GUIDEWIRE SOFTWARE, INC. The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and the 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 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. 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 internal information technology 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 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 the customer purchases multiple products or assesses the benefits of a cloud-based subscription in addition to our more traditional self-managed licensing model. 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, 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 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. Support related to subscription arrangements is included in subscription revenue. 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 products, services, and platform. Substantially all 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 products, introduce new products, and advance our ability to cost-effectively deliver, operate and support 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 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 and language skills are used in the most efficient way to meet our customers' implementation needs. Our partnerships with leading SI partners allow us to increase efficiency and scale while reducing customer implementation costs. Our extensive relationships with SI and other industry partners have strengthened and expanded in line with the interest in and adoption of our services and products. 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 implement our services and 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 services and products successfully, migrating our business towards a subscription model with ratable revenue recognition, increasing the overall adoption of our 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, 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. Additionally, current revenue recognition guidance, also referred to as ASC 606, could continue to heighten or change the seasonal impact on our business as new term licenses and multi-year term license renewals recognize more revenue upfront based on the length of the committed term. 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 may create a challenging comparable period for the first quarter of fiscal year 2022. On an annual basis, our support revenue, which is recognized ratably, may also be impacted in the event that seasonal patterns change significantly. 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 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 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 continue to disrupt our business and operations, as well as that of our 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 36 -------------------------------------------------------------------------------- Table of Contents 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, and the change in fair value of strategic investments. ARR and revenue, especially services revenue, for the first nine months of fiscal 2021 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. Although vaccines are making progress against the COVID-19 pandemic inthe 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 2021, 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 or will be cancelled or postponed, while the majority are being hosted 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 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 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. In response to the pandemic, various government programs have been announced which provide financial relief to affected businesses. As an example, the Canadian Government enacted theCanada Emergency Wage Subsidy ("CEWS") under their COVID-19 Economic Response Plan to prevent layoffs and help employers offset, for a limited time, a portion of their employee salaries and wages. Beginning inJanuary 2021 , we have applied for the CEWS, to the extent we met the requirements to receive the subsidy, and recorded a reduction of compensation expense of approximately$3.3 million that is reflected in cost of revenue and operating expenses in our condensed consolidated statements of operations during the nine months endedApril 30, 2021 . We will continue to review and apply for additional subsidies for the remaining term of the program, where applicable. 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 Annual Recurring Revenue ("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 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 . Our reported ARR results for interim quarterly periods in fiscal year 2021 are based on actual currency rates at the end of fiscal year 2020, held constant throughout the year. ARR was$538 million as ofApril 30, 2021 , compared to$514 million as ofJuly 31, 2020 . 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 37 -------------------------------------------------------------------------------- Table of Contents 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. The build out and furnishing of our corporate headquarters inSan Mateo, California impacted free cash flow by$13.8 million for the nine months endedApril 30, 2020 and had no impact for the nine months endedApril 30, 2021 . Additionally during the nine months endedApril 30, 2021 , the Company received$2.5 million from the CEWS, which is a program that was not available during the nine months endedApril 30, 2020 . 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
2021 2020
Net cash provided by (used in) operating activities $ 3,233
$ 5,907 Purchases of property and equipment (12,412) (18,966) Capitalized software development costs (7,619) (3,273) Free cash flow$ (16,798) $ (16,332)
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, 2020 . 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, 2020 . 38
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Three Months Ended April 30,
As a % of As a % of
2021 total revenue 2020 total revenue
(in thousands, except percentages)Revenue: Subscription and support$ 64,836 40 %$ 50,772 30 % License 50,937 31 63,104 38 Services 48,195 29 54,289 32 Total revenue 163,968 100 168,165 100 Cost of revenue: Subscription and support 41,284 25 30,522 18 License 1,991 1 2,566 2 Services 48,790 30 52,664 31 Total cost of revenue 92,065 56 85,752 51 Gross profit: Subscription and support 23,552 15 20,250 12 License 48,946 30 60,538 36 Services (595) (1) 1,625 1 Total gross profit 71,903 44 82,413 49 Operating expenses: Research and development 54,155 33 51,893 30 Sales and marketing 40,879 25 35,235 21 General and administrative 23,695 14 20,885 12 Total operating expenses 118,729 72 108,013 63 Income (loss) from operations (46,826) (28) (25,600) (14) Interest income 1,559 1 6,072 3 Interest expense (4,698) (3) (4,505) (3) Other income (expense), net 5,259 3 (12,356) (7)
Income (loss) before provision for (benefit from) income taxes
(44,706) (27) (36,389) (21)
Provision for (benefit from) income taxes (8,073) (5) (5,351) (3)
Net income (loss) $ (36,633) (22) % $ (31,038) (18) %
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Nine Months Ended April 30,
As a % of As a % of
2021 total revenue 2020 total revenue
(in thousands, except percentages)
Revenue:
Subscription and support $ 182,365 35 % $ 149,353 30 %
License 194,132 38 193,987 39
Services 137,335 27 155,293 31
Total revenue 513,832 100 498,633 100
Cost of revenue:
Subscription and support 118,448 23 83,667 16
License 7,762 2 8,027 2
Services 148,724 29 158,510 32
Total cost of revenue 274,934 54 250,204 50
Gross profit:
Subscription and support 63,917 12 65,686 14
License 186,370 36 185,960 37
Services (11,389) (2) (3,217) (1)
Total gross profit 238,898 46 248,429 50
Operating expenses:
Research and development 159,964 31 148,343 30
Sales and marketing 116,739 23 105,590 21
General and administrative 67,695 13 62,723 13
Total operating expenses 344,398 67 316,656 64
Income (loss) from operations (105,500) (21) (68,227) (14)
Interest income 6,363 1 20,666 4
Interest expense (13,969) (3) (13,396) (3)
Other income (expense), net 14,632 3 (12,789) (3)Income (loss) before provision for (benefit from) income taxes
(98,474) (20) (73,746) (16)
Provision for (benefit from) income taxes (32,999) (6) (7,773) (2)
Net income (loss) $ (65,475) (14) % $ (65,973) (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.
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
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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 generate revenue on a time and
materials basis and revenue is recognized upon providing our services.
Three Months Ended April 30,
2021 2020 Change
As a % of total As a % of total
Amount revenue Amount revenue ($) (%)
(in thousands, except percentages)Revenue: Subscription and support: Subscription$ 44,553 27 %$ 30,078 18 %$ 14,475 48 % Support 20,283 13 20,694 12 (411) (2) % License: Term license 50,688 31 62,656 37 (11,968) (19) % Perpetual license 249 - 448 1 (199) (44) % Services 48,195 29 54,289 32 (6,094) (11) % Total revenue$ 163,968 100 %$ 168,165 100 %$ (4,197) (2) % Nine Months Ended April 30, 2021 2020 Change As a % of total As a % of total Amount revenue Amount revenue ($) (%) (in thousands, except percentages) Revenue: Subscription and support: Subscription$ 120,061 23 %$ 86,572 17 %$ 33,489 39 % Support 62,304 12 62,781 13 (477) (1) % License: Term license 193,777 38 191,448 38 2,329 1 % Perpetual license 355 - 2,539 1 (2,184) (86) % Services 137,335 27 155,293 31 (17,958) (12) % Total revenue$ 513,832 100 %$ 498,633 100 %$ 15,199 3 % Subscription and Support 41
-------------------------------------------------------------------------------- Table of Contents 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. If we complete a higher percentage of subscription arrangements in a given period, our short-term growth rates will be negatively impacted. Subscription revenue increased by$14.5 million and$33.5 million during the three and nine months endedApril 30, 2021 , respectively, compared to the same periods a year ago, primarily due to the impact of new and existing subscription services agreements for InsuranceSuite via Guidewire Cloud entered into sinceApril 30, 2020 . Support revenue decreased by$0.4 million and$0.5 million during the three and nine months endedApril 30, 2021 , 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 decreased by$12.0 million during the three months endedApril 30, 2021 compared to the prior year period, primarily driven by lower revenue from new term licenses of$7.0 million and term license renewals of$5.0 million . Included in these amounts is the impact of term license contracts with an initial term of greater than two years or a renewal term of greater than one year. The impact on term license revenue from contracts that deviated from our standard contract durations was$0.5 million in the three months endedApril 30, 2021 compared with$12.8 million in the prior year period. Term license revenue increased by$2.3 million during the nine months endedApril 30, 2021 compared to the prior year period, primarily driven by higher revenue from term license renewals of$9.9 million , partially offset by lower revenue from new term license deals of$7.6 million . Included in these amounts is the impact of term license revenue from contracts that deviated from our standard contract durations of$20.0 million for each of the nine months endedApril 30, 2021 and 2020. Perpetual license revenue accounted for less than 1% of total revenue during the three and nine months endedApril 30, 2021 . 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 decreased by$6.1 million and$18.0 million during the three and nine months endedApril 30, 2021 , respectively, compared to the same periods a year ago. The decrease is primarily driven by contracts with lower average services billing rates and increased investments in customer implementations, and to a lesser extent, a reduction in revenue from billable travel costs due to travel restrictions associated with the COVID-19 pandemic of$1.5 million and$7.0 million during the three and nine months endedApril 30, 2021 , respectively. We expect modestly higher levels 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 further. We expect challenges related to COVID-19 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 services 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 certain 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 42 -------------------------------------------------------------------------------- Table of Contents parties, and amortization of certain intangible assets. Our cost of services revenue primarily consists of personnel costs for our professional service employees, third-party 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: Three
Months Ended
2021 2020 Change
Amount Amount ($) (%)
(in thousands, except percentages)
Cost of revenue:
Subscription and support $ 41,284 $ 30,522 $ 10,762 35 %
License 1,991 2,566 (575) (22)
Services 48,790 52,664 (3,874) (7)
Total cost of revenue $ 92,065 $ 85,752 $ 6,313 7
Includes stock-based compensation of:
Cost of subscription and support
revenue $ 2,780 $ 1,986 $ 794
Cost of license revenue 183 177 6
Cost of services revenue 5,395 4,862 533
Total $ 8,358 $ 7,025 $ 1,333
Nine Months Ended April 30,
2021 2020 Change
Amount Amount ($) (%)
(in thousands, except percentages)
Cost of revenue:
Subscription and support 118,448 $ 83,667 $ 34,781 42 %
License 7,762 8,027 (265) (3)
Services 148,724 158,510 (9,786) (6)
Total cost of revenue $ 274,934 $ 250,204 $ 24,730 10
Includes stock-based compensation of:
Cost of subscription and support
revenue $ 8,336 $ 5,505 $ 2,831
Cost of license revenue 579 545 34
Cost of services revenue 16,516 15,663 853
Total $ 25,431 $ 21,713 $ 3,718
Cost of subscription and support revenue during the three months ended April 30,
2021 increased by $10.8 million , compared to the same period a year ago. The
increase is primarily due to increases in personnel expense of $7.6 million and
cloud infrastructure expense of $4.1 million , partially offset by net decreases
in amortization expense of $1.7 million due to the net impact of certain
acquired intangible assets being fully amortized and higher amortization of
previously capitalized cloud software development costs. The three months ended
April 30, 2021 included a benefit of $0.8 million to cost of subscription and
support revenue related to the CEWS.
Cost of subscription and support revenue during the nine months ended April 30,
2021 increased by $34.8 million , compared to the same period a year ago. The
increase is primarily due to increases in personnel expense of $23.9 million ,
cloud infrastructure
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expense of $11.0 million , and professional services expense of $1.9 million .
These increases were partially offset by a net decrease in amortization and
royalties expense of $1.1 million due to the net impact of certain acquired
intangible assets being fully amortized, higher amortization of capitalized
cloud software development costs, and increased subscription royalty costs. The
nine months ended April 30, 2021 included a benefit of $1.5 million to cost of
subscription and support revenue related to the CEWS.
Due to our growth in cloud-based customers, the costs to provide our
subscription services has increased. Additionally, we continue to invest in our
cloud operations to increase operational efficiency and scale and continuously
improve security. We expect our cost of subscription revenue to continue 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 revenue is expected to remain flat
or slightly decrease over time as term license customers transition to the
cloud.
The $0.6 million decrease in cost of license revenue during the three months
ended April 30, 2021 compared to the same period a year ago was primarily
attributable to decreased amortization expense of $0.7 million due to certain
acquired intangible assets being fully amortized.
The $0.3 million decrease in cost of license revenue during the nine months
ended April 30, 2021 compared to the same period a year ago was primarily
attributable to decreased amortization expense of $0.7 million due to certain
acquired intangible assets being fully amortized, partially offset by a $0.5
million increase related to the development of online training curriculum, which
is included as part of the latest releases of InsuranceSuite, and royalties to
solution partners for technologies integrated with our self-managed offerings.
We anticipate lower cost of license revenue over time as our term license
customers migrate to cloud subscription agreements.
The $3.9 million decrease in cost of services revenue during the three months
ended April 30, 2021 compared to the same period a year ago was primarily
attributable to a decrease of $3.7 million in billable travel costs resulting
from COVID-19 travel restrictions.
The $9.8 million decrease in cost of services revenue during the nine months
ended April 30, 2021 compared to the same period a year ago was primarily
attributable to decreases of $11.4 million in billable travel costs resulting
from COVID-19 travel restrictions and $1.2 million in software subscriptions and
hosting costs, partially offset by an increase of $3.0 million in personnel
costs, primarily bonuses.
We had 562 cloud operations and technical support employees and 658 professional
services employees at April 30, 2021 , compared to 335 cloud operations and
technical support employees and 761 professional services employees at April 30,
2020 . Approximately 90 employees have been transferred from professional
services to cloud operations and research and development since April 30, 2020
to support the growth in our cloud customers.
Gross Profit:
Three Months Ended April 30,
2021 2020 Change
Amount Margin % Amount Margin % ($) (%)
(in thousands, except percentages)
Gross profit:
Subscription and support $ 23,552 36 % $ 20,250 40 % $ 3,302 16 %
License 48,946 96 60,538 96 (11,592) (19)
Services (595) (1) 1,625 3 (2,220) 137
Total gross profit $ 71,903 44 $ 82,413 49 $ (10,510) (13)
Our gross profit decreased $10.5 million during the three months ended April 30,
2021 compared to the same period a year ago. Gross profit was impacted by the
decrease in term license revenue resulting from entering into multi-year term
license arrangements during fiscal year 2020, decreases in professional services
revenue driven by contracts with lower average services billing rates, increased
investments in implementation engagements, and lower billable travel costs
resulting from COVID-19 travel restrictions.
Our gross margin decreased to 44% during the three months ended April 30, 2021 ,
as compared to 49% during the same period a year ago. Gross margin was impacted
by lower subscription and support gross margins resulting from increasing
investments in cloud operations and negative services gross margin resulting
from contracts with lower average services billing rates and investments in
implementation engagements.
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Nine Months Ended April 30,
2021 2020 Change
Amount Margin % Amount Margin % ($) (%)
(in thousands, except percentages)
Gross profit:
Subscription and support $ 63,917 35 % $ 65,686 44 % $ (1,769) (3) %
License 186,370 96 185,960 96 410 -
Services (11,389) (8) (3,217) (2) (8,172) (254)
Total gross profit $ 238,898 46 $ 248,429 50 $ (9,531) (4)
Our gross profit decreased $9.5 million during the nine months ended April 30,
2021 compared to the same period a year ago. Gross profit was impacted by
decreases in professional services revenue, and, to a lesser extent, continued
investments in cloud operations to support our growing cloud customer base.
Our gross margin decreased to 46% during the nine months ended April 30, 2021 ,
as compared to 50% during the same period a year ago. Gross margin was impacted
by lower subscription and support gross margins resulting from increasing
investments in cloud operations, and negative services gross margins resulting
from contracts with lower average services billing rates and investments in
implementation engagements.
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 time. In
addition to the impact of our investment in customer migrations and
implementations, we expect continued challenges related to COVID-19 will
negatively impact services gross margin through fiscal year 2021 and potentially
longer. 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 flat compared to prior periods.
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.
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Three Months Ended April 30,
2021 2020 Change
As a % of total
Amount As a % of total revenue Amount revenue ($) (%)
(in thousands, except percentages)
Operating expenses:
Research and development $ 54,155 33% $ 51,893 30 % $ 2,262 4 %
Sales and marketing 40,879 25 35,235 21 5,644 16
General and administrative 23,695 14 20,885 12 2,810 13
Total operating expenses $ 118,729 72 $ 108,013 63 $ 10,716 10
Includes stock-based compensation
of:
Research and development $ 6,930 $ 6,500 $ 430
Sales and marketing 6,587 4,990 1,597
General and administrative 6,348 6,266 82
Total $ 19,865 $ 17,756 $ 2,109
Nine Months Ended April 30,
2021 2020 Change
As a % of total As a % of total
Amount revenue Amount revenue ($) (%)
(in thousands, except percentages)
Operating expenses:
Research and development $ 159,964 31 % $ 148,343 30 % $ 11,621 8 %
Sales and marketing 116,739 23 105,590 21 11,149 11
General and administrative 67,695 13 62,723 13 4,972 8
Total operating expenses $ 344,398 67 $ 316,656 64 $ 27,742 9
Includes stock-based compensation
of:
Research and development $ 21,781 $ 19,349 $ 2,432
Sales and marketing 19,370 16,143 3,227
General and administrative 19,621 18,870 751
Total $ 60,772 $ 54,362 $ 6,410
Research and Development
Our research and development expenses primarily consist of personnel costs for
our technical staff and consultants providing professional services.
The $2.3 million increase in research and development expenses during the three
months ended April 30, 2021 compared to the same period a year ago, was
primarily due to increases of $1.7 million in personnel costs associated with
higher headcount in fiscal year 2021, $0.7 million of cloud infrastructure costs
for our development environments, and $0.4 million of professional services
costs for consultants that support the development of our subscription
offerings, information security requirements, and cloud strategy. These
increases were partially offset by a decrease in travel costs of $0.5 million
due to COVID-19 travel restrictions. The three months ended April 30, 2021
included a $0.5 million benefit to research and development expenses related to
the CEWS.
The $11.6 million increase in research and development expenses during the nine
months ended April 30, 2021 compared to the same period a year ago was primarily
due to increases of $11.1 million in personnel costs associated with higher
headcount in fiscal year 2021, $1.7 million of cloud infrastructure costs for
our development environments, and $0.8 million of professional services costs
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for consultants that support the development of our subscription offerings,
information security requirements, and cloud strategy. These increases were
partially offset by a decrease in travel costs of $1.9 million due to COVID-19
travel restrictions. The nine months ended April 30, 2021 included a $1.1
million benefit related to the CEWS.
Our research and development headcount was 802 at April 30, 2021 compared with
749 at April 30, 2020 .
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 $5.6 million increase in sales and marketing expenses during the three
months ended April 30, 2021 compared to the same period a year ago was primarily
attributable to increases of $5.8 million in personnel costs due to higher
headcount to sell and market our services and products, including an increase of
$0.6 million due to the amortization of contract acquisition costs (primarily
commissions). Marketing and advertising expense increased $0.5 million due to
costs associated with Connections Reimagined, a three part series of virtual
events that occurred over the course of the year due to COVID-19. Costs
associated with the conferences held in March and May 2021 were incurred during
the three months ended April 30, 2021 . Costs for the annual event held in fiscal
year 2020 were recognized in the three months ended January 31, 2020 , the
quarter in which the in-person event occurred. We expect to recognize additional
costs associated with the May 2021 event in the fourth quarter of fiscal year
2021. These increases were partially offset by a decrease of $1.0 million in
travel costs due to COVID-19 travel restrictions. The three months ended
April 30, 2021 included a $0.1 million benefit to sales and marketing expenses
related to the CEWS.
The $11.1 million increase in sales and marketing expenses during the nine
months ended April 30, 2021 compared to the same period a year ago was primarily
attributable to an increase of $17.4 million in personnel costs due to higher
headcount to sell and market our services and products, including an increase of
$2.9 million due to the amortization of contract acquisition costs (primarily
commissions). These increases were partially offset by decreases of $5.3 million
in travel costs due to COVID-19 travel restrictions and $1.5 million in
marketing, advertising and related professional services expenses for our user
conferences due to Connections in November 2019 being an in-person event while
Connections Reimagined was three virtual events held throughout fiscal 2021. The
nine months ended April 30, 2021 included a $0.2 million benefit to sales and
marketing expenses related to the CEWS.
Our sales and marketing headcount was 423 at April 30, 2021 compared with 395 at
April 30, 2020 .
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. Additionally, we anticipate that Connections
will be an in-person event in the future, supplemented by virtual content, which
may contribute to an increase in sales and marketing expenses.
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 $2.8 million increase during the three months ended April 30, 2021 compared
to the same period a year ago was primarily due to the $3.6 million increase in
professional services and software expenses to support our growth and remote
work environment, partially offset by decreases of $0.5 million in depreciation
expense as we early terminated certain office space in December 2020 and $0.3
million in travel costs due to COVID-19 travel restrictions.
The $5.0 million increase during the nine months ended April 30, 2021 compared
to the same period a year ago was primarily due to the $6.0 million increase in
professional services and software expenses to support our growth and remote
work environment, partially offset by a $1.0 million decrease in travel costs
due to COVID-19 travel restrictions.
Our general and administrative headcount was 371 at April 30, 2021 compared with
318 at April 30, 2020 . General and administrative headcount includes personnel
in information technology support, information security, facilities, and
recruiting whose expenses are allocated across all functional departments.
We expect that our general and administrative expenses will increase in absolute
dollars as we continue to invest in personnel, corporate infrastructure, and
systems required to support our strategic initiatives, the growth of our
business, and our compliance and reporting obligations.
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Other Income (Expense)
Three Months Ended April 30,
2021 2020 Change
Amount Amount ($) (%)
(in thousands, except percentages)
Interest income $ 1,559 $ 6,072 $ (4,513) (74) %
Interest expense (4,698) (4,505) (193) 4 %
Other income (expense), net 5,259 (12,356) 17,615 *
*Not meaningful
Nine Months Ended April 30,
2021 2020 Change
Amount Amount ($) (%)
(in thousands, except percentages)
Interest income $ 6,363 $ 20,666 $ (14,303) (69) %
Interest expense (13,969) (13,396) (573) 4 %
Other income (expense), net 14,632 (12,789) 27,421 *
*Not meaningful
Interest Income
Interest income represents interest earned on our cash, cash equivalents, and
investments.
Interest income decreased $4.5 million and $14.3 million during the three and
nine months ended April 30, 2021 , respectively, compared to the same periods a
year ago, 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 the three months endedApril 30, 2021 and 2020 consists of non-cash interest expense related to the amortization of debt discount and issuance costs of$3.4 million and$3.2 million , respectively, and stated interest of$1.3 million in both periods. Interest expense for the nine months endedApril 30, 2021 and 2020 consists of non-cash interest expense related to the amortization of debt discount and issuance costs of$10.1 million and$9.6 million , respectively, and stated interest of$3.7 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. 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 and intercompany receivables and payables. 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, New Zealand Dollar, Polish Zloty, Russian Ruble, and Swiss Franc. Other income (expense), net during the three months endedApril 30, 2021 was income of$5.3 million , as compared to expense of$12.4 million during the same period a year ago. Due to fluctuations in exchange rates, the three months endedApril 30, 2021 included a realized and unrealized foreign currency gain of$5.3 million , while the three months endedApril 30, 2020 included a realized and unrealized foreign currency loss of$1.6 million . Foreign currency exchange rates have been more volatile in the past six months. The three months endedApril 30, 2020 also included a change in fair value of our strategic investments of$10.7 million . Other income (expense), net during the nine months endedApril 30, 2021 was income of$14.6 million , as compared to expense of$12.8 million during the same period a year ago. Due to fluctuations in exchange rates, the nine months endedApril 30, 2021 48 -------------------------------------------------------------------------------- Table of Contents included a realized and unrealized foreign currency gain of$14.3 million while the nine months endedApril 30, 2020 included a realized and unrealized foreign currency loss of$2.1 million . The nine months endedApril 30, 2020 also included a change in fair value of our strategic investments of$10.7 million . Provision for (benefit from) Income Taxes We are subject to taxes inthe United States as well as other tax jurisdictions and countries in which we conduct business. Earnings from our non-U.S. activities are subject to local country income tax and may also be subject toU.S. income tax. Three Months Ended April 30, 2021 2020 Change Amount Amount ($) (%) (in thousands, except percentages) Provision for (benefit from) income taxes$ (8,073) $ (5,351) $ (2,722) 51 % Effective tax rate 18 % 15 % Nine Months Ended April 30, 2021 2020 Change Amount Amount ($) (%) (in thousands, except percentages) Provision for (benefit from) income taxes$ (32,999) $ (7,773) $ (25,226) 325 % Effective tax rate 34 % 11 % We recognized an income tax benefit of$8.1 million and$5.4 million for the three months endedApril 30, 2021 and 2020, respectively, and an income tax benefit of$33.0 million and$7.8 million for the nine months endedApril 30, 2021 and 2020, respectively. The change in the amount of income taxes recorded for the three months endedApril 30, 2021 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, 2021 compared to the same period a year ago was primarily due to the increase in the loss before taxes, release of uncertain tax positions, and the tax status change of certain foreign subsidiaries forU.S. tax purposes. The effective tax rate of 18% and 34% for the three and nine months endedApril 30, 2021 differs from the statutoryU.S. federal income tax rate of 21% due to permanent differences for stock-based compensation including excess tax benefits, research and development credits, an increase in the valuation allowance against deferred tax assets, certain non-deductible expenses including executive compensation, the release of uncertain tax positions, and the tax status change of certain foreign subsidiaries. During the three and nine months endedApril 30, 2021 , unrecognized tax benefits increased by$0.3 million and decreased by$5.7 million , respectively. As ofApril 30, 2021 , we had unrecognized tax benefits of$11.8 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. 49 -------------------------------------------------------------------------------- Table of Contents 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. Three Months Ended April 30, Nine Months Ended April 30, 2021 2020 2021 2020 Gross profit reconciliation: GAAP gross profit$ 71,903 $ 82,413 $ 238,898 $ 248,429 Non-GAAP adjustments: Stock-based compensation 8,358 7,025 25,431 21,713 Amortization of intangibles 2,303 4,805 11,355 14,695 COVID-19Canada Emergency Wage Subsidy benefit(3) (951) - (1,919) - Non-GAAP gross profit$ 81,613 $ 94,243 $ 273,765 $ 284,837 Income (loss) from operations reconciliation: GAAP income (loss) from operations$ (46,826) $ (25,600) $ (105,500) $ (68,227) Non-GAAP adjustments: Stock-based compensation 28,223 24,781 86,203 76,075 Amortization of intangibles 3,921 6,602 16,567 20,511 COVID-19Canada Emergency Wage Subsidy benefit(3) (1,623) - (3,309) -
Non-GAAP income (loss) from operations
Net income (loss) reconciliation: GAAP net income (loss)$ (36,633) $ (31,038) $ (65,475) $ (65,973) Non-GAAP adjustments: Stock-based compensation 28,223 24,781 86,203 76,075 Amortization of intangibles 3,921 6,602 16,567 20,511 Amortization of debt discount and issuance costs 3,429 3,244 10,143 9,598 Changes in fair value of strategic investment(4) - 10,672 - 10,672 COVID-19Canada Emergency Wage Subsidy benefit(3) (1,623) - (3,309) - Tax impact of non-GAAP adjustments(1) (10,532) (6,559) (33,907) (14,645) Non-GAAP net income (loss)$ (13,215) $ 7,702
Tax provision (benefit) reconciliation: GAAP tax provision (benefit)$ (8,073) $ (5,351) $ (32,999) $ (7,773) Non-GAAP adjustments: Stock-based compensation (5,566) 3,295 (19,719) 11,824 Amortization of intangibles (773) 878 (4,071) 3,197 Amortization of debt discount and issuance costs (676) 431 (2,403) 1,489 Changes in fair value of strategic investment(4) - 1,418 - 1,418 50
-------------------------------------------------------------------------------- Table of Contents COVID-19Canada Emergency Wage Subsidy benefit(3) 320 - (139) - Tax impact of non-GAAP adjustments(1) 17,227 537 60,239 (3,283)
Non-GAAP tax provision (benefit)
Net income (loss) per share reconciliation: GAAP net income (loss) per share - diluted$ (0.44) $
(0.37)
0.34 0.30 1.04 0.92
Amortization of intangibles 0.05 0.08 0.21 0.25
Amortization of debt discount and
issuance costs 0.04 0.04 0.12 0.12
Changes in fair value of strategic
investment(4) - 0.13 - 0.13
COVID-19 Canada Emergency Wage Subsidy
benefit(3) (0.02) - (0.04) -
Tax impact of non-GAAP adjustments(1) (0.13) (0.08) (0.41) (0.18)
Non-GAAP dilutive shares excluded from
GAAP net income (loss) per share
calculation(2) - (0.01) (0.02) (0.02)
Non-GAAP net income (loss) per share -
diluted $ (0.16) $
0.09
Shares used in computing Non-GAAP income (loss) per share amounts: GAAP weighted average shares - diluted 83,600,327 83,024,291 83,693,045 82,701,267 Non-GAAP dilutive shares excluded from GAAP income (loss) per share calculation(2) - 486,398 807,361 798,189 Pro forma weighted average shares - diluted 83,600,327 83,510,689 84,500,406 83,499,456 (1) Adjustments reflect the impact on the tax benefit (provision) from all non-GAAP adjustments. (2) 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. (3) Effective the second fiscal quarter of 2021, the COVID-19Canada Emergency Wage Subsidy benefit was included as a non-GAAP adjustment. Prior to the second fiscal quarter of 2021, this program was not available. (4) 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. Liquidity and Capital Resources Our principal sources of liquidity are as follows (in thousands): April 30, 2021 July
31, 2020
Cash, cash equivalents, and investments $ 1,288,826 $ 1,434,267
Working capital $ 1,093,649 $ 1,118,020 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, 2021 , approximately$57.6 million of our cash and cash equivalents were domiciled in 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. 51
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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. During the three months endedApril 30, 2021 , we repurchased 764,782 shares of common stock at an average price of$104.47 per share, for an aggregate purchase price of$79.9 million . During the nine months endedApril 30, 2021 , we repurchased 1,123,341 shares of common stock at an average price of$110.21 per share, for an aggregate purchase price of$123.8 million . As ofApril 30, 2021 ,$76.2 million remained available for future share repurchases. 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 endedOctober 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
2021 2020
Net cash provided by (used in) operating activities $ 3,233 $ 5,907
Net cash provided by (used in) investing activities $ 32,637 $ 33,408
Net cash provided by (used in) financing activities $
(120,655)
Cash Flows from Operating Activities Net cash provided by operating activities was$3.2 million for the nine months endedApril 30, 2021 compared to cash provided by operating activities of$5.9 million during the nine months endedApril 30, 2020 . This$2.7 million decrease in operating cash provided was primarily attributable to a$9.3 million increase in cash provided by working capital activities, including$2.5 million received from the CEWS, partially offset by a$11.9 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, and other non-cash items. Cash Flows from Investing Activities Net cash provided by investing activities was$32.6 million for the nine months endedApril 30, 2021 compared to net cash provided by investing activities of$33.4 million for the nine months endedApril 30, 2020 . The decrease in cash provided by investing activities was primarily due to higher capitalized cloud software development costs of$4.3 million , new strategic equity investments of$2.0 million , and lower cash from available-for-sale securities transactions of$1.0 million , offset by a reduction in capital expenditures primarily due to the completion of our new headquarters inSan Mateo, California of$6.6 million . Cash Flows from Financing Activities Net cash used in financing activities for the nine months endedApril 30, 2021 was$120.7 million compared to$3.1 million provided by financing activities for the nine months endedApril 30, 2020 . This$123.7 million increase in cash used was primarily because we repurchased$122.6 million of our common stock under our share repurchase program and, to a lesser extent, a decrease in proceeds from option exercises of$1.2 million . 52 -------------------------------------------------------------------------------- Table of Contents Commitments and Contractual Obligations Our primary contractual obligations consist of our Convertible Senior Notes due in 2025, obligations under leases for our office facilities, and letters of credit we have issued to lessors and customers to guarantee our performance under certain arrangements. See Notes 6, 7 and 8 to our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for discussions of our Convertible Senior Notes, lease commitments, and letters of credit. 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, 2020 . See the Annual Report on Form 10-K for the fiscal year endedJuly 31, 2020 for additional information regarding the Company's contractual obligations. Off-Balance Sheet Arrangements ThroughApril 30, 2021 , 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. ITEM 3. Quantitative and Qualitative Disclosures about Market Risk We are exposed to market risks in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in interest rates and foreign currency exchange rates. We do not hold or issue financial instruments for trading purposes.
Interest Rate Sensitivity
Our exposure to market risk for changes in interest rates relates primarily to our cash, cash equivalents, and investments. Our cash, cash equivalents, and investments as ofApril 30, 2021 andJuly 31, 2020 were$1,288.8 million and$1,434.3 million , respectively, primarily consisting of cash, money market funds, 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. Changes inU.S. interest rates affect the interest earned on our cash, cash equivalents, and investments, and their market value. A hypothetical 100 basis point increase in interest rates is estimated to result in a decrease of$4.6 million and$5.6 million in the market value of our available-for-sale securities as ofApril 30, 2021 andJuly 31, 2020 , respectively. Any realized gains or losses resulting from such interest rate changes would only occur if we sold the investments prior to maturity. Foreign Currency Exchange Risk Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the Argentine Peso, Australian Dollar, Brazilian Real, British Pound, Canadian Dollar,Danish Kroner , Euro, Indian Rupee, Japanese Yen, Malaysian Ringgit, New Zealand Dollar, Polish Zloty, Russian Ruble, and Swiss Franc, the currency of the locations within which we currently operate. The volatility of exchange rates depends on many factors that we cannot forecast with reliable accuracy. We believe our operating activities act as a natural hedge for a substantial portion of our foreign currency exposure because we typically collect revenue and incur costs in the currency of the location in which we provide our services. However, our relationships with our customers are long-term in nature so it is difficult to predict if our operating activities will provide a natural hedge in the future. Additionally, changes in foreign currency exchange rates can affect our financial results due to transaction gains or losses related to revaluing certain 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 and intercompany receivables and payables. For the nine months endedApril 30, 2021 and 2020, we recorded foreign currency gains of$14.3 million and foreign currency losses of$2.1 million , respectively, in other income (expense) in our condensed consolidated statement of operations primarily due to currency exchange rate fluctuations. We will continue to experience fluctuations in foreign currency exchange rates. If a hypothetical ten percent change in foreign exchange rates were to occur in the future, the resulting transaction gain or loss is estimated to be approximately$15.1 million . As our international operations grow, we will continue to assess our approach to managing our risk relating to fluctuations in currency rates. Fair Value of Financial Instruments We do not have material exposure to market risk with respect to investments in financial instruments, as our investments primarily consist of highly liquid investments purchased with a remaining maturity of three years or less. We do not use derivative financial instruments for speculative or trading purposes. However, this current position does not preclude our adoption of specific hedging strategies in the future. 53
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Table of Contents Our strategic investments in privately held securities are in various classes of equity and convertible debt that may have different rights and preferences. The particular securities we hold, and their rights and preferences relative to those of other securities within the capital structure, may impact the magnitude by which our investment value moves in relation to movements in the total enterprise value of the company in which we are invested. As a result, our investment in a specific company may move by more or less than any change in value of that overall company. In addition, the financial success of our investment in any company is typically dependent on a liquidity event, such as public offering, acquisition, or other favorable market event reflecting appreciation to the value of our investment. All of our investments, particularly those in privately held companies, are therefore subject to a risk of partial or total loss of invested capital.
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