.3 million decrease in cash used was primarily because our authorized share repurchase program was completed in the second quarter of fiscal year 2022, which resulted in our repurchase of$85.1 million less of our common stock during the nine months endedApril 30, 2022 compared to the same period a year ago, partially offset by a decrease in proceeds from option exercises of$1.8 million .
Commitments and Contractual Obligations
Our estimated future obligations consist of leases, royalties, purchase obligations, debt, and taxes as ofApril 30, 2022 . Refer to Note 7 "Convertible Senior Notes," Note 8 "Leases," Note 9 "Commitments and Contingencies," and Note 11 "Income Taxes" to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q. There has been no material change in our contractual obligations and commitments other than in the ordinary course of business since our fiscal year endedJuly 31, 2021 . See the Annual Report on Form 10-K for the fiscal year endedJuly 31, 2021 for additional information regarding the Company's contractual obligations.
Off-Balance Sheet Arrangements
ThroughApril 30, 2022 , we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. 53
--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source
