GUIDEWIRE SOFTWARE, INC. The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes thereto included in Item 8 and the Risk Factors included in Item 1A of Part I of this Annual Report on Form 10-K. 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. We have elected to omit discussion on the earliest of the three years covered by the consolidated financial statements presented. Refer to Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations located in our Form 10-K for the fiscal year endedJuly 31, 2019 , filed onSeptember 30, 2019 , for reference to discussion of the fiscal year endedJuly 31, 2018 , the earliest of the three fiscal years presented. Overview We deliver the platform P&C insurers trust to engage, innovate, and grow efficiently. We combine 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 products are InsuranceSuite via Guidewire Cloud, InsuranceNow, and InsuranceSuite for self-managed installations. These products are core transactional systems of record that support the entire insurance lifecycle, including insurance product definition, distribution, underwriting, policyholder services, and claims management. -------------------------------------------------------------------------------- Table of Contents 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 leverages our in-house Guidewire Cloud operations team. InsuranceSuite via Guidewire Cloud is designed to support multiple releases a 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 system that offers policy, billing, and claims management functionality to insurers that have limited IT resources. InsuranceSuite for self-managed 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 Guidewire 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 SI partners. We maintain and continue to grow our sales and marketing efforts globally, and maintain regional sales centers throughout the world. Our sales cycles for new and existing customers remain protracted as customers are deliberate and the decision-making and product evaluation process is long. These evaluation periods can extend further if the customer purchases multiple products or assesses the benefits of a cloud-based subscription in addition to our more traditional self-managed licensing models. 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 products, the introduction of new products, efficient operation of our cloud infrastructure, and the continued development of relevant local content and the creation of automated tools for updating content. Additionally, we maintain and grow our credibility with each successful implementation. We sell our cloud-delivered offerings through subscription services and our self-managed products through term-licenses. We generally price our products and services 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. We also offer professional services, both directly and through partners, to help our customers deploy, migrate, and utilize our products and platform. Substantially all of our services revenue is billed on a time and materials basis. We have primarily been entering into cloud-based subscription arrangements with our new and existing customers. Generally, these subscriptions have an initial term of three to five years, and are typically billed annually in advance, although in some instances additional fees may be assessed in arrears as customers increase their DWP. Revenue derived from these subscriptions is recognized ratably over the contractual term beginning after the subscription is effectively provisioned, which is the date our service is made available to customers. We anticipate that subscriptions will be a majority of annual new sales going forward. As a result of the ratable recognition of revenue associated with subscriptions, a significant shift from term licenses to subscriptions will adversely affect our reported revenue growth. As this sales model 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 products, introduce new products, and advance our ability to cost-effectively deliver each of our products 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 and solutions. -------------------------------------------------------------------------------- Table of Contents Our track record of success with customers and their implementations is central to maintaining our strong competitive position. We rely on our services teams and SI partners to meet our customers' implementation needs. Our services organization is comprised of on-site, near-shore, and off-shore technical experts. The services organization seeks to ensure that teams with the right combination of product and language skills are used in the most efficient way. Our partnerships with leading SI partners allow us to increase efficiency and scale while reducing customer implementation costs. Our extensive relationships with SI partners and industry partners have strengthened and expanded in line with the interest in and adoption of our products and services. 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. We continue to grow our services organization and invest time and resources in increasing the number of qualified consultants employed by our SI partners, developing relationships with new SI partners in existing and new markets, and ensuring that all partners are qualified to assist with implementing our products. 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 products successfully, migrating our business towards a subscription model with ratable revenue recognition, increasing the overall adoption of our products, and 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. Our investments in sales and marketing align with our goal of winning new customers in both existing and new markets, and enable us to maintain a persistent, consultative relationship with our existing customers. Our investments in product development are designed to meet the evolving needs of our customers. Public Offerings OnMarch 13, 2018 , we closed a public offering of 2,628,571 shares of our common stock, including the underwriters' exercise in full of their option to purchase additional shares of our common stock. The public offering price of the shares sold in the offering was$87.50 per share. Our stockholders did not sell any shares in this public offering. Concurrently, we offered and sold$400.0 million aggregate principal amount of our Convertible Senior Notes, including the underwriters' exercise in full of their option to purchase additional Convertible Senior Notes. Net of issuance costs, we received net proceeds of approximately$220.9 million related to the common stock offering and$387.2 million related to the convertible note offering. COVID-19 Impact InMarch 2020 , theWorld Health Organization declared the outbreak of COVID-19 a pandemic that continues 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 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, our compliance with these measures has impacted our day-to-day operations and could 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 delay the timing of new orders and professional services engagements in the future. Our business and financial results since the third fiscal quarter of 2020 have been impacted due to these disruptions, including decreases in annual recurring revenue ("ARR") growth rates, services revenue and margins, operating cash flow as a result of an early partial bonus payout, and the change in fair value of a strategic investment. ARR and revenue, especially services revenue, for the fourth fiscal quarter of 2020 continued to be impacted 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. For example, we or our SI partners have not been able to visit customer facilities to make sales visits or to work on implementation engagements sinceMarch 2020 . These disruptions and their impact on our business and the businesses of our customers, SI partners, and vendors are expected to continue for at least the first half of fiscal year 2021. We currently believe that we may continue to be adversely impacted as a result of the pandemic's global economic impact for an unknown period of time. 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 or will be cancelled or postponed, while the majority are being hosted virtually, like our annual 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 we may need to increase allowance for doubtful accounts and revenue reserves. 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 -------------------------------------------------------------------------------- Table of Contents 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 products and services 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 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." Annual Recurring Revenue ("ARR") We use ARR to identify the annualized recurring value of 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 subscription arrangements that are not expected to recur (primarily perpetual licenses and services) are excluded. 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 . ARR exiting fiscal year 2020 was$514 million based on currency rates at the end of fiscal year 2020, up from$460 million at the end of fiscal year 2019 based on currency rates at the end of fiscal year 2019. Revaluing our ARR at the end of fiscal year 2020 using currency rates at the beginning of fiscal year 2020, our ARR at the end of fiscal year 2020 would be$509 million , or approximately$5 million lower than the ARR reported above. 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, leasehold improvements, and capitalized software development costs. Free cash flow was impacted by a$9.9 million partial early bonus payout during the third fiscal quarter of 2020. This partial early bonus payout was approved by our board of directors in order to support our employees and, in turn, their local economies during the extraordinary situation created by the COVID-19 pandemic. The build out and furnishing of our corporate headquarters inSan Mateo, California impacted free cash flow by$11.1 million and$23.6 million for the fiscal years endedJuly 31, 2020 and 2019, respectively. For a further discussion of our operating cash flows, see "Liquidity and Capital Resources - Cash Flows." Fiscal years endedJuly 31, 2020 2019
Net cash provided by (used in) operating activities
$ 116,126 Purchases of property and equipment (21,377) (44,921) Capitalized software development costs (4,283) (3,936) Free cash flow $ 87,406$ 67,269
-------------------------------------------------------------------------------- Table of Contents Critical Accounting Policies and Estimates Our consolidated financial statements are prepared in accordance with GAAP. Accounting policies, methods, and estimates are an integral part of the preparation of our 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 our 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 consolidated financial statements, which are described in Note 1 "The Company and a Summary of Significant Accounting Policies and Estimates" to our consolidated financial statements included in this Annual Report on Form 10-K, our revenue recognition policies are particularly critical to fiscal years 2020 and 2019. Revenue Recognition Revenue recognition requires judgment and the use of estimates, especially in identifying and evaluating the various non-standard terms and conditions in our contracts with customers as to their effect on reported revenue. Our revenue is derived from contracts with customers. The majority of our revenue is derived from licensing arrangements that can span multiple years, subscriptions for our cloud services, and implementation and other professional services arrangements. OnAugust 1, 2018 , we adopted ASC 606 using the modified retrospective method and recorded a net cumulative effect adjustment of$44.3 million . The core principle of ASC 606 is to recognize revenue upon the transfer of services or products to customers in an amount that reflects the consideration we expect to be entitled to in exchange for those services or products. We apply a five-step framework to recognize revenue as described in our Revenue Recognition policy included in Note 1 of our consolidated financial statements included in this Annual Report on Form 10-K. Our customers have significant negotiating power during the sales process which can and does result in terms and conditions that are different from our standard terms and conditions. When terms and conditions of our customer contracts are not standard, certain negotiated terms may require significant judgment in order to determine the appropriate revenue recognition in accordance with ASC 606. The estimates and assumptions requiring significant judgment under our revenue policy in accordance with ASC 606 are as follows: Identification of the contract, or contracts, with the customer Contracts may be modified to account for changes in contract scope or price. We consider contract modifications to exist when the modification either creates new rights or obligations or changes the existing enforceable rights and obligations of either party. Contract modifications for products and services that are distinct from the existing contract and are priced commensurate with their standalone selling price are treated as separate contracts, and are accounted for prospectively. Contract modifications for products and services that are distinct but are not priced commensurate with their standalone selling price or are not distinct from the existing contract may affect the initial transaction price or the allocation of the transaction price to the performance obligations in the contract. In such cases, previously recognized revenue may be adjusted. Determination of the transaction price The transaction price is determined based on the consideration to which we expect to be entitled in exchange for transferring services and products to our customer. Variable consideration is estimated and included in the transaction price if, in our judgment, it is probable that there will not be a significant future reversal of cumulative revenue under the contract. Self-managed software licenses and subscription services may be subject to either fixed or variable installments. Variable installments are generally subject to changes in a customer's DWP or a customer's Gross Written Premium ("GWP"). When consideration is subject to variable installments, we estimate variable consideration using the expected value method based on historical DWP or GWP usage to the extent that a significant revenue reversal is not probable to occur. When consideration is subject to a customer termination right, we estimate the total transaction price using the most likely method, and defer consideration associated with the customer's termination right until it expires. We evaluate whether a significant financing component exists when the timing of revenue recognition occurs in advance of invoicing. This timing difference occurs when control of the software license is transferred at a point in time, usually at the contract onset, but the customer payments occur over time. A significant financing component generally does not exist under our standard contracting and billing practices. For example, our typical time-based licenses have a two-year initial term with the final payment due at the end of the first year. -------------------------------------------------------------------------------- Table of Contents Allocation of the transaction price to the performance obligations in the contract If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on its standalone selling price ("SSP") in relation to the total fair value of all performance obligations in the arrangement. The majority of our contracts contain multiple performance obligations, such as when licenses are sold with support, implementation services, or training services. Additionally, as customers transition to subscription services, our customers may be under contract for both self-managed licenses and subscription services for a period of time, which may require an allocation of the transaction price to each performance obligation. Some of our performance obligations, such as support, implementation services, and training services, have observable inputs that are used to determine the SSP of those distinct performance obligations. Where SSP is not directly observable, we determine the SSP using information that may include market conditions and other observable inputs. In the circumstances when available information to determine SSP is highly variable or uncertain, such as for our term licenses, we use the residual method. Recent Accounting Pronouncements See Note 1 "The Company and Summary of Significant Accounting Policies and Estimates" in the notes to the consolidated financial statements in Item 8 of Part II of this Annual Report on Form 10-K, for a full description of recent accounting pronouncements adopted, including the dates of adoption, which is incorporated herein by reference. Recent Accounting Pronouncements Not Yet Adopted Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments InJune 2016 , the FASB issued ASU No. 2016-13 (ASU 2016-13), Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model that requires the use of forward-looking information to calculate credit loss estimates. It also eliminates the concept of other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. These changes will result in earlier recognition of credit losses. We adopted this standard onAugust 1, 2020 . We have evaluated the impact of adopting the new standard and expect the impact to the consolidated financial statements to be immaterial. Intangibles,Goodwill and Other (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract InAugust 2018 , the FASB issued ASU No. 2018-15, Intangibles,Goodwill and Other (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract ("ASU 2018-15"), which requires implementation costs incurred by customers in cloud computing arrangements to be deferred and recognized over the term of the arrangement, if those costs would be capitalized by the customer in a software licensing arrangement under the internal-use software guidance in ASC 350-40. We adopted this standard using the prospective approach onAugust 1, 2020 , and the impact of the adoption to the consolidated financial statements will largely depend on the magnitude of implementation costs incurred in our cloud computing arrangements afterAugust 1, 2020 . Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity InAugust 2020 , the FASB issued ASU No. 2020-06, "Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging- Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity", which simplifies the accounting for convertible instruments by eliminating the requirement to separate embedded conversion features from the host contract when the conversion features are not required to be accounted for as derivatives under Topic 815, Derivatives and Hedging, or that do not result in substantial premiums accounted for as paid-in capital. By removing the separation model, a convertible debt instrument will be reported as a single liability instrument with no separate accounting for embedded conversion features. This new standard also removes certain settlement conditions that are required for contracts to qualify for equity classification and simplifies the diluted earnings per share calculations by requiring that an entity use the if-converted method and that the effect of potential share settlement be included in diluted earnings per share calculations. This new standard will be effective for fiscal years beginning afterDecember 15, 2021 , including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning afterDecember 15, 2020 . We are currently assessing the impact of adopting this standard on the consolidated financial statements. -------------------------------------------------------------------------------- Table of Contents Other Accounting Pronouncements Other recent accounting pronouncements that will be applicable to us are not expected to have a material impact on our present or future financial statements. -------------------------------------------------------------------------------- Table of Contents Results of Operations The following table sets forth our results of operations for the years presented. The data has been derived from the consolidated financial statements contained in this Annual Report on Form 10-K 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 fiscal years presented. The operating results for any period should not be considered indicative of results for any future period. At the end of fiscal year 2020, we changed the presentation for revenue and cost of revenue to include subtotals for "subscription and support," "license," and "services." Our presentation in prior fiscal years included subtotals for "license and subscription," "maintenance" (now referred to as "support"), and "services." We have reclassified prior period amounts in this report to conform to the current period presentation. In fiscal year 2019, we began reporting results under ASC 606, using the modified retrospective method. Financial results for reporting periods prior to fiscal year 2019 are presented as previously disclosed in conformity with then existing guidance. Fiscal years ended July 31, As a % of As a % of 2020 Total Revenue 2019 Total Revenue (in thousands except percentages)
Revenue: Subscription and support$ 203,473 27 %$ 150,474 21 % License 331,554 45 320,272 44 Services 207,280 28 248,768 35 Total revenue 742,307 100 719,514 100 Cost of revenue: Subscription and support 117,158 16 73,597 10 License 11,566 2 7,700 1 Services 209,291 28 243,053 34 Total cost of revenue 338,015 46 324,350 45 Gross profit: Subscription and support 86,315 11 76,877 11 License 319,988 43 312,572 43 Services (2,011) - 5,715 1 Total gross profit 404,292 54 395,164 55 Operating expenses: Research and development 200,575 27 188,541 26 Sales and marketing 142,420 19 130,751 18 General and administrative 85,183 11 74,401 10 Total operating expenses 428,178 57 393,693 54 Income (loss) from operations (23,886) (3) 1,471 1 Interest income 24,705 3 30,182 4 Interest expense (17,945) (2) (17,334) (2) Other income (expense), net (7,205) (1) (1,867) - Income (loss) before provision for income taxes (24,331) (3) 12,452 3 Provision for (benefit from) income taxes 2,867 - (8,280) (1) Net income (loss)$ (27,198) (3) %$ 20,732 4 %
-------------------------------------------------------------------------------- Table of Contents Comparison of the Fiscal Years EndedJuly 31, 2020 and 2019 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. Our support revenue is generally recognized ratably over the committed support term of the 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 software. Since the beginning of fiscal year 2017, a majority of our term licenses have 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 services performed for our customers, reimbursable travel expenses, and training fees. A substantial majority of our services engagements are billed monthly in arrears on a time and materials basis and revenue is recognized upon providing our services. Fiscal years ended July 31, 2020 2019 Change % of total % of total Amount revenue Amount revenue ($) (%) (in thousands, except percentages) Revenue: Subscription and support revenue: Subscription$ 119,658 16 %$ 65,050 9 %$ 54,608 84 % Support 83,815 11 85,424 12 (1,609) (2) License revenue: Term 328,489 44 318,142 44 10,347 3 Perpetual 3,065 1 2,130 - 935 44 Services 207,280 28 248,768 35 (41,488) (17) Total revenue$ 742,307 100 %$ 719,514 100 %$ 22,793 3 % Subscription and Support Revenue We anticipate subscriptions will continue to represent a majority of annual new deals 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. If we complete a higher percentage of subscription deals 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 orders in the fourth fiscal quarter, our historically largest quarter for new orders, is not reflected in revenues until the following fiscal year. -------------------------------------------------------------------------------- Table of Contents Subscription revenue increased by$54.6 million , compared to the prior year period, primarily due to the full year impact of orders entered into last fiscal year and new orders entered into during the earlier quarters of this fiscal year for InsuranceSuite via Guidewire Cloud. Support revenue decreased$1.6 million , compared to the prior year period. Maintenance related to subscription arrangements is included in subscription revenue, as maintenance is not quoted or priced separately from the subscription services. As a result, we expect the increase in subscription orders as a percentage of total new sales and customers transitioning from term licenses to subscription services will continue to reduce the growth in or result in lower support revenue in the future. License Term license revenue increased by$10.3 million , compared to the prior year period, primarily due to new term license and multi-year renewal deals of approximately$51 million during fiscal year 2020 compared to new term license and multi-year renewal deals of approximately$37 million during fiscal year 2019, including one ten-year term license contract where we recognized$14.5 million of license revenue. Revenue related to new term licenses and multi-year renewals is generally recognized upfront and have no license revenue in subsequent periods until after the committed term expires. As customers transition from term license to subscription agreements, the timing of revenue recognition will be impacted by allocations of revenue between the license, subscription, and support performance obligations. License revenue growth could be negatively impacted as subscription sales increase as a percentage of total new sales and as customers transition from term licenses to subscription services. Perpetual license revenue increased by$0.9 million , compared to the prior year, and accounted for approximately 1% of total revenue in fiscal year 2020. We expect perpetual license revenue to continue to represent a small percentage of our total revenue. We also expect perpetual license revenue to remain volatile across periods due to the large amount of perpetual revenue that may be generated from a single customer order in a given period. Services Revenue Services revenue decreased$41.5 million , compared to the prior year period. The decrease is primarily driven by the completion of large InsuranceSuite implementations since the end of the prior fiscal year, increased involvement by SI partners in customer cloud implementations, and reduced travel related to travel restrictions associated with the COVID-19 pandemic, given that reimbursable travel expenses are billed at actual amounts incurred. As the number of implementations led by our SI partners increase, our services revenue could decrease further. We expect challenges related to COVID-19 will also continue to negatively impact services revenue. We expect modestly higher levels of variability in our services revenue in future periods. As we continue to expand into new markets and develop new products and services, we have, and may continue to, enter into contracts with reduced billing rates, make investments in customer 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 our 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 our intangible assets. Our cost of services revenue primarily consists of personnel costs for our professional service employees, third-party contractors, and travel-related 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. --------------------------------------------------------------------------------
Table of Contents
Cost of Revenue:
Fiscal years ended July 31,
2020 2019 Change
% of total % of total
Amount revenue Amount revenue ($) (%)
(In thousands, except percentages)
Cost of revenue:
Subscription and support $ 117,158 16 % $ 73,597 10 % $ 43,561 59 %
License 11,566 2 7,700 1 3,866 50
Services 209,291 28 243,053 34 (33,762) (14)
Total cost of revenue $ 338,015 46 % $ 324,350 45 % $ 13,665 4 %
Includes stock-based compensation of:
Cost of subscription and support
revenue $ 7,575 $ 4,659 $ 2,916
Cost of license revenue 769 173 596
Cost of services revenue 20,816 22,781 (1,965)
Total $ 29,160 $ 27,613 $ 1,547
Cost of subscription and support revenue increased by $43.6 million primarily
due to increases of $32.0 million in personnel expenses, $8.2 million in cloud
infrastructure costs, and $4.8 million in professional services due to our
continued investment in our cloud operations to increase operational efficiency
and scale for our growing cloud customer base.
We expect our cost of subscription revenue to increase as we continue to invest
in our cloud operations to support our growing cloud customer base, to improve
efficiencies, and to continuously improve and maintain secure environments. Cost
of support revenues are expected to remain flat or slightly decrease over time
as term license customers transition to the cloud.
The $3.9 million increase in our cost of license revenue was primarily
attributable to increased costs associated with the development of online
training curriculum included with the latest releases of InsuranceSuite,
partially offset by decreases in amortization of acquired intangible assets. We
anticipate lower cost of license revenue over time as our term license customers
transition to cloud subscription agreements.
The $33.8 million decrease in cost of services was attributable to decreases in
personnel expenses and third-party consultant costs billable to customers
primarily as a result of the completion of certain large InsuranceSuite and
InsuranceNow implementation engagements and, to a lesser extent, lower billable
travel expenses resulting from COVID-19 travel restrictions.
We had 378 cloud operations and technical support employees and 758 professional
service employees at July 31, 2020 compared to 198 cloud operations and
technical support employees and 781 professional services employees at July 31,
2019 .
Gross Profit
Fiscal years ended July 31,
2020 2019 Change
Amount margin % Amount margin % ($) (%)
(In thousands, except percentages)
Gross profit:
Subscription and support $ 86,315 42 % $ 76,877 51 % $ 9,438 12 %
License 319,988 97 312,572 98 7,416 2
Services (2,011) (1) 5,715 2 (7,726) (135)
Total gross profit $ 404,292 54 % $ 395,164 55 % $ 9,128 2 %
Our gross profit increased $9.1 million , primarily due to growth in our
subscription revenue and the execution of multi-year term license and multi-year
term license renewal deals in fiscal year 2020. These increases were partially
offset by investments in cloud operations and the completion of, and investments
in, certain large implementation engagements.
Our gross margin slightly decreased to 54% in fiscal year 2020, as compared to
55% in fiscal year 2019. Gross margin was impacted by lower subscription and
support gross margins resulting from increasing investments in cloud operations,
and
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to a lesser extent, lower services gross margins resulting from the completion
of certain large customer implementations and the lower utilization of services
employees.
We expect subscription and support gross margins will fluctuate as our
subscription revenue increases and we continue to invest in our cloud
operations. In addition to the impact of our customer investments, we expect
challenges related to COVID-19 will negatively impact services gross margin in
at least the first half of fiscal 2021 and potentially longer. We expect license
gross margin will fluctuate based on changes in revenue due to multi-year term
license and multi-year term license renewal deals as cost of license revenue is
expected to be relatively flat compared to fiscal 2020.
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.
Fiscal years ended July 31,
2020 2019 Change
% of total % of total
Amount revenue Amount revenue ($) (%)
(In thousands, except percentages)
Operating expenses:
Research and development $ 200,575 27 % $ 188,541 26 % 12,034 6
Sales and marketing 142,420 19 130,751 18 11,669 9
General and administrative 85,183 11 74,401 10 10,782 14
Total operating expenses $ 428,178 57 % $ 393,693 54 % 34,485 9
Includes stock-based compensation of:
Research and development $ 26,324 $ 23,421 2,903
Sales and marketing 21,260 19,245 2,015
General and administrative 25,073 21,237 3,836
Total $ 72,657 $ 63,903 8,754
Research and Development
Our research and development expenses primarily consist of personnel costs for
our technical staff and consultants providing professional services.
The $12.0 million increase in research and development expenses was primarily
due to a $9.4 million increase in personnel costs associated with higher
headcount in fiscal year 2020, as well as additional cloud infrastructure costs
of $2.9 million in order to support the development of our subscription
offerings, information security requirements, and cloud strategy.
Our research and development headcount was 809 as of July 31, 2020 compared with
724 as of July 31, 2019 .
We expect our research and development expenses to increase in absolute dollars
as we continue to hire and dedicate internal resources to developing, improving,
and expanding the functionality of our solutions and migrating 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. It also includes travel expenses, professional
services for marketing activities, and amortization of certain acquired
intangibles.
The $11.7 million increase in sales and marketing expenses was primarily due to
increases of $15.1 million in personnel expenses due to higher headcount to sell
and market our products and services, including an increase of $4.3 million due
to the net amortization of contract acquisition costs (primarily commissions).
Contract acquisition costs 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. This increase
was partially offset by decreases of $2.5 million due to lower travel expenses
resulting from COVID-19 travel restrictions and $1.7 million due to lower
amortization of intangible assets.
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Our sales and marketing headcount was 399 as of July 31, 2020 compared with 354
as of July 31, 2019 .
We expect our sales and marketing expenses to continue to increase in absolute
dollars as we continue to invest in sales and marketing activities to support
our business 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 $10.8 million increase in our general and administrative expenses was
primarily attributable to increases in our facilities, personnel, and software
expenses to support our growth.
Our general and administrative headcount was 346 as of July 31, 2020 compared
with 298 as of July 31, 2019 . General and administrative headcount includes
personnel in information technology support, information security, facilities,
and recruiting whose expenses are allocated across all functional departments.
We expect that our general and administrative expenses will increase in absolute
dollars as we continue to invest in personnel, corporate infrastructure, and
systems required to support our strategic initiatives, the growth of our
business, and our compliance and reporting obligations.
Other Income (Expense)
Fiscal years ended July 31,
2020 2019 Change
Amount Amount ($) (%)
(In thousands, except percentages)
Interest income $ 24,705 $ 30,182 (5,477) (18)
Interest expense $ (17,945) $ (17,334) (611) 4
Other income (expense), net $ (7,205) $ (1,867) (5,338) 286
Interest Income Interest income represents interest earned on our cash, cash equivalents, and investments. Interest income decreased by$5.5 million in fiscal year 2020, primarily due to lower yields on invested funds. Interest Expense Interest expense includes both stated interest and the amortization of debt discount and issuance costs associated with the$400.0 million aggregate principal amount of our Convertible Senior Notes that were issued inMarch 2018 . 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 fiscal year 2020 and 2019 consist of non-cash interest expense related to the amortization of debt discount and issuance costs of$12.9 million and$12.2 million respectively, and stated interest of$5.0 million in both periods. 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. We currently have entities with a functional currency of the Argentine Peso, Australian Dollar, Brazilian Real, British Pound, Canadian Dollar,Danish Kroner , Euro, Indian Rupee, Japanese Yen, Malaysian Ringgit, Polish Zloty, Russian Ruble, and Swiss Franc. Additionally, changes in the fair value of strategic investments are also included in other income (expense), net. Other expense, net increased by$5.3 million during fiscal year 2020, as compared to the prior year, primarily due to the$10.7 million reduction in fair value of one of our strategic investments, partially offset by net currency exchange rate gains. In fiscal year 2019, exchange rate movements on monetary assets and monetary liabilities denominated in currencies other than the functional currency of the entity in which the transaction was recorded resulted in a net currency exchange rate loss. Provision for Income Taxes We are subject to taxes inthe United States as well as other tax jurisdictions and countries in which we conduct business. Earnings from our non-U.S. activities are subject to local country income tax and may be subject to currentU.S. income tax.
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Fiscal years ended July 31,
2020 2019 Change
Amount Amount ($) (%)
(In thousands, except percentages)
Provision for (benefit from) income taxes $ 2,867 $ (8,280) 11,147 (135)
Effective tax rate (12) % (66) %
We recognized an income tax provision of $2.9 million for fiscal year 2020
compared to an income tax benefit of $8.3 million for fiscal year 2019. The
fiscal year 2020 income tax provision was primarily due to the BEAT liability,
including interest and penalties, of $11.4 million recorded in fiscal year 2020,
of which $7.7 million relates to fiscal year 2020 and $3.7 million relates to
fiscal year 2019, as a result of regulations issued by the Internal Revenue
Service ("IRS") on December 2, 2019 , and subsequent amendments resulting from
the CARES Act which was passed on March 27, 2020 .
As of July 31, 2020 , we had unrecognized tax benefits of $18.0 million that, if
recognized, would affect our effective tax rate.
On December 22, 2017 , the Tax Act was enacted into law which substantially
changed U.S. tax law, including a reduction in the U.S. corporate income tax
rate to 21% effective January 1, 2018 and several provisions that may impact us
in current and future periods. The Tax Act includes a provision to tax global
intangible low-taxed income ("GILTI") of foreign subsidiaries, a special
deduction for foreign-derived intangible income, and a BEAT measure that taxes
certain payments between a U.S. corporation and its foreign subsidiaries. These
provisions of the Tax Act became effective for us beginning on August 1, 2018 .
The effective tax rate of (12)% for fiscal year 2020, differs from the statutory
U.S. Federal income tax rate of 21% mainly due to permanent differences for
stock-based compensation, including excess tax benefits, research and
development credits, change in valuation allowance, certain non-deductible
expenses including executive compensation, and BEAT.
Comparison of the Fiscal Years Ended July 31, 2019 and 2018
Refer to Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations located in our 10-K for the fiscal year ended July 31,
2019 , filed on September 30, 2019 , for the discussion of the comparison of the
fiscal year ended July 31, 2019 to the fiscal year ended July 31, 2018 , the
earliest of the three fiscal years presented in the consolidated financial
statements.
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Quarterly Results of Operations
The following table sets forth our selected unaudited quarterly financial
information for each of the eight fiscal quarters ended July 31, 2020 . In
management's opinion, the data below has been prepared on the same basis as the
audited consolidated financial statements and reflect all necessary adjustments,
consisting only of normal recurring adjustments, necessary for a fair statement
of the data. The results of historical periods are not necessarily indicative of
the results to be expected for a full year or any future period.
Fiscal quarters ended
January 31 , October 31 , January 31 , October 31 ,
July 31, 2020 April 30, 2020 2020 2019 July 31, 2019 April 30, 2019 2019 2018
(unaudited)
(in thousands, except per share amounts)
Total revenue $ 243,674 $ 168,165
87,811 85,752 83,596 80,856 82,784 80,278 79,680 81,608
Total gross profit 155,863 82,413 89,862 76,154 125,074 82,589 88,854 98,647
Income (loss) from operations 44,341 (25,600) (18,030) (24,597) 21,082 (15,767) (6,331) 2,487
Net income (loss) $ 38,775 $ (31,038) $ (19,944) $ (14,991) $ 23,005 $ (8,581) $ (1) $ 6,309
Income (loss) per share -
basic $ 0.46 $ (0.37) (0.11) $ -$ 0.08 Income (loss) per share - diluted $ 0.46 $ (0.37)$ (0.24) $ (0.18) $ 0.28 $ (0.11) $ -$ 0.08 Our quarterly results of operations may fluctuate significantly due to a variety of factors, many of which are outside of our control, making our results of operations variable and difficult to predict. Such factors include those discussed above and those set forth in "Risk Factors-We may experience significant quarterly and annual fluctuations in our results of operations due to a number of factors" and "Risk Factors-Seasonal sales patterns may cause significant fluctuations in our results of operations and cash flows and may prevent us from achieving our quarterly or annual forecasts, which may cause our stock price to decline" in Item 1A of Part I of this Annual Report on Form 10-K. One or more of these factors may cause our results of operations to vary widely. As such, we believe that our quarterly results of operations may vary significantly in the future and that sequential quarterly comparisons of our results of operations may not be meaningful and should not be relied upon as an indication of future performance. -------------------------------------------------------------------------------- Table of Contents 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:
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Fiscal years ended July 31,
2020 2019
Gross profit reconciliation:
GAAP gross profit $ 404,292 $ 395,164
Non-GAAP adjustments:
Stock-based compensation 29,160 27,614
Amortization of intangibles 19,221 19,780
Non-GAAP gross profit Income (loss) from operations reconciliation: GAAP income (loss) from operations$ (23,886) $ 1,471 Non-GAAP adjustments: Stock-based compensation 101,817 91,516 Amortization of intangibles 26,834 29,113 Non-GAAP income (loss) from operations
Net income (loss) reconciliation: GAAP net income (loss)$ (27,198) $ 20,732 Non-GAAP adjustments: Stock-based compensation 101,817 91,516 Amortization of intangibles 26,834 29,113 Amortization of debt discount and issuance costs 12,886 12,194 Changes in fair value of strategic investment (1) 10,672 - Tax impact of non-GAAP adjustments (2) (19,243) (33,678) Non-GAAP net income (loss)
Tax provision (benefit) reconciliation: GAAP tax provision (benefit)$ 2,867 $ (8,280) Non-GAAP adjustments: Stock-based compensation 16,453 15,800 Amortization of intangibles 4,334 5,033 Amortization of debt discount and issuance costs 2,080 2,117 Changes in fair value of strategic investment (1) 1,418 - Tax impact of non-GAAP adjustments (2) (5,042) 10,728 Non-GAAP tax provision (benefit)
Net income (loss) per share reconciliation: GAAP net income (loss) per share - diluted$ (0.33) $ 0.25 Non-GAAP adjustments: Stock-based compensation (1) 1.23 1.11 Amortization of intangibles (1) 0.33 0.35 Amortization of debt discount and issuance costs (2) 0.16 0.16 Changes in fair value of strategic investment (1) 0.13 - Tax impact of non-GAAP adjustments (2) (0.23) (0.42)
Non-GAAP dilutive shares excluded from GAAP net income (loss) per share calculation (3)
(0.03) -
Non-GAAP net income (loss) per share - diluted
$ 1.26
Shares used in computing Non-GAAP income (loss) per share amounts: GAAP weighted average shares - diluted
82,855,392 82,681,214
Non-GAAP dilutive shares excluded from GAAP income (loss) per share calculation (3)
834,002 -
Pro forma weighted average shares - diluted 83,689,394 82,681,214
(1) Effective the third fiscal quarter of 2020, changes in fair value of strategic investments are excluded from non-GAAP measures. Prior to the third fiscal quarter of 2020, there were no changes in fair value of strategic investments in any periods presented.
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(2) Adjustments reflect the tax benefit (provision) resulting from all non-GAAP
adjustments.
(3) 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):
July 31, 2020 July 31 , 2019
Cash, cash equivalents, and investments
$ 1,118,020 $ 1,102,702 Cash, Cash Equivalents, and Investments Our cash equivalents are comprised of liquid investments with remaining maturities of 90 days or less from the date of purchase, primarily commercial paper and money market funds. Substantially all of our investments are comprised of corporate debt securities,U.S. government and agency securities, commercial paper, asset-backed securities, and non-U.S. government securities, which include state, municipal and foreign government securities. As ofJuly 31, 2020 , approximately$43.4 million of our cash and cash equivalents were domiciled in various foreign jurisdictions. While we have no current plans to repatriate these funds tothe United States , we may repatriate foreign earnings 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. Cash Flows Our cash flows from operations are significantly impacted by timing of invoicing and collections of accounts receivable and 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 endedOctober 31 , as we generally pay cash bonuses to our employees for the prior fiscal year during that period and pay seasonally higher sales commissions from increased customer orders booked in our fourth fiscal quarter. 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 capital 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 may also invest in or acquire complementary businesses, applications, or technologies, 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 consolidated financial statements included elsewhere in this Annual Report on Form 10-K (in thousands):
Fiscal years ended
2020 2019
Net cash provided by (used in) operating activities $ 113,066 $ 116,126
Net cash provided by (used in) investing activities $ (5,801) $ (301,433)
Net cash provided by (used in) financing activities $
4,955
Cash Flows from Operating Activities Net cash provided by operating activities decreased by$3.1 million in fiscal year 2020 as compared to fiscal year 2019. The decrease in operating cash was primarily attributable to a$15.3 million decrease in net income after excluding the impact of non-cash charges such as deferred taxes, stock-based compensation expense, depreciation and amortization expense, change in fair value of our strategic investments, and other non-cash items, partially offset by a$12.3 million increase in cash provided by working capital activity as compared to the same period a year ago, which was driven by$21.3 million in higher collections from customers, partially offset by a$9.9 million partial early bonus payout during the third fiscal quarter endedApril 30, 2020 . -------------------------------------------------------------------------------- Table of Contents This partial early bonus payout was approved by our board of directors in order to support our employees and, in turn, their local economies during the extraordinary situation created by the COVID-19 pandemic. Cash Flows from Investing Activities Net cash used in investing activities decreased by$295.6 million in fiscal year 2020 as compared to fiscal year 2019. The decrease in net cash used in investing activities was primarily due to a decrease of$274.6 million in net cash flows from marketable securities transactions and a$23.2 million decrease in capital expenditures primarily due to the completion of construction and furnishing of our new headquarters inSan Mateo, California , partially offset by the purchase of$2.2 million in new strategic investments. Cash Flows from Financing Activities Net cash provided by financing activities was$5.0 million in fiscal year 2020, as compared to$4.0 million in fiscal year 2019. The increase of$1.0 million in net cash provided by financing activities was because of higher proceeds from option exercises. Comparison of the Fiscal Years EndedJuly 31, 2019 and 2018 Refer to Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - "Liquidity and Capital Resources" located in our 10-K for the fiscal year endedJuly 31, 2019 , filed onSeptember 30, 2019 , for the discussion of the comparison of fiscal year endedJuly 31, 2019 to the fiscal year endedJuly 31, 2018 , the earliest of the three fiscal years presented in the consolidated financial statements. Contractual Obligations The following summarizes our contractual obligations as ofJuly 31, 2020 (in thousands): Payments due by period Less than 1 to 3 3 to 5 More than 1 year years years 5 years Total Long-term debt (1)$ 5,000 $ 10,000 $ 410,000 $ -$ 425,000 Royalty obligations (2) 2,755 2,627 - - 5,382 Purchase commitments (3) 67,494 35,428 3,073 - 105,995 Operating lease obligations (4) 15,660 33,995 31,945 78,886 160,486 Total$ 90,909 $ 82,050 $ 445,018 $ 78,886 $ 696,863 (1)Long-term debt consists of principal and interest payments on our Convertible Senior Notes. The$400 million in principal is due inMarch 2025 . (2)Royalty obligations primarily represent our obligations under our non-cancellable agreements related to certain revenue-generating agreements. (3)Purchase commitments consist of agreements to purchase goods and services, entered into in the ordinary course of business for which a penalty could be imposed if the agreement was canceled for any reason other than an event of default as described by the agreement. (4)Lease obligations primarily represent payments required under our non-cancellable lease agreements for our corporate headquarters and worldwide offices through 2032. Additionally, we have unrecognized tax benefits of$23.7 million as ofJuly 31, 2020 . We are unable to estimate when any cash settlement with a taxing authority might occur. Off-Balance Sheet Arrangements ThroughJuly 31, 2020 , 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.
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