S-1/A 1 d219721ds1a.htm AMENDMENT NO. 4 TO FORM S-1 Amendment No. 4 to Form S-1
Table of Contents

As filed with the Securities and Exchange Commission on January 9, 2012

Registration No. 333-176667

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 4

TO

FORM S-1

REGISTRATION STATEMENT

Under

The Securities Act of 1933

 

 

Guidewire Software, Inc.

(Exact name of Registrant as specified in its charter)

 

 

 

Delaware   7372   36-4468504
(State or other jurisdiction of
incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)

2211 Bridgepointe Parkway

San Mateo, CA 94404

Tel: (650) 357-9100

(Address, including zip code, and telephone number,

including area code, of Registrant’s principal executive offices)

 

 

Marcus S. Ryu

President and Chief Executive Officer

2211 Bridgepointe Parkway

San Mateo, CA 94404

Tel: (650) 357-9100

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Craig M. Schmitz

Richard A. Kline

Goodwin Procter LLP

135 Commonwealth Drive

Menlo Park, CA 94025

 

Robert F. Donohue

Vice President and General Counsel

Guidewire Software, Inc.

2211 Bridgepointe Parkway

San Mateo, CA 94404

 

Jeffrey D. Saper

Robert G. Day

Wilson Sonsini Goodrich & Rosati, P.C.

650 Page Mill Road

Palo Alto, CA 94304

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box:  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

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

 

Large accelerated filer  ¨

   Accelerated filer   ¨    Non-accelerated filer  x    Smaller reporting company  ¨
      (do not check if a smaller reporting company)   

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of

Securities to be Registered

 

Amount

to be
Registered (1)

  Proposed Maximum
Aggregate Offering
Price Per Share (2)
 

Proposed Maximum
Aggregate

Offering Price (2)

 

Amount of

Registration Fee (3)

Common Stock, $0.0001 par value

  8,625,000   $12.00   $103,500,000   $12,012

 

 

 

(1) Includes 1,125,000 shares of common stock that may be purchased by the underwriters to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the registration fee pursuant to Rule 457(a) under the Securities Act.
(3) The registration fee is equal to the sum of (a) the product of (i) the proposed maximum aggregate offering price of $100,000,000, as previously proposed on the initial filing of this Registration Statement on September 2, 2011 and (ii) the then-current statutory rate of $116.10 per $1,000,000 ($11,610 was previously paid) and (b) the product of (i) the marginal increase of $3,500,000 in the proposed maximum aggregate offering price hereunder and (ii) the current statutory rate of $114.60 per $1,000,000.

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

PRELIMINARY PROSPECTUS, SUBJECT TO COMPLETION, DATED JANUARY 9, 2012

Prospectus

7,500,000 Shares

LOGO

Common Stock

This is the initial public offering of common stock of Guidewire Software, Inc. Prior to this offering, there has been no public market for our common stock. The initial public offering price of our common stock is expected to be between $10.00 and $12.00 per share.

Our common stock has been approved for listing on the New York Stock Exchange under the symbol “GWRE.”

 

     Per Share      Total  

Initial public offering price

   $                    $                

Underwriting discounts and commissions

   $                    $                

Proceeds to Guidewire Software, Inc., before expenses

   $                    $                

We have granted the underwriters an option to purchase up to 1,125,000 additional shares of common stock to cover over-allotments.

Battery Ventures VIII, L.P., or Battery Ventures, an existing stockholder of Guidewire, has indicated an interest in purchasing up to 400,000 shares of our common stock in this offering at the initial public offering price. Because this indication of interest is not a binding agreement or commitment to purchase, Battery Ventures may elect not to purchase shares in this offering or the underwriters may elect not to sell any shares in this offering to Battery Ventures. The underwriters will receive the same discount from any shares of our common stock purchased by Battery Ventures as they will from any other shares of our common stock sold to the public in this offering.

Investing in our common stock involves risks. See “Risk Factors ” beginning on page 12.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares on or about                    , 2012.

 

J.P. Morgan   Deutsche Bank Securities   Citigroup

 

Stifel Nicolaus Weisel    Pacific Crest Securities

                    , 2012


Table of Contents

LOGO


Table of Contents

TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1   

Risk Factors

     12   

Special Note Regarding Forward-Looking Statements

     36   

Industry and Market Data

     37   

Use of Proceeds

     38   

Dividend Policy

     38   

Capitalization

     39   

Dilution

     41   

Selected Consolidated Financial Data

     43   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     46   

Business

     87   

Management

     103   

Compensation

     109   

Certain Relationships and Related Party Transactions

     137   

Principal Stockholders

     139   

Description of Capital Stock

     141   

Shares Eligible for Future Sale

     146   

Material United States Federal Income Tax and Estate Tax Consequences to Non-U.S. Holders

     149   

Underwriting

     153   

Legal Matters

     158   

Experts

     158   

Where You Can Find More Information

     158   

Index to Consolidated Financial Statements

     F-1   

You should rely only on the information contained in this prospectus and in any related free writing prospectus prepared by or on behalf of us. We have not, and the underwriters have not, authorized anyone to provide you with information different from, or in addition to, that contained in this prospectus or any related free writing prospectus. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

Through and including                    , 2012 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

For investors outside the United States: neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus.

 

i


Table of Contents

PROSPECTUS SUMMARY

This summary highlights selected information appearing elsewhere in this prospectus and does not contain all the information you should consider before investing in our common stock. You should carefully read this prospectus in its entirety before investing in our common stock, including “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this prospectus. Unless the context otherwise requires, we use the terms “Guidewire,” “we,” “us,” “the Company” and “our” in this prospectus to refer to Guidewire Software, Inc. and its subsidiaries. Our fiscal years ended July 31, 2009, 2010 and 2011 are referred to herein as fiscal year 2009, fiscal year 2010 and fiscal year 2011, respectively.

Overview

Guidewire Software is a leading provider of core system software to the global property and casualty, or P&C, insurance industry. Our solutions serve as the transactional systems-of-record for, and enable the key functions of, a P&C insurance carrier’s business: underwriting and policy administration, claims management and billing. Since our inception, our mission has been to empower P&C insurance carriers to transform and improve their businesses by replacing their legacy core systems with our innovative modern software platform.

We have developed an integrated suite of highly configurable applications that are delivered through a web-based interface and can be deployed either on-premise or in cloud environments. A key advantage of our architecture over that of legacy core systems is that our solutions enable extensive configurability of business rules, workflows and user interfaces without modification of the underlying code base, allowing customers to easily make changes in response to specific, evolving business needs. Our Guidewire InsuranceSuite includes Guidewire PolicyCenter, Guidewire ClaimCenter and Guidewire BillingCenter applications, which enable a broad range of core P&C insurance operations. According to Gartner, Inc., as of January 2011, ClaimCenter, our first application, is the P&C insurance industry’s most widely used web-based claims system.

Strong customer relationships are a key component of our success given the long-term nature of our contracts and the importance of customer references for new sales. Our customers range from some of the largest global insurance carriers or their subsidiaries such as Tokio Marine & Nichido Fire Insurance Co., Ltd. and Zurich Financial Services Group Ltd. to national carriers such as Nationwide Mutual Insurance Company to regional carriers such as AAA affiliates. As of October 31, 2011, we had 103 customers.

We primarily generate software license revenues through annual license fees that recur during the multi-year term of a customer’s contract. The average initial length of our contracts is approximately five years, and these contracts are renewable on an annual or multi-year basis. We typically bill our customers for license and maintenance fees annually in advance. We primarily derive our service revenues from implementation and training services performed for our customers. A significant majority of services are billed on a time and materials basis and recognized as revenues upon delivery of the services. We generated revenues of $144.7 million and $172.5 million in fiscal years 2010 and 2011, respectively, and $52.4 million for the three months ended October 31, 2011. We generated net income of $15.5 million and $35.6 million in fiscal years 2010 and 2011, respectively, including a benefit of $27.2 million related to the release of a significant portion of our tax valuation allowance during fiscal year 2011, and $4.8 million for the three months ended October 31, 2011.

 

 

1


Table of Contents

Overview of the P&C Insurance Industry

The P&C insurance industry is large, fragmented, highly regulated and complex. In order to effectively manage their operations, P&C insurance carriers require IT systems that integrate with other internal systems, control workflow, enable extensive configurability and provide visibility to every user. According to Gartner, in 2010, P&C insurance carriers spent $4.0 billion on software and $10.5 billion on IT services, which encompasses outsourced custom development and maintenance.

Many P&C insurance carriers are experiencing increased operational risk and financial loss due to the inadequacy of their existing legacy core systems. The inherent functional and technical limitations of these systems have impeded carriers’ ability to grow profitability and adapt to the evolving expectations of consumer, commercial and government insurance customers. Key factors driving adoption of modern core system software include:

 

  Ÿ  

Aging IT infrastructure and increasing scarcity of experienced workforce.     P&C insurance carriers typically rely on legacy core systems that have often been in operation for 20 years or more, utilize outdated programming languages and are difficult to change, upgrade or integrate with modern infrastructure. Compounding the problem, specialized IT staff qualified to maintain these systems are retiring and hard to replace, leaving aging systems inadequately supported.

 

  Ÿ  

Increased business risk due to continued reliance on inefficient processes.    P&C insurance carriers’ reliance on a combination of inefficient and inflexible paper-based processes and legacy systems significantly hinders productivity and may result in mispricing of policies, incorrect claims payouts and inaccurate or incomplete customer records.

 

  Ÿ  

Financial loss due to fraud and error in the claims process.    P&C insurance carriers experience substantial financial losses each year due to claims leakage, where the amount paid on a claim exceeds the amount to which a claimant is entitled. Claims leakage, which includes fraud as well as system and human error, is often the result of ineffective business process controls in legacy systems. We believe, based upon our analysis and industry reports, that claims leakage costs the P&C insurance industry approximately $50.0 billion annually, including $30.0 billion related to fraud.

 

  Ÿ  

Changing insurance customer expectations.    P&C insurance carriers’ IT needs continue to change as their business models and insurance products evolve to meet the changing needs and behaviors of consumer, commercial and government insurance customers. For example, these purchasers and their agents increasingly compare insurance products and prices through Internet research, as well as through traditional phone and in-person channels. Processes that cannot accommodate multiple sales channels and insurance products may result in pricing confusion, poor customer service, information inconsistency and customer loss.

 

  Ÿ  

Continued pressure on underwriting margins.    Insurance product commoditization and declining investment returns have pressured P&C insurance carriers’ profitability. P&C insurance carriers’ reliance on legacy IT systems has limited their ability to offer new and differentiated products, effectively use the Internet to access a larger customer base and increase operational efficiencies, further pressuring pricing and margins.

 

 

2


Table of Contents

Our Solutions

Our solutions are designed to provide P&C insurance carriers with the core system capabilities required to effectively manage their business and overcome critical industry challenges. The key benefits of our solutions include:

 

  Ÿ  

Integrated software suite for key processes of P&C insurance lifecycle.    Our integrated software suite addresses the key functional areas in insurance: underwriting and policy administration, claims management and billing. The comprehensive nature of our solutions enables P&C insurance carriers to migrate from many disparate, non-compatible systems to our unified technology platform and suite of applications.

 

  Ÿ  

Intelligent enforcement of best practices and controls.    Our solutions are designed to manage the large data sets and highly complex workflow decisions specific to P&C insurance, enabling P&C insurance carriers to implement and enforce best practices company-wide. The integration of disparate information and rule standardization provides managers the ability to better monitor, identify and react to trends in their business.

 

  Ÿ  

Improved operational productivity and visibility.    Our solutions automate and facilitate many of the manual tasks performed by employees of P&C insurance carriers, such as data entry, documentation, correspondence, records management and financial processing. Dashboards, customized searches and real-time analytics provide accurate and relevant information, while rule-based workflows allow for efficient intervention in the minority of situations that require human attention. As a result, our solutions enhance the productivity and decision-making of supervisors and senior managers.

 

  Ÿ  

Extensive configurability enabling business adaptation.    Our unified software platform gives customers the flexibility to easily configure key aspects of our solutions to meet their specialized needs. Relative to legacy system environments, our solutions enable our customers to capture significantly broader sets of data, design and modify business workflows more easily, change business rules more rapidly and adapt user interfaces for greater productivity. This flexibility enables P&C insurance carriers to respond more quickly to changing business demands and regulatory requirements.

 

  Ÿ  

Differentiated insurance offerings and customer services.     Our solutions are designed to enhance P&C insurance carriers’ growth and brand differentiation strategies. The flexibility of our solutions enables and accelerates the introduction of new insurance products, entry into new geographies, use of new distribution channels and delivery of additional differentiated services.

Our Growth Strategy

We intend to extend our leadership as a provider of core system software to the global P&C insurance industry. The key elements of our strategy include:

 

  Ÿ  

Continue to innovate and extend our technology leadership.    We intend to enhance the functionality of our industry-leading software for P&C insurance carriers through continued focus on product innovation and investment in research and development.

 

 

3


Table of Contents
  Ÿ  

Expand our customer base.    We intend to continue to aggressively pursue new customers by specifically targeting key accounts, expanding our sales and marketing organization, leveraging current customers as references and extending our geographic reach. We target new customers with our complete InsuranceSuite solution or by selling one or more of our applications, based on their initial needs.

 

  Ÿ  

Upsell our existing customer base.    We intend to build upon our established customer relationships and track record of successful implementations to sell additional products into our existing customer base. Given our initial success with ClaimCenter, we believe there is a significant opportunity to upsell our PolicyCenter and BillingCenter applications into our existing customer base.

 

  Ÿ  

Deepen and expand strategic relationships with our system integration partners.    We will continue to collaborate with, and seek to increase the value that our solutions generate for, our strategic partners. We believe these efforts will encourage our partners to drive awareness and adoption of our software solutions throughout the P&C insurance industry.

 

  Ÿ  

Increase market awareness of our brand and solutions.    We intend to continue to use our key partnerships, customer references and marketing efforts to strengthen our brand and reputation, enhance market awareness of our PolicyCenter solution and our integrated InsuranceSuite and establish Guidewire as the leading provider of core system software to the P&C insurance industry.

Risks Affecting Us

Our business, financial condition, results of operations and prospects are subject to numerous risks. These risks include, among others, that:

 

  Ÿ  

our quarterly and annual results of operations are likely to vary significantly;

 

  Ÿ  

seasonal and other variations related to our revenue recognition may cause significant fluctuations in our results of operations and cash flows;

 

  Ÿ  

we rely on sales to and renewals from a relatively small number of large customers for a substantial portion of our revenues;

 

  Ÿ  

our services revenues produce lower gross margins than our license and maintenance revenues, and increases in services revenues as a percentage of total revenues could adversely affect our overall gross margins and profitability;

 

  Ÿ  

assertions by third parties that we violate their intellectual property rights could substantially harm our business;

 

  Ÿ  

we face intense competition in our market;

 

  Ÿ  

weakened global economic conditions may adversely affect the P&C insurance industry including the rate of information technology spending;

 

  Ÿ  

our product development and sales cycles are lengthy, and we may incur significant expenses prior to earning corresponding revenues; and

 

  Ÿ  

our two largest stockholders, U.S. Venture Partners and Bay Partners, will own 46.1% of our stock and will continue to have effective control over our management and affairs and other matters requiring stockholder approval after the completion of this offering.

 

 

4


Table of Contents

If we are unable to adequately address these and other risks we face, our business, financial condition, results of operations and prospects may be materially and adversely affected. In addition, there are numerous risks related to an investment in our common stock. You should carefully consider the risks described in “Risk Factors” and elsewhere in this prospectus.

Corporate History and Information

We were incorporated in Delaware in 2001. Our principal executive offices are located at 2211 Bridgepointe Parkway, San Mateo, California 94404, and our telephone number is (650) 357-9100. Our website address is www.guidewire.com. Information contained on our website is not incorporated by reference into this prospectus, and you should not consider any information contained on, or that can be accessed through, our website as part of this prospectus or in deciding whether to purchase shares of our common stock.

“Guidewire,” “Guidewire Software,” “Guidewire BillingCenter,” “Guidewire ClaimCenter,” “Guidewire PolicyCenter,” “Guidewire InsuranceSuite” and “Gosu” are registered or common law trademarks or service marks of Guidewire Software, Inc. This prospectus also contains additional trade names, trademarks, and service marks of ours and of other companies. We do not intend our use or display of other companies’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, these other companies. We have omitted the ® and ™ designations, as applicable, for the trademarks we name in this prospectus.

 

 

5


Table of Contents

THE OFFERING

 

Common stock offered by us

7,500,000 shares

 

Common stock to be outstanding after this offering

47,542,951 shares

 

Over-allotment option offered by us

1,125,000 shares

 

Use of proceeds

We intend to use the net proceeds of this offering primarily for general corporate purposes, including working capital. We also intend to use certain of the net proceeds to satisfy tax withholding obligations related to the vesting of restricted stock units, or RSUs, held by current or former employees, which will begin to vest 180 days after the completion of this offering. See “Use of Proceeds.”

 

Proposed New York Stock Exchange symbol

“GWRE”

Battery Ventures, one of our existing stockholders, has indicated an interest in purchasing up to 400,000 shares of our common stock in this offering at the initial public offering price. Because this indication of interest is not a binding agreement or commitment to purchase, Battery Ventures may elect not to purchase shares in this offering or the underwriters may elect not to sell any shares in this offering to Battery Ventures. The underwriters will receive the same discount from any shares of our common stock purchased by Battery Ventures as they will from any other shares of our common stock sold to the public in this offering. Any shares purchased by Battery Ventures will be subject to lock-up restrictions described in “Shares Eligible for Future Sale.”

The number of shares of our common stock to be outstanding following this offering is based on 40,042,951 shares of our common stock outstanding as of October 31, 2011, assuming conversion of all outstanding shares of our convertible preferred stock on a one-for-one basis into 25,357,721 shares of common stock, and excludes:

 

  Ÿ  

8,181,978 shares of common stock issuable upon the exercise of options outstanding as of October 31, 2011, with a weighted average exercise price of $3.16 per share;

 

  Ÿ  

4,855,572 shares of common stock issuable upon the vesting of RSUs outstanding as of October 31, 2011;

 

  Ÿ  

69,529 shares of common stock issuable upon the exercise of warrants to purchase convertible preferred stock outstanding as of October 31, 2011, assuming conversion of all outstanding shares of our convertible preferred stock, which we expect to occur immediately prior to the closing of this offering, with an exercise price of $5.03 per share; and

 

  Ÿ  

7,595,117 shares of our common stock reserved for future issuance under our stock-based compensation plans as of October 31, 2011, consisting of 25,168 shares of common stock reserved for issuance under our 2006 Stock Plan (on November 9, 2011 and January 3, 2012, our board of directors increased the shares available under the 2006 Stock Plan by 240,000 shares to 265,168 shares; options to purchase 235,000 shares and 30,000 shares were granted on November 11, 2011 and January 3, 2012, respectively), 521 shares of common

 

 

6


Table of Contents
 

stock reserved for issuance under our 2009 Stock Plan, 49,428 shares of common stock reserved for issuance under our 2010 Restricted Stock Unit Plan (on November 9, 2011, our board of directors increased the shares available under the 2010 Restricted Stock Unit Plan by 255,000 shares; 297,500 shares are subject to issuance upon vesting of RSUs granted on November 11, 2011) and, subject to and effective upon the closing of this offering, 7,500,000 shares of common stock reserved for issuance under our 2011 Stock Plan and any future increase in shares reserved for issuance under such plans.

Unless otherwise noted, the information in this prospectus (except for our historical financial statements) reflects and assumes the following:

 

  Ÿ  

the conversion of all outstanding shares of our convertible preferred stock into an aggregate of 25,357,721 shares of common stock, which we expect to occur immediately prior to the closing of this offering;

 

  Ÿ  

the filing of our amended and restated certificate of incorporation immediately prior to the closing of this offering; and

 

  Ÿ  

no exercise by the underwriters of their over-allotment option.

 

 

7


Table of Contents

SUMMARY CONSOLIDATED FINANCIAL DATA

The following table summarizes our consolidated financial data. We have derived the summary consolidated statements of operations data for the fiscal years ended July 31, 2009, 2010 and 2011 from our audited consolidated financial statements included elsewhere in this prospectus. We have derived the summary consolidated statements of operations data for the three months ended October 31, 2010 and 2011 and our consolidated balance sheet data as of October 31, 2011 from our unaudited interim consolidated financial statements included elsewhere in this prospectus. The unaudited interim financial statements have been prepared on a basis consistent with the audited consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, that management considers necessary to present fairly the financial information set forth in those statements. Our historical results are not necessarily indicative of the results that may be expected in the future and the results for the three months ended October 31, 2011 are not necessarily indicative of the results to be expected for the fiscal year ending July 31, 2012 or any other future annual or interim period. The following summary consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

    Years Ended July 31,     Three Months
Ended October 31,
 
    2009     2010     2011     2010     2011  
                      (unaudited)  
    (in thousands, except share and per share data)  

Revenues:

         

License

  $ 26,996      $ 60,315      $ 73,883      $ 10,153      $ 20,815   

Maintenance

    9,572        18,702        21,321        4,610        7,106   

Services

    48,177        65,674        77,268        19,907        24,459   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    84,745        144,691        172,472        34,670        52,380   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenues(1):

         

License

    349        267        1,264        201        299   

Maintenance

    2,628        3,685        4,063        886        1,266   

Services

    38,679        51,519        63,017        14,105        17,925   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues

    41,656        55,471        68,344        15,192        19,490   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit:

         

License

    26,647        60,048        72,619        9,952        20,516   

Maintenance

    6,944        15,017        17,258        3,724        5,840   

Services

    9,498        14,155        14,251        5,802        6,534   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gross profit

    43,089        89,220        104,128        19,478        32,890   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

         

Research and development(1)

    22,356        28,273        34,773        7,519        10,959   

Sales and marketing(1)

    21,559        26,741        28,950        5,546        7,361   

General and administrative(1)

    9,646        16,192        23,534        4,628        6,438   

Litigation provision

    —          —          10,000        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    53,561        71,206        97,257        17,693        24,758   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    (10,472     18,014        6,871        1,785        8,132   

Interest income, net

    27        95        156        37        40   

Other income (expense), net

    (123     (391     1,269        193        (316
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before provision for income taxes

    (10,568     17,718        8,296        2,015        7,856   

Provision for (benefit from) income taxes

    398        2,199        (27,262     125        3,044   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (10,966   $ 15,519      $ 35,558      $ 1,890      $ 4,812   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

8


Table of Contents
    Years Ended July 31,     Three Months
Ended October 31,
 
    2009     2010     2011     2010     2011  
                      (unaudited)  
    (in thousands, except share and per share data)  

Net income (loss) per share(2):

         

Basic

  $ (0.83   $ 0.32      $ 0.83      $ 0.03      $ 0.10   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  $ (0.83   $ 0.30      $ 0.76      $ 0.03      $ 0.09   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Shares used in computing net income (loss) per share(2):

         

Basic

    13,284,938        13,535,736        14,064,055        13,873,022        14,554,428   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

    13,284,938        15,933,374        17,763,859        16,046,865        21,153,441   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net income per share (unaudited)(2):

         

Basic

    $ 0.40      $ 0.90      $ 0.05      $ 0.12   
   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

    $ 0.38      $ 0.82      $ 0.05      $ 0.10   
   

 

 

   

 

 

   

 

 

   

 

 

 

Shares used in computing pro forma net income per share (unaudited)(2):

         

Basic

      38,893,457        39,421,776        39,230,743        39,912,149   
   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

      41,291,095        43,121,580        41,404,586        46,511,161   
   

 

 

   

 

 

   

 

 

   

 

 

 

Other financial data:

         

Adjusted EBITDA(3) (unaudited)

  $ (6,377   $ 22,744      $ 25,777      $ 3,050      $ 12,123   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating cash flows

  $ 11,379      $ 9,534      $ 27,686      $ (13,099   $ (27,085 )(4) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Includes stock-based compensation as follows:

 

     Years Ended July 31,      Three Months
Ended October 31,
 
     2009      2010      2011      2010      2011  
                          (unaudited)  
     (in thousands)  

Cost of revenues

   $ 780       $ 925       $ 1,384       $ 306       $ 758   

Research and development

     688         769         1,372         248         845   

Sales and marketing

     857         755         903         135         497   

General and administrative

     464         905         3,021         334         1,212   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $ 2,789       $ 3,354       $ 6,680       $ 1,023       $ 3,312   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(2) 

See Note 9 to our audited consolidated financial statements for an explanation of the calculations of our actual basic and diluted and pro forma basic and diluted net income (loss) per share attributable to common stockholders. All shares to be issued in this offering were excluded from the unaudited pro forma basic and diluted net income per share calculation.

(3) 

We define Adjusted EBITDA as net income (loss), plus provision for (benefit from) income taxes, other (income) expense, net, interest (income) expense, net, litigation provision, depreciation and amortization and stock-based compensation.

(4) 

Includes $10.0 million litigation settlement payment.

 

 

9


Table of Contents

Adjusted EBITDA

We believe Adjusted EBITDA, a non-GAAP measure, is useful, in addition to other financial measures presented in accordance with GAAP, in evaluating our operating performance compared to that of other companies in our industry, as this metric generally eliminates the effects of certain items that may vary for different companies for reasons unrelated to overall operating performance. We believe that:

 

  Ÿ  

Adjusted EBITDA provides investors and other users of our financial information consistency and comparability with our past financial performance, facilitates period-to-period comparisons of operations and facilitates comparisons with other companies, many of which use similar non-GAAP financial measures to supplement their GAAP results; and

 

  Ÿ  

it is useful to exclude non-cash charges, such as depreciation and amortization, stock-based compensation and one-time charges such as our litigation provision from Adjusted EBITDA because the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations and these expenses can vary significantly between periods.

We use Adjusted EBITDA in conjunction with traditional GAAP measures as part of our overall assessment of our performance, including the preparation of our annual operating budget and quarterly forecasts, to evaluate the effectiveness of our business strategies and to communicate with our board of directors regarding our financial performance.

Adjusted EBITDA should not be considered as a substitute for other measures of financial performance reported in accordance with GAAP. There are limitations to using non-GAAP financial measures, including that other companies may calculate these measures differently than we do. We compensate for the inherent limitations associated with using Adjusted EBITDA through disclosure of these limitations, presentation of our financial statements in accordance with GAAP and reconciliation of Adjusted EBITDA to the most directly comparable GAAP measure, net income (loss).

The following table provides a reconciliation of net income (loss) to Adjusted EBITDA:

 

    Years Ended July 31,     Three Months
Ended October 31,
 
    2009     2010     2011     2010     2011  
    (unaudited)  
    (in thousands)  

Reconciliation of Adjusted EBITDA:

       

Net income (loss)

  $ (10,966   $   15,519      $ 35,558      $   1,890      $ 4,812   

Non-GAAP adjustments:

         

Provision for (benefit from) income taxes

    398        2,199          (27,262     125        3,044   

Other (income) expense, net

    123        391        (1,269     (193     316   

Interest income, net

    (27     (95     (156     (37     (40

Litigation provision

    —          —          10,000        —          —     

Depreciation and amortization

    1,306        1,376        2,226        242        679   

Total stock-based compensation

         2,789        3,354        6,680        1,023        3,312   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ (6,377   $ 22,744      $ 25,777      $ 3,050      $   12,123   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table presents our summary consolidated balance sheet data as of October 31, 2011:

 

  Ÿ  

on an actual basis;

 

  Ÿ  

on a pro forma basis to give effect to the conversion of all outstanding shares of our convertible preferred stock into shares of common stock and all outstanding warrants to purchase convertible preferred stock into warrants to purchase common stock; and

 

 

10


Table of Contents
  Ÿ  

on a pro forma as adjusted basis to give effect to the conversion described in the prior bullet and the sale by us of the shares of common stock offered by this prospectus at an initial public offering price of $11.00 per share, the midpoint of the price range on the cover of this prospectus, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. A $1.00 increase (decrease) in the assumed initial public offering price of $11.00 per share would increase (decrease) our pro forma as adjusted cash and cash equivalents, working capital, total assets and total stockholders’ equity by $7.0 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

     As of October 31, 2011  
   Actual      Pro Forma      Pro Forma  as
Adjusted(1)
 
  

(unaudited)

 
     (in thousands)  

Consolidated Balance Sheet Data:

        

Cash and cash equivalents

   $ 31,171       $ 31,171       $ 104,869   

Working capital

     13,461         13,461         86,186   

Total assets

     102,795         102,795         175,520   

Total liabilities

     76,126         76,126         76,126   

Convertible preferred stock

     36,500         —           —     

Total stockholders’ equity

     26,669         26,669         99,394   

 

(1) We paid $973,000 of our initial public offering expenses as of October 31, 2011 in connection with the preparation of the registration statement of which this prospectus forms a part.

 

 

11


Table of Contents

RISK FACTORS

Investing in our common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below, together with all of the other information in this prospectus, including our consolidated financial statements and related notes, before deciding whether to purchase shares of our common stock. If any of the following risks are realized, our business, financial condition, results of operations and prospects could be materially and adversely affected. In that event, the price of our common stock could decline and you could lose part or all of your investment. See “Special Note Regarding Forward-Looking Statements.”

Risks Relating to Our Business and Industry

We may experience significant quarterly and annual fluctuations in our results of operations due to a number of factors.

Our quarterly and annual results of operations may fluctuate significantly due to a variety of factors, many of which are outside of our control. This variability may lead to volatility in our stock price as research analysts and investors respond to quarterly fluctuations. In addition, comparing our results of operations on a period-to-period basis, particularly on a sequential quarterly basis, may not be meaningful. You should not rely on our past results as an indication of our future performance.

Factors that may affect our results of operations include:

 

  Ÿ  

structure of our licensing contracts;

 

  Ÿ  

the timing of new orders and revenue recognition for new and prior year orders;

 

  Ÿ  

seasonal buying patterns of our customers;

 

  Ÿ  

our ability to increase sales to and renew agreements with our existing customers, particularly larger customers, at comparable prices;

 

  Ÿ  

our ability to attract new customers, particularly larger customers, in both domestic and international markets;

 

  Ÿ  

our ability to enter into contracts on favorable terms, including terms related to price, payment timing and product delivery;

 

  Ÿ  

volatility in the sales of our products and timing of the execution of new and renewal agreements within such periods;

 

  Ÿ  

commissions expense related to large transactions;

 

  Ÿ  

the lengthy and variable nature of our product implementation cycles;

 

  Ÿ  

reductions in our customers’ budgets for information technology purchases and delays in their purchasing cycles, particularly in light of recent adverse global economic conditions;

 

  Ÿ  

our ability to control costs, including our operating expenses;

 

  Ÿ  

any significant change in our facilities-related costs;

 

  Ÿ  

the timing of hiring personnel and of large expenses such as those for trade shows and third-party professional services;

 

  Ÿ  

the timing and amount of an additional litigation settlement payment, if any;

 

  Ÿ  

stock-based compensation expenses, which vary along with changes to our stock price;

 

  Ÿ  

general domestic and international economic conditions, in the insurance industry in particular;

 

12


Table of Contents
  Ÿ  

fluctuations in foreign currency exchange rates;

 

  Ÿ  

future accounting pronouncements or changes in our accounting policies; and

 

  Ÿ  

the impact of a recession or any other adverse global economic conditions on our business, including uncertainties that may cause a delay in entering into or a failure to enter into significant customer agreements.

The foregoing factors are difficult to forecast, and these, as well as other factors, could materially adversely affect our quarterly and annual results of operations. Any failure to adjust spending quickly enough to compensate for a revenues shortfall could magnify the adverse impact of such revenues shortfall on our results of operations. Failure to achieve our quarterly forecasts or to meet or exceed the expectations of research analysts or investors will cause our stock price to decline.

Seasonal and other variations related to our revenue recognition 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.

We sign a significantly higher percentage of software license orders in the second and fourth quarters of each fiscal year. We generally see increased orders in our second fiscal quarter, which is the quarter ended January 31, due to customer buying patterns. We also see increased orders in our fourth fiscal quarter due to efforts by our sales team to achieve annual incentives. As a result, a significantly higher percentage of our annual license revenues have historically been recognized during those quarters. Since a substantial majority of our license revenues recur annually under our multi-year contracts, we expect to continue to experience this seasonality effect in subsequent years.

Notwithstanding the fact that we generally see increased orders in our second and fourth fiscal quarters, we expect to see additional quarterly revenue fluctuations that may, in some cases, mask the impact of these expected seasonal variations. Our quarterly growth in revenues also may not match up to new orders we receive in a given quarter. This mismatch is primarily due to the following reasons:

 

  Ÿ  

for the initial year of a multi-year term license, we generally recognize revenues when payment is due and payment may not be due until a subsequent fiscal quarter;

 

  Ÿ  

we may enter into license agreements with specified terms for product upgrades or functionality, which may require us to delay revenue recognition for the initial period; and

 

  Ÿ  

we may enter into license agreements with other contractual terms that may affect the timing of revenue recognition.

For example, we received new orders for both term and perpetual licenses in the fourth fiscal quarter of 2011 that committed future product functionality that was delivered in the first fiscal quarter of 2012. As a result, our license revenues in the first fiscal quarter of 2012 were $7.2 million higher than they would have been had the functionality been delivered in the fourth fiscal quarter of 2011 and we currently expect our revenues for the second and third fiscal quarters of 2012 to be down or flat as compared to the first fiscal quarter of 2012.

We generally charge annual software license fees for our multi-year term licenses and price our licenses based on the amount of direct written premiums, or DWP, that will be managed by our solutions. However, in certain circumstances we offer our customers the ability to purchase our products on a perpetual license basis, resulting in an acceleration of revenue recognition. In addition, certain of our multi-year term licenses provide the customer with the option to purchase a perpetual license at the end of the initial contract term, which we refer to as a perpetual buyout right. The mix of our contract terms for our licenses and the exercise of perpetual buyout rights at the end of the initial contract term by our customers may lead to variability in our results of operations. Increases in

 

13


Table of Contents

perpetual license sales and exercises of perpetual buyout rights by our customers may affect our ability to show consistent growth in license revenues in subsequent periods. For example, we received orders for two perpetual licenses pursuant to which we recognized revenues of $6.9 million in the first fiscal quarter of 2012. This caused our license revenues to increase significantly in the first fiscal quarter of 2012 from the first fiscal quarter of 2011. In addition, because we price our products based on the amount of DWP that will be managed by our solutions, license revenues from each customer may fluctuate up or down based upon insurance policies sold by the customer in the preceding year. Seasonal and other variations related to our revenue recognition may cause significant fluctuations in our results of operations and cash flows, may make it challenging for an investor to predict our performance on a quarterly basis and may prevent us from achieving our quarterly or annual forecasts or meeting or exceeding the expectations of research analysts or investors, which may cause our stock price to decline.

We have relied and expect to continue to rely on orders from a relatively small number of customers in the P&C insurance industry for a substantial portion of our revenues, and the loss of any of these customers would significantly harm our business, results of operations and financial condition.

Our revenues are dependent on orders from customers in the P&C insurance industry, which may be adversely affected by economic, environmental and world political conditions. A relatively small number of customers have historically accounted for a majority of our revenues. In fiscal years 2010 and 2011, our top 10 customers accounted for 48% and 41% of our revenues, respectively. We expect that we will continue to depend upon a relatively small number of customers for a significant portion of our revenues for the foreseeable future. As a result, if we fail to successfully sell our products and services to one or more anticipated customers in any particular period or fail to identify additional potential customers or an anticipated customer purchases fewer of our products or services, defers or cancels orders, or terminates its relationship with us, our business, results of operations and financial condition would be harmed. Some of our orders are realized at the end of the quarter or are subject to delayed payment terms. As a result of this concentration and timing, if we are unable to complete one or more substantial sales or achieve any required performance or acceptance criteria in any given quarter, our quarterly results of operations may fluctuate significantly.

Our services revenues produce lower gross margins than our license or maintenance revenues, and an increase in services revenues as a percentage of total revenues could adversely affect our overall gross margins and profitability.

Our services revenues were 45% of total revenues for fiscal years 2010 and 2011. Our services revenues produce lower gross margins than our license revenues. The gross margin of our services revenues was 22% and 18% for fiscal years 2010 and 2011, respectively, while the gross margin for license revenues was 100% and 98% for the respective periods. An increase in the percentage of total revenues represented by services revenues could reduce our overall gross margins.

The volume and profitability of our services offerings depend in large part upon:

 

  Ÿ  

price charged to our customers;

 

  Ÿ  

the utilization rate of our services personnel;

 

  Ÿ  

the complexity of our customers’ information technology environments;

 

  Ÿ  

our ability to accurately forecast the time and resources required for each implementation project;

 

  Ÿ  

the resources directed by our customers to their implementation projects;

 

14


Table of Contents
  Ÿ  

our ability to hire, train and retain qualified services personnel;

 

  Ÿ  

unexpected difficulty in projects which may require additional efforts on our part without commensurate compensation;

 

  Ÿ  

the extent to which system integrators provide services directly to customers; and

 

  Ÿ  

our ability to adequately predict customer demand and scale our professional services staff accordingly.

Any erosion in our services margins or any significant increase in services revenues as a percentage of total revenues would adversely affect our results of operations.

Assertions by third parties of infringement or other violation by us of their intellectual property rights could result in significant costs and substantially harm our business and results of operations.

The software industry is characterized by the existence of a large number of patents and frequent claims and related litigation regarding patents and other intellectual property rights. In particular, leading companies in the software industry own large numbers of patents, copyrights, trademarks and trade secrets, which they may use to assert claims against us. From time to time, third parties, including certain of these leading companies, may assert patent, copyright, trademark or other intellectual property claims against us, our customers and partners, and those from whom we license technology and intellectual property.

Although we believe that our products and services do not infringe upon the intellectual property rights of third parties, we cannot assure you that third parties will not assert infringement or misappropriation claims against us with respect to current or future products or services, or that any such assertions will not require us to enter into royalty arrangements or result in costly litigation, or result in us being unable to use certain intellectual property. We cannot assure you that we are not infringing or otherwise violating any third party intellectual property rights. Infringement assertions from third parties may involve patent holding companies or other patent owners who have no relevant product revenues, and therefore our own issued and pending patents may provide little or no deterrence to these patent owners in bringing intellectual property rights claims against us.

Any intellectual property infringement or misappropriation claim or assertion against us, our customers or partners, and those from whom we license technology and intellectual property could have a material adverse effect on our business, financial condition, reputation and competitive position regardless of the validity or outcome. If we are forced to defend against any infringement or misappropriation claims, whether they are with or without merit, are settled out of court, or are determined in our favor, we may be required to expend significant time and financial resources on the defense of such claims. Furthermore, an adverse outcome of a dispute may require us to pay damages, potentially including treble damages and attorneys’ fees, if we are found to have willfully infringed a party’s intellectual property; cease making, licensing or using our products or services that are alleged to infringe or misappropriate the intellectual property of others; expend additional development resources to redesign our products or services; enter into potentially unfavorable royalty or license agreements in order to obtain the right to use necessary technologies or works; and to indemnify our partners, customers, and other third parties. Royalty or licensing agreements, if required or desirable, may be unavailable on terms acceptable to us, or at all, and may require significant royalty payments and other expenditures. Any of these events could seriously harm our business, results of operations and financial condition. In addition, any lawsuits regarding intellectual property rights, regardless of their success, could be expensive to resolve and divert the time and attention of our management and technical personnel.

 

15


Table of Contents

We may incur additional future expenses in connection with the settlement of our litigation with Accenture.

In December 2007, we were sued by Accenture, a competitor, in the U.S. District Court for the District of Delaware, or the Delaware Court, over our alleged infringement of certain of their intellectual property rights. Two of the three patents that were the subject of these actions were dismissed by agreement of the parties, with prejudice, and the third patent was found invalid by the Delaware Court. Accenture appealed the judgment with respect to the third patent. In addition, we sued Accenture over its alleged infringement of certain of our intellectual property rights and Accenture counterclaimed that we infringe certain of their intellectual property rights. In October 2011, we agreed with Accenture to resolve all outstanding patent litigation concerning our respective insurance claims management software. In connection with the settlement, we paid $10.0 million to Accenture with a potential additional payment based on the final outcome of Accenture’s pending appeal of the Delaware Court’s ruling on the third patent, as referenced above. If Accenture is successful in its appeal, we have agreed to pay them a maximum of an additional $20.0 million. At any time prior to an initial determination by the appeals court, we may instead pay Accenture $15.0 million to discharge this potential obligation. If Accenture is not successful in its appeal, no further payments would be due in connection with the settlement. Our patent litigation with Accenture and the terms of the settlement are further described in “Business—Legal Proceedings.”

We face intense competition in our market, which could negatively impact our business, results of operations and financial condition and cause our market share to decline.

The market for our core insurance system software is intensely competitive. Our implementation cycle is lengthy, variable and requires the investment of significant time and expense by our customers. We compete with legacy systems, many of which have been in operation for decades. Maintaining these legacy systems may be so time consuming and costly for our customers that they do not have adequate resources to devote to the purchase and implementation of our products. We also compete against technology consulting firms that offer software and systems or develop custom, proprietary products for the P&C insurance industry. These consulting firms generally have greater name recognition, larger sales and marketing budgets and greater resources than we do and may have pre-existing relationships with our potential customers, including relationships with, and access to, key decision makers within these organizations. We also encounter competition from small independent firms that compete on the basis of price, custom developments or unique product features or functions and from vendors of software products that may be customized to address the needs of P&C insurance carriers.

We expect the intensity of competition to increase in the future as new companies enter our markets and existing competitors develop stronger capabilities. Increased competition could result in increased pricing pressure, reduced profit margins, increased sales and marketing expenses, and failure to increase, or the loss of, market share, any of which could harm our business, results of operations and financial condition. Our competitors may be able to devote greater resources to the development, promotion and sale of their products than we can to ours, which could allow them to respond more quickly than we can to new technologies and changes in customer needs and achieve wider market acceptance. We may not be able to compete effectively and competitive pressures may prevent us from acquiring and maintaining the customer base necessary for us to increase our revenues and profitability.

Our current and potential competitors may also establish cooperative relationships among themselves or with third parties that may further enhance their resources. Current or potential competitors may be acquired by third parties with greater available resources, such as Accenture’s recent acquisition of Duck Creek Technologies, Inc. As a result of such acquisitions, our current or potential competitors might be able to adapt more quickly to new technologies and customer needs, devote greater resources to the promotion or sale of their products and services, initiate or withstand

 

16


Table of Contents

substantial price competition, take advantage of other opportunities more readily or develop and expand their product and service offerings more quickly than we do. Additionally, they may hold larger portfolios of patents and other intellectual property rights as a result of such acquisitions. If we are unable to compete effectively for a share of our market, our business, results of operations and financial condition could be materially and adversely affected.

Weakened global economic conditions may adversely affect the P&C insurance industry, including the rate of information technology spending, which could cause our customers to defer or forego purchases of our products or services.

Our business depends on the overall demand for information technology from, and on the economic health of, our current and prospective customers. In addition, the purchase of our products is discretionary and involves a significant commitment of capital and other resources. The United States and world economies currently face a number of economic challenges, including threatened sovereign defaults, credit downgrades, restricted credit for businesses and consumers and potentially falling demand for a variety of products and services. Recently, the financial markets have been dramatically and adversely affected and many companies are either cutting back expenditures or delaying plans to add additional personnel or systems. Our customers may suffer from reduced operating budgets, which could cause them to defer or forego purchases of our products or services. Continued challenging global economic conditions, or a reduction in information technology spending even if economic conditions improve, could adversely impact our business, results of operations and financial condition in a number of ways, including longer sales cycles, lower prices for our products and services, material default rates among our customers, reduced sales of our products and services and lower or no growth.

Our sales cycle is lengthy and variable, depends upon many factors outside our control, and could cause us to expend significant time and resources prior to earning associated revenues.

The typical sales cycle for our products and services is lengthy and unpredictable, requires pre-purchase evaluation by a significant number of employees in our customers’ organizations, and often involves a significant operational decision by our customers. Our sales efforts involve educating our customers about the use and benefits of our products, including the technical capabilities of our products and the potential cost savings achievable by organizations deploying our products. Customers typically undertake a significant evaluation process, which frequently involves not only our products, but also those of our competitors and can result in a lengthy sales cycle. Moreover, a purchase decision by a potential customer typically requires the approval of several senior decision makers, including the board of directors of our customers. Our sales cycle for new customers is typically one to two years and can extend even longer in some cases. We spend substantial time, effort and money in our sales efforts without any assurance that our efforts will produce any sales. In addition, we sometimes commit to include specific functions in our base product offering at the request of a customer or group of customers and are unable to recognize license revenues until the specific functions have been added to our products. Providing this additional functionality may be time consuming and may involve factors that are outside of our control. The lengthy and variable sales cycle may also have a negative impact on the timing of our revenues, causing our revenues and results of operations to vary significantly from period to period.

Our large customers have substantial negotiating leverage, which may require that we agree to terms and conditions that result in increased cost of sales, decreased revenues and lower average selling prices and gross margins, all of which could harm our operating results.

Some of our customers are large P&C insurance carriers with significant bargaining power in negotiations with us. In fiscal years 2010 and 2011, our top 10 customers accounted for 48% and 41% of our revenues, respectively. These customers have and may continue to seek advantageous pricing and other commercial terms and may require us to develop additional features in the products we sell

 

17


Table of Contents

to them. We have and may continue to be required to reduce the average selling price, or increase the average cost, of our products in response to these pressures. If we are unable to offset any reductions in our average selling prices or increases in our average costs with increased sales volumes and reduced costs, our results of operations could be harmed.

Our limited operating history and the evolving nature of the industry in which we operate may make it difficult to evaluate our business.

We were incorporated in 2001, and since that time have been developing products to meet the evolving demands of customers in the markets in which we operate. We sold the initial versions of ClaimCenter in 2003, PolicyCenter in 2004 and BillingCenter in 2006. This limited operating history makes financial forecasting and evaluation of our business difficult. Furthermore, because we depend in part on the market’s acceptance of our products, it is difficult to evaluate trends that may affect our business. We have limited historical financial data, and we operate in an evolving industry, and, as such, any predictions about our future revenues and expenses may not be as accurate as they would be if we had a longer operating history or operated in a more predictable industry.

We have a history of significant net losses and may not be profitable in future periods.

Although we had a profit of $15.5 million in fiscal year 2010 and $35.6 million in fiscal year 2011, which included a benefit of $27.2 million related to a release of a significant portion of our tax valuation allowance during fiscal year 2011, we have incurred significant losses in prior years, including a net loss of $11.0 million in fiscal year 2009, a net loss of $16.9 million in fiscal year 2008 and a net loss of $28.5 million in fiscal year 2007. We expect that our expenses will increase in future periods as we implement initiatives designed to grow our business, including, among other things, improvement of our current products, development and marketing of new services and products, international expansion, investment in our infrastructure and increased general and administrative functions. If our revenues do not sufficiently increase to offset these expected increases in operating expenses, we will incur significant losses and will not be profitable. Our revenues growth in recent periods should not be considered indicative of our future performance. Any failure to continue profitability may materially and adversely affect our business, results of operations and financial condition.

Because we derive substantially all of our revenues and cash flows from our ClaimCenter, PolicyCenter, BillingCenter and InsuranceSuite products and related services, failure of any of these products or services to satisfy customer demands or to achieve increased market acceptance would harm our business, results of operations, financial condition and growth prospects.

We derive substantially all of our revenues and cash flows from our ClaimCenter, PolicyCenter, BillingCenter and InsuranceSuite products and related services. We expect to continue to derive a substantial portion of our revenues from these products and related services. As such, the market acceptance of these products is critical to our continued success. Historically, we have derived a substantial majority of our revenues from our ClaimCenter product. As of July 31, 2011, 64% of the outstanding licenses for our products contain licenses for our ClaimCenter product. In addition, we continue to invest significant resources in the enhancement and sales of our PolicyCenter product. The failure of PolicyCenter, as well as our integrated InsuranceSuite, to achieve broader market acceptance would result in significant harm to our business, results of operations, financial condition and growth prospects. Demand for our products is affected by a number of factors beyond our control, including the timing of development and release of new products by us and our competitors, technological change, and growth or contraction in the worldwide market for technological solutions for the P&C insurance industry. If we are unable to continue to meet customer demands or to achieve more widespread market acceptance of our products, our business, results of operations, financial condition and growth prospects will be materially and adversely affected.

 

18


Table of Contents

Our business depends on customers renewing and expanding their license and maintenance contracts for our products. A decline in our customer renewals and expansions could harm our future results of operations.

Our customers have no obligation to renew their term licenses after their license period expires, and these licenses may not be renewed on the same or more favorable terms. Moreover, under certain circumstances, our customers have the right to cancel their license agreements before they expire. We have limited historical data with respect to rates of customer license renewals, upgrades and expansions so we may not accurately predict future trends in customer renewals. In addition, our term and perpetual license customers have no obligation to renew their maintenance arrangements after the expiration of the initial contractual period, which is typically one to three years. Our customers’ renewal rates may fluctuate or decline because of several factors, including their satisfaction or dissatisfaction with our products and services, the prices of our products and services, the prices of products and services offered by our competitors or reductions in our customers’ spending levels due to the macroeconomic environment or other factors. In addition, in some cases, our customers have a right to exercise a perpetual buyout of their term licenses at the end of the initial contract term. If our customers do not renew their term licenses for our solutions or renew on less favorable terms, our revenues may decline or grow more slowly than expected and our profitability may be harmed.

Our implementation cycle is lengthy and variable, depends upon factors outside our control, and could cause us to expend significant time and resources prior to earning associated revenues.

The implementation and testing of our products by our customers lasts 6 to 24 months or longer, and unexpected implementation delays and difficulties can occur. Implementing our products typically involves integration with our customers’ systems, as well as adding their data to our system. This can be complex, time-consuming and expensive for our customers and can result in delays in the implementation and deployment of our products. Depending upon the nature and complexity of our customers’ systems and the time and resources that our customers are willing to devote to implementation of our products, the implementation and testing of our products may take significantly longer than 24 months. Historically, under the zero gross margin method, until the implementation project was completed, we recognized revenues in connection with implementing our products up to the corresponding costs of revenues and operating expenses. The lengthy and variable implementation cycle may also have a negative impact on the timing of our revenues, causing our revenues and results of operations to vary significantly from period to period.

Our product development cycles are lengthy, and we may incur significant expenses before we generate revenues, if any, from new products.

Because our products are complex and require rigorous testing, development cycles can be lengthy, taking us up to five years to develop and introduce new products. Moreover, development projects can be technically challenging and expensive. The nature of these development cycles may cause us to experience delays between the time we incur expenses associated with research and development and the time we generate revenues, if any, from such expenses. If we expend a significant amount of resources on research and development and our efforts do not lead to the successful introduction or improvement of products that are competitive in the marketplace, this could materially and adversely affect our business and results of operations. Additionally, anticipated customer demand for a product we are developing could decrease after the development cycle has commenced. Such decreased customer demand may cause us to fall short of our sales targets, and we may nonetheless be unable to avoid substantial costs associated with the product’s development. If we are unable to complete product development cycles successfully and in a timely fashion and generate revenues from such future products, the growth of our business may be harmed.

 

19


Table of Contents

Failure to meet customer expectations on the implementation of our products could result in negative publicity and reduced sales, both of which would significantly harm our business, results of operations, financial condition and growth prospects.

We provide our customers with upfront estimates regarding the duration, budget and costs associated with the implementation of our products. Failing to meet these upfront estimates and the expectations of our customers for the implementation of our products could result in a loss of customers and negative publicity regarding us and our products and services, which could adversely affect our ability to attract new customers and sell additional products and services to existing customers. Such failure could result from our product capabilities or service engagements by us, our system integrator partners or our customers’ IT employees. The consequences could include, and have included: monetary credits for current or future service engagements, reduced fees for additional product sales, and a customer’s refusal to pay their contractually-obligated license, maintenance or service fees. In addition, time-consuming implementations may also increase the amount of services personnel we must allocate to each customer, thereby increasing our costs and adversely affecting our business, results of operations and financial condition.

If we are unable to maintain vendor specific objective evidence of fair value for any undelivered element of a software order from a customer, offer certain contractual provisions to our customers, such as delivery of specified functionality, or combine multiple arrangements signed in different periods, our revenues relating to the entire software order will be deferred and recognized over future periods, reducing the revenues we recognize on a significant portion of such order in a particular quarter.

In the course of our selling efforts, we typically enter into sales arrangements pursuant to which we license our software applications and provide maintenance support and professional services. We refer to each individual product or service as an “element” of the overall sales arrangement. These arrangements typically require us to deliver particular elements in a future period. We apply software revenue recognition rules and allocate the total revenues among elements based on the objective and reliable evidence of fair value, or vendor-specific objective evidence, VSOE, of fair value of each element. As we discuss further in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Revenue Recognition,” if we are unable to determine the VSOE of fair value of any undelivered elements, offer certain contractual provisions to our customers, such as delivery of specified functionality, or combine multiple arrangements signed in different periods, then we are required under U.S. generally accepted accounting principles, or GAAP, to defer additional revenues to future periods. If we are required to defer additional revenues to future periods for a significant portion of our sales, our revenues for that quarter could fall below our expectations or those of securities analysts and investors, resulting in a decline in our stock price.

Failure to protect our intellectual property could substantially harm our business and results of operations.

Our success depends in part on our ability to enforce and defend our intellectual property rights. We rely upon a combination of trademark, trade secret, copyright, patent and unfair competition laws, as well as license agreements and other contractual provisions, to do so.

We have filed, and may in the future file, patent applications related to certain of our innovations. We do not know whether any of our patent applications will result in the issuance of a patent or whether the examination process will require us to narrow our claims. In addition, we may not receive competitive advantages from the rights granted under our patents and other intellectual property. Our existing patents, and any patents granted to us or that we otherwise acquire in the future, may be contested, circumvented or invalidated, and we may not be able to prevent third parties from infringing

 

20


Table of Contents

these patents. Therefore, the exact effect of the protection of these patents cannot be predicted with certainty. In addition, given the costs, effort, risks and downside of obtaining patent protection, including the requirement to ultimately disclose the invention to the public, we may choose not to seek patent protection for certain innovations; however, such patent protection could later prove to be important to our business.

We also rely on several registered and unregistered trademarks to protect our brand. We have registered the trademarks Guidewire, Guidewire PolicyCenter, Guidewire ClaimCenter and Guidewire BillingCenter in the United States and Canada. We also own a U.S. trademark registration, an International Registration (with protection extended to Australia and the European Community) and a Canada trademark for the Gosu trademark. Additionally, we own an Australia trademark registration, a Hong Kong trademark registration, and a pending Japan trademark application for the Guidewire trademark. Nevertheless, competitors may adopt service names similar to ours, or purchase our trademarks and confusingly similar terms as keywords in Internet search engine advertising programs, thereby impeding our ability to build brand identity and possibly leading to confusion in the marketplace. In addition, there could be potential trade name or trademark infringement claims brought by owners of other registered trademarks or trademarks that incorporate variations of our trademarks. Any claims or customer confusion related to our trademarks could damage our reputation and brand and substantially harm our business and results of operations.

In addition, we attempt to protect our intellectual property, technology, and confidential information by generally requiring our employees and consultants to enter into confidentiality and assignment of inventions agreements and third parties to enter into nondisclosure agreements, all of which offer only limited protection. These agreements may not effectively prevent unauthorized use or disclosure of our confidential information, intellectual property or technology and may not provide an adequate remedy in the event of unauthorized use or disclosure of our confidential information, intellectual property or technology. Despite our efforts to protect our confidential information, intellectual property, and technology, unauthorized third parties may gain access to our confidential proprietary information, develop and market products or services similar to ours, or use trademarks similar to ours, any of which could materially harm our business and results of operations. In addition, others may independently discover our trade secrets and confidential information, and in such cases, we could not assert any trade secret rights against such parties. Existing U.S. federal, state and international intellectual property laws offer only limited protection. The laws of some foreign countries do not protect our intellectual property rights to as great an extent as the laws of the United States, and many foreign countries do not enforce these laws as diligently as governmental agencies and private parties in the United States. Moreover, policing our intellectual property rights is difficult, costly and may not always be effective.

From time to time, legal action by us may be necessary to enforce our patents and other intellectual property rights, to protect our trade secrets, to determine the validity and scope of the intellectual property rights of others or to defend against claims of infringement or invalidity. Such litigation could result in substantial costs and diversion of resources and could negatively affect our business, reputation, results of operations and financial condition. If we are unable to protect our technology and to adequately maintain and protect our intellectual property rights, we may find ourselves at a competitive disadvantage to others who need not incur the additional expense, time and effort required to create the innovative products that have enabled us to be successful to date.

We and our customers rely on technology and intellectual property of third parties, the loss of which could limit the functionality of our products and disrupt our business.

We use technology and intellectual property licensed from unaffiliated third parties in certain of our products, and we may license additional third-party technology and intellectual property in the future. Any errors or defects in this third-party technology and intellectual property could result in errors

 

21


Table of Contents

that could harm our brand and business. In addition, licensed technology and intellectual property may not continue to be available on commercially reasonable terms, or at all. The loss of the right to license and distribute this third party technology could limit the functionality of our products and might require us to redesign our products.

Further, although we believe that there are currently adequate replacements for the third-party technology and intellectual property we presently use and distribute, the loss of our right to use any of this technology and intellectual property could result in delays in producing or delivering affected products until equivalent technology or intellectual property is identified, licensed or otherwise procured, and integrated. Our business would be disrupted if any technology and intellectual property we license from others or functional equivalents of this software were either no longer available to us or no longer offered to us on commercially reasonable terms. In either case, we would be required either to attempt to redesign our products to function with technology and intellectual property available from other parties or to develop these components ourselves, which would result in increased costs and could result in delays in product sales and the release of new product offerings. Alternatively, we might be forced to limit the features available in affected products. Any of these results could harm our business and impact our results of operations.

Catastrophes may adversely impact the P&C insurance industry, preventing us from expanding or maintaining our existing customer base and increasing our revenues.

Our customers are P&C insurance carriers which have experienced, and will likely experience in the future, catastrophe losses that adversely impact their businesses. Catastrophes can be caused by various events, including, amongst others, hurricanes, tsunamis, floods, windstorms, earthquakes, hail, tornados, explosions, severe weather and fires. Moreover, acts of terrorism or war could cause disruptions in our or our customers’ businesses or the economy as a whole. The risks associated with natural disasters and catastrophes are inherently unpredictable, and it is difficult to predict the timing of such events or estimate the amount of loss they will generate. In the event a future catastrophe adversely impacts our current or potential customers, we may be prevented from maintaining and expanding our customer base and from increasing our revenues because such events may cause customers to postpone purchases of new products and professional service engagements or discontinue projects.

There may be consolidation in the P&C insurance industry, which could reduce the use of our products and services and adversely affect our revenues.

Mergers or consolidations among our customers could reduce the number of our customers and potential customers. This could adversely affect our revenues even if these events do not reduce the aggregate number of customers or the activities of the consolidated entities. If our customers merge with or are acquired by other entities that are not our customers, or that use fewer of our products and services, they may discontinue or reduce their use of our products and services. Any of these developments could materially and adversely affect our results of operations and cash flows.

Some of our services and technologies may use “open source” software, which may restrict how we use or distribute our services or require that we release the source code of certain products subject to those licenses.

Some of our services and technologies may incorporate software licensed under so-called “open source” licenses, including, but not limited to, the GNU General Public License and the GNU Lesser General Public License. In addition to risks related to license requirements, usage of open source software can lead to greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or controls on origin of the software. Additionally, open source licenses typically require that source code subject to the license be made available to the public

 

22


Table of Contents

and that any modifications or derivative works to open source software continue to be licensed under open source licenses. These open source licenses typically mandate that proprietary software, when combined in specific ways with open source software, become subject to the open source license. If we combine our proprietary software with open source software, we could be required to release the source code of our proprietary software.

We take steps to ensure that our proprietary software is not combined with, and does not incorporate, open source software in ways that would require our proprietary software to be subject to an open source license. However, few courts have interpreted open source licenses, and the manner in which these licenses may be interpreted and enforced is therefore subject to some uncertainty. Additionally, we rely on multiple software programmers to design our proprietary technologies, and although we take steps to prevent our programmers from including open source software in the technologies and software code that they design, write and modify, we do not exercise complete control over the development efforts of our programmers and we cannot be certain that our programmers have not incorporated open source software into our proprietary products and technologies or that they will not do so in the future. In the event that portions of our proprietary technology are determined to be subject to an open source license, we could be required to publicly release the affected portions of our source code, re-engineer all or a portion of our technologies, or otherwise be limited in the licensing of our technologies, each of which could reduce or eliminate the value of our services and technologies and materially and adversely affect our business, results of operations and prospects.

Real or perceived errors or failures in our products, or unsatisfactory performance of our products or services could adversely affect our reputation and the market acceptance of our products, and cause us to lose customers or subject us to liability for breach of warranty claims.

Because we offer complex products, undetected errors or failures may exist or occur, especially when products are first introduced or when new versions are released. Our products are often installed and used in large-scale computing environments with different operating systems, system management software and equipment and networking configurations, which may cause errors or failures in our products or may expose undetected errors, failures or bugs in our products. Despite testing by us, we may not identify all errors, failures or bugs in new products or releases until after commencement of commercial sales or installation. In the past, we have discovered software errors, failures and bugs in some of our product offerings after their introduction.

Product errors will affect the performance of our products and could delay the development or release of new products or new versions of products, adversely affect our reputation and our customers’ willingness to buy products from us, and adversely affect market acceptance or perception of our products. In addition, because our software is used to manage functions that are critical to our customers, the licensing and support of our products involves the risk of product liability claims. We also may face liability for breaches of our product warranties, product failures or damages caused by faulty installation of our products. Provisions in our contracts relating to warranty disclaimers and liability limitations may be unenforceable or otherwise ineffective.

Any errors or delays in releasing new products or new versions of products or allegations of unsatisfactory performance of our products or services could cause us to lose revenues or market share, increase our service costs, cause us to incur substantial costs in redesigning the products, cause us to lose significant customers, harm our reputation, subject us to liability for breach of warranty claims or damages and divert our resources from other tasks, any one of which could materially and adversely affect our business, results of operations and financial condition.

 

23


Table of Contents

We may be obligated to disclose our proprietary source code to our customers, which may limit our ability to protect our intellectual property and could reduce the renewals of our support and maintenance services.

Our software license agreements typically contain provisions permitting the customer to become a party to, or a beneficiary of, a source code escrow agreement under which we place the proprietary source code for our products in escrow with a third party. Under these escrow agreements, the source code to the applicable product may be released to the customer, typically for its use to maintain, modify and enhance the product, upon the occurrence of specified events, such as our filing for bankruptcy, discontinuance of our maintenance services and breaching our representations, warranties or covenants of our agreements with our customers. Additionally, in some cases, customers have the right to request access to our source code upon demand. Some of our customers have obtained the source code for our products by exercising this right, and others may do so in the future.

Disclosing the content of our source code may limit the intellectual property protection we can obtain or maintain for that source code or the products containing that source code and may facilitate intellectual property infringement claims against us. It also could permit a customer to which a product’s source code is disclosed to support and maintain that software product without being required to purchase our support or maintenance services. Each of these could harm our business, results of operations and financial condition.

If our products experience data security breaches, and there is unauthorized access to our customers’ data, we may lose current or future customers and our reputation and business may be harmed.

Our products are used by our customers to manage and store proprietary information and sensitive or confidential data relating to their businesses. Although we maintain security features in our products, our security measures may not detect or prevent hacker interceptions, break-ins, security breaches, the introduction of viruses or malicious code, and other disruptions that may jeopardize the security of information stored in and transmitted by our products. A party that is able to circumvent our security measures in our products could misappropriate our or our customers’ proprietary or confidential information, cause interruption in their operations, damage or misuse their computer systems, and misuse any information that they misappropriate.

If any compromise of the security of our products were to occur, we may lose customers and our reputation, business, financial condition and results of operations could be harmed. In addition, if there is any perception that we cannot protect our customers’ proprietary and confidential information, we may lose the ability to retain existing customers and attract new customers and our revenues could decline.

Incorrect or improper use of our products or our failure to properly train customers on how to implement or utilize our products could result in customer dissatisfaction and negatively affect our business, results of operations, financial condition and growth prospects.

Our products are complex and are deployed in a wide variety of network environments. The proper use of our products requires training of the customer. If our products are not used correctly or as intended, inadequate performance may result. Additionally, our customers or third-party partners may incorrectly implement or use our products. Our products may also be intentionally misused or abused by customers or their employees or third parties who are able to access or use our products. Similarly, our products are sometimes installed or maintained by customers or third parties with smaller or less qualified IT departments, potentially resulting in sub-optimal installation and, consequently, performance that is less than the level anticipated by the customer. Because our customers rely on our products, services and maintenance support to manage a wide range of operations, the incorrect or

 

24


Table of Contents

improper use of our products, our failure to properly train customers on how to efficiently and effectively use our products, or our failure to properly provide implementation or maintenance services to our customers may result in negative publicity or legal claims against us. Also, as we continue to expand our customer base, any failure by us to properly provide these services will likely result in lost opportunities for follow-on sales of our products and services.

In addition, if there is substantial turnover of customer personnel responsible for implementation and use of our products, or if customer personnel are not well trained in the use of our products, customers may defer the deployment of our products, may deploy them in a more limited manner than originally anticipated or may not deploy them at all. Further, if there is substantial turnover of the customer personnel responsible for implementation and use of our products, our ability to make additional sales may be substantially limited.

Our ability to sell our products is highly dependent on the quality of our professional services and technical support services and the support of our partners, and the failure of us or our partners to offer high-quality professional services or technical support services could damage our reputation and adversely affect our ability to sell our products and services to new customers and renew our licenses to existing customers.

If we or our partners do not effectively assist our customers in deploying our products, succeed in helping our customers quickly resolve post-deployment issues, and provide effective ongoing support, our ability to sell additional products and services to existing customers would be adversely affected and our reputation with potential customers could be damaged. Once our products are deployed and integrated with our customers’ existing information technology investments and data, our customers may depend on our technical support services, and in some cases the support of our partners, to resolve any issues relating to our products. High-quality support is critical for the continued successful marketing and sale of our products. In addition, as we continue to expand our operations internationally, our support organization will face additional challenges, including those associated with delivering support, training and documentation in languages other than English. Many enterprise customers require higher levels of support than smaller customers. If we fail to meet the requirements of our larger customers, it may be more difficult to increase our penetration with larger customers, which is key to the growth of our revenues and profitability. As a result, our failure to maintain high quality support services would have a material adverse effect on our business, results of operations, financial condition and growth prospects.

If we are unable to develop, introduce and market new and enhanced versions of our products, we may be put at a competitive disadvantage.

Our success depends on our continued ability to develop, introduce and market new and enhanced versions of our products to meet evolving customer requirements. However, we cannot assure you that this process can be maintained. If we fail to develop new products or enhancements to our existing products, our business could be adversely affected, especially if our competitors are able to introduce products with enhanced functionality. We plan to continue our investment in product development in future periods. It is critical to our success for us to anticipate changes in technology, industry standards and customer requirements and to successfully introduce new, enhanced and competitive products to meet our customers’ and prospective customers’ needs on a timely basis. However, we cannot assure you that revenues will be sufficient to support the future product development that is required for us to be competitive. Although we may be able to release new products in addition to enhancements to existing products, we cannot assure you that our new or upgraded products will be accepted by the market, will not be delayed or canceled, will not contain errors or “bugs” that could affect the performance of the products or cause damage to users’ data, or will not be rendered obsolete by the introduction of new products or technological developments by

 

25


Table of Contents

others. If we fail to develop products that are competitive in technology and price and fail to meet customer needs, our market share will decline and our business and results of operations could be harmed.

We may be subject to significant liability claims if our core system software fails and the limitation of liability provided in our license agreements may not protect us, which may adversely impact our financial condition.

The license and support of our core system software creates the risk of significant liability claims against us. Our license agreements with our customers contain provisions designed to limit our exposure to potential liability claims. It is possible, however, that the limitation of liability provisions contained in such license agreements may not be enforced as a result of international, federal, state and local laws or ordinances or unfavorable judicial decisions. Breach of warranty or damage liability or injunctive relief resulting from such claims could have a material and adverse impact on our results of operations and financial condition.

If we are unable to retain our personnel and hire and integrate additional skilled personnel, we may be unable to achieve our goals and our business will suffer.

Our future success depends upon our ability to continue to attract, train, integrate and retain highly skilled employees, particularly our management team, sales and marketing personnel, professional services personnel and software engineers. Each of our executive officers and other key employees could terminate his or her relationship with us at any time. The loss of any member of our senior management team might significantly delay or prevent the achievement of our business or development objectives and could materially harm our business. In addition, many of our senior management personnel are substantially vested in their stock option grants or other equity compensation. While we periodically grant additional equity awards to management personnel and other key employees to provide additional incentives to remain employed by us, employees may be more likely to leave us if a significant portion of their equity compensation is fully vested, especially if the shares underlying the equity awards have significantly appreciated in value. Our inability to attract and retain qualified personnel, or delays in hiring required personnel, may seriously harm our business, results of operations and financial condition.

We face intense competition for qualified individuals from numerous software and other technology companies. In addition, competition for qualified personnel is particularly intense in the San Francisco Bay Area, where our headquarters are located. Often, significant amounts of time and resources are required to train technical, sales and other personnel. We have a limited number of sales people. The loss of some of these sales people in a short period of time could have a negative impact on our sales efforts. Further, qualified individuals are in high demand. We may incur significant costs to attract and retain them, and we may lose new employees to our competitors or other technology companies before we realize the benefit of our investment in recruiting and training them. We may be unable to attract and retain suitably qualified individuals who are capable of meeting our growing technical, operational and managerial requirements, on a timely basis or at all, and we may be required to pay increased compensation in order to do so. Because of the technical nature of our products and services and the dynamic market in which we compete, any failure to attract, integrate and retain qualified direct sales, professional services and product development personnel, as well as our contract workers, could have a material adverse effect on our ability to generate sales or successfully develop new products, customer and consulting services and enhancements of existing products. Also, to the extent we hire personnel from competitors, we may be subject to allegations that they have been improperly solicited or divulged proprietary or other confidential information.

 

26


Table of Contents

Our ability to effectively use equity compensation to help attract and retain qualified personnel may be limited by our stockholders, and equity compensation arrangements may negatively impact our results of operations.

We intend to continue to issue stock options and restricted stock units as key components of our overall compensation and employee attraction and retention efforts. We may face pressure from stockholders, who must approve any increases in our equity compensation pool, to limit the use of equity-based compensation so as to minimize its dilutive effect on stockholders. In addition, we are required under GAAP to recognize compensation expense in our results of operations for employee share-based equity compensation under our equity grants, which may negatively impact our results of operations and may increase the pressure to limit equity-based compensation. These factors may make it more difficult or unlikely for us to continue granting attractive equity-based compensation packages to our employees, which could adversely impact our ability to attract and retain key employees. If we lose any senior executive or other key employee, our business and results of operations could be materially and adversely affected.

If we are unable to continue the successful development of our direct sales force and the expansion of our relationships with our strategic partners, sales of our products and services will suffer and our growth could be slower than we project.

We believe that our future growth will depend on the continued development of our direct sales force and their ability to obtain new customers, particularly large P&C insurance carriers, and to manage our existing customer base. Our ability to achieve significant growth in revenues in the future will depend, in large part, on our success in recruiting, training and retaining a sufficient number of direct sales personnel. New hires require significant training and may, in some cases, take more than a year before becoming productive, if at all. If we are unable to hire and develop sufficient numbers of productive direct sales personnel, sales of our products and services will suffer and our growth will be impeded.

We believe our future growth also will depend on the expansion of successful relationships with system integrators. Our system integrators as channel partners help us reach additional customers. Our growth in revenues, particularly in international markets, will be influenced by the development and maintenance of this indirect sales channel. Although we have established relationships with some of the leading system integrators, our products and services compete directly against the products and services of other leading system integrators, including Accenture. We are unable to control the resources that our system integrator partners commit to implementing our products or the quality of such implementation. If they do not commit sufficient resources to these activities, our business and results of operations could fail to grow in line with our projections.

Failure to manage our rapid growth effectively and manage our headquarters transition could harm our business.

We have recently experienced, and expect to continue to experience, rapid growth in our number of employees and in our international operations that has placed, and will continue to place, a significant strain on our operational and financial resources and our personnel. To manage our anticipated future growth effectively, we must continue to maintain and may need to enhance our information technology infrastructure, financial and accounting systems and controls and manage expanded operations and employees in geographically distributed locations. We also must attract, train and retain a significant number of additional qualified sales and marketing personnel, professional services personnel, software engineers, technical personnel and management personnel. Our failure to manage our rapid growth effectively could have a material adverse effect on our business, results of operations and financial condition. Our growth could require significant capital expenditures and may divert financial resources from other projects, such as the development of new services or product

 

27


Table of Contents

enhancements. For example, since it may take as long as six months to hire and train a new member of our professional services staff, we make decisions regarding the size of our professional services staff based upon our expectations with respect to customer demand for our products and services. If these expectations are incorrect, and we increase the size of our professional services organization without experiencing an increase in sales of our products and services, we will experience reductions in our gross and operating margins and net income. Furthermore, we have entered into a seven-year lease agreement to relocate our headquarters to Foster City, California commencing August 1, 2012. We expect to incur additional expense in connection with this relocation and our new headquarters lease. These efforts may also disrupt our operations and distract our management team. If we are unable to effectively manage our growth, our expenses may increase more than expected, our revenues could decline or grow more slowly than expected and we may be unable to implement our business strategy. We also intend to continue to expand into additional international markets which, if not technologically or commercially successful, could harm our financial condition and prospects.

Our international sales and operations subject us to additional risks that can adversely affect our business, results of operations and financial condition.

We sell our products and services to customers located outside the United States and Canada, and we are continuing to expand our international operations as part of our growth strategy. In fiscal year 2011, 34% of our revenues were derived from outside of the United States and Canada. Our current international operations and our plans to expand our international operations subject us to a variety of risks, including:

 

  Ÿ  

increased management, travel, infrastructure and legal compliance costs associated with having multiple international operations;

 

  Ÿ  

longer payment cycles and difficulties in enforcing contracts and collecting accounts receivable;

 

  Ÿ  

the need to localize our products and licensing programs for international customers;

 

  Ÿ  

lack of familiarity with and unexpected changes in foreign regulatory requirements;

 

  Ÿ  

increased exposure to fluctuations in currency exchange rates;

 

  Ÿ  

the burdens of complying with a wide variety of foreign laws and legal standards;

 

  Ÿ  

compliance with the U.S. Foreign Corrupt Practices Act of 1977, as amended, or FCPA, particularly in emerging market countries;

 

  Ÿ  

import and export license requirements, tariffs, taxes and other trade barriers;

 

  Ÿ  

increased financial accounting and reporting burdens and complexities;

 

  Ÿ  

weaker protection of intellectual property rights in some countries;

 

  Ÿ  

multiple and possibly overlapping tax regimes; and

 

  Ÿ  

political, social and economic instability abroad, terrorist attacks and security concerns in general.

As we continue to expand our business globally, our success will depend, in large part, on our ability to anticipate and effectively manage these and other risks associated with our international operations. Any of these risks could harm our international operations and reduce our international sales, adversely affecting our business, results of operations, financial condition and growth prospects.

 

28


Table of Contents

Certain of our software products may be deployed through cloud-based implementations, and if such implementations are compromised by data security breaches or other disruptions, our reputation could be harmed, and we could lose customers or be subject to significant liabilities.

Although our software products typically are deployed on our customers’ premises, our products may be deployed in our customers’ cloud-based environments, in which our products and associated services are made available using an Internet-based infrastructure. In cloud deployments, the infrastructure of third-party service providers used by our customers may be vulnerable to hacking incidents, other security breaches, computer viruses, telecommunications failures, power loss, other system failures and similar disruptions.

Any of these occurrences, whether intentional or accidental, could lead to interruptions, delays or cessation of operation of the servers of third-party service providers’ used by our customers, and to the unauthorized use or access of our software and proprietary information and sensitive or confidential data stored or transmitted by our products. The inability of service providers used by our customers to provide continuous access to their hosted services, and to secure their hosted services and associated customer information from unauthorized use, access or disclosure, could cause us to lose customers and to incur significant liability, and could harm our reputation, business, financial condition and results of operations.

We may expand through acquisitions of and/or partnerships with other companies, which may divert our management’s attention and result in unexpected operating and technology integration difficulties, increased costs and dilution to our stockholders.

In the future, our business strategy may include acquiring complementary software, technologies, or businesses. Acquisitions may result in unforeseen operating difficulties and expenditures. In particular, we may encounter difficulties in assimilating or integrating the businesses, technologies, services, products, personnel or operations of the acquired companies, especially if the key personnel of the acquired company choose not to work for us, and we may have difficulty retaining the existing customers or signing new customers of any acquired business. Acquisitions may also disrupt our ongoing business, divert our resources and require significant management attention that would otherwise be available for ongoing development of our current business. We also may be required to use a substantial amount of our cash or issue equity securities to complete an acquisition, which could deplete our cash reserves and dilute our existing stockholders. Following an acquisition, we may be required to defer the recognition of revenues that we receive from the sale of products that we acquired, or from the sale of a bundle of products that includes products that we acquired, if we have not established VSOE for the undelivered elements in the arrangement. A delay in the recognition of revenues from sales of acquired products or bundles that include acquired products may cause fluctuations in our quarterly financial results and may adversely affect our operating margins.

Additionally, competition within our industry for acquisitions of businesses, technologies and assets has been, and may in the future continue to be, intense. As such, even if we are able to identify an acquisition that we would like to consummate, the target may be acquired by another company or we may otherwise not be able to complete the acquisition on commercially reasonable terms, if at all. Moreover, we cannot assure you that the anticipated benefits of any acquisition, including our revenues or return on investment assumptions, would be realized or that we would not be exposed to unknown liabilities.

If our estimates or judgments relating to our critical accounting policies are based on assumptions that change or prove to be incorrect, our results of operations could fall below expectations of securities analysts and investors, resulting in a decline in our stock price.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements.

 

29


Table of Contents

We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as provided in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the results of which form the basis for making judgments about the carrying values of assets, liabilities, equity, revenues and expenses that are not readily apparent from other sources. Because our customer contracts are highly negotiated, they often include unique terms and conditions that require judgment with respect to revenue recognition. Our results of operations may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our results of operations to fall below the expectations of securities analysts and investors, resulting in a decline in our stock price.

We will incur increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives.

As a public company, we will incur legal, accounting and other expenses that we did not incur as a private company. In addition, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley Act, as well as rules subsequently implemented by the Securities and Exchange Commission, or SEC, and the New York Stock Exchange, impose additional requirements on public companies, including specific corporate governance practices. For example, the listing requirements of the New York Stock Exchange require that we satisfy certain corporate governance requirements relating to independent directors, audit and compensation committees, distribution of annual and interim reports, stockholder meetings, stockholder approvals, solicitation of proxies, conflicts of interest, stockholder voting rights and codes of conduct. Our management and other personnel will need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations will increase our legal, accounting and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantial additional costs to maintain the same or similar coverage. These rules and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers.

We may not be able to obtain capital when desired on favorable terms, if at all, or without dilution to our stockholders.

We may need additional financing to execute on our current or future business strategies, including to:

 

  Ÿ  

hire additional personnel;

 

  Ÿ  

develop new or enhance existing products and services;

 

  Ÿ  

enhance our operating infrastructure;

 

  Ÿ  

acquire businesses or technologies; or

 

  Ÿ  

otherwise respond to competitive pressures.

If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders could be significantly diluted, and these newly-issued securities may have rights, preferences or privileges senior to those of existing stockholders. If we incur additional funds through debt financing, a substantial portion of our operating cash flow may be dedicated to the payment of principal and interest on such indebtedness, thus limiting funds available for our business activities. We cannot assure you that additional financing will be available on terms favorable to us, or at all. If adequate funds are not available or are not available on acceptable terms, when we desire them, our ability to fund our operations, take advantage of unanticipated opportunities,

 

30


Table of Contents

develop or enhance our products and services, or otherwise respond to competitive pressures would be significantly limited. Any of these factors could harm our results of operations.

If we fail to maintain effective internal control over financial reporting in the future, the accuracy and timing of our financial reporting may be adversely affected.

Preparing our consolidated financial statements involves a number of complex manual and automated processes, which are dependent upon individual data input or review and require significant management judgment. One or more of these elements may result in errors that may not be detected and could result in a material misstatement of our consolidated financial statements. The Sarbanes-Oxley Act requires, among other things, that as a publicly-traded company we disclose whether our internal control over financial reporting and disclosure controls and procedures are effective.

If a material misstatement occurs in the future, we may fail to meet our future reporting obligations, we may need to restate our financial results and the price of our common stock may decline. Any failure of our internal controls could also adversely affect the results of the periodic management evaluations and annual independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting that will be required when the rules of the SEC, under Section 404 of the Sarbanes-Oxley Act, become applicable to us beginning with the filing of our Annual Report on Form 10-K for the fiscal year ending July 31, 2013. Effective internal controls are necessary for us to produce reliable financial reports and are important to helping prevent financial fraud. If we cannot provide reliable financial reports or prevent fraud, our business and results of operations could be harmed, investors could lose confidence in our reported financial information, and the trading price of our stock could drop significantly.

If tax laws change or we experience adverse outcomes resulting from examination of our income tax returns, it could adversely affect our results of operations.

We are subject to federal, state and local income taxes in the United States and in foreign jurisdictions. Our future effective tax rates and the value of our deferred tax assets could be adversely affected by changes in tax laws. In addition, we are subject to the examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from such examinations to determine the adequacy of our provision for income taxes. Significant judgment is required in determining our worldwide provision for income taxes. Although we believe we have made appropriate provisions for taxes in the jurisdictions in which we operate, changes in the tax laws or challenges from tax authorities under existing tax laws could adversely affect our business, financial condition and results of operations.

Our business is subject to the risks of earthquakes, fire, floods and other natural catastrophic events, and to interruption by manmade problems such as computer viruses or terrorism.

Our corporate headquarters and the majority of our operations are located in the San Francisco Bay Area, a region known for seismic activity. A significant natural disaster, such as an earthquake, fire or a flood, could have a material adverse impact on our business, results of operations and financial condition. In addition, our servers are vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering with our computer systems. In addition, acts of terrorism could cause disruptions in our or our customers’ business or the economy as a whole. To the extent that such disruptions result in delays or cancellations of customer orders, or the deployment of our products, our business, results of operations and financial condition would be adversely affected.

 

31


Table of Contents

Risks Related to this Offering and Our Common Stock

There is no existing market for our common stock and we do not know if one will develop to provide our stockholders adequate liquidity.

There has not been a public trading market for shares of our common stock prior to this offering. An active trading market may not develop or be sustained after this offering. The initial public offering price for the shares of our common stock sold in this offering will be determined by negotiations between us and representatives of the underwriters. This price may not be indicative of the price at which our common stock will trade after this offering.

Our stock price may be volatile and you may be unable to sell your shares at or above the offering price.

The market price of our common stock could be subject to wide fluctuations in response to, among other things, the risk factors described in this section of this prospectus, and other factors beyond our control, such as fluctuations in the valuation of companies perceived by investors to be comparable to us.

Furthermore, the stock markets have experienced price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions, such as recessions, interest rate changes or international currency fluctuations, may negatively affect the market price of our common stock.

In the past, many companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may become the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’s attention from other business concerns, which could seriously harm our business.

If research analysts do not publish research about our business or if they issue unfavorable commentary or downgrade our common stock, our stock price and trading volume could decline.

The trading market for our common stock will depend in part on the research and reports that research analysts publish about us and our business. If we do not establish and maintain adequate research coverage or if one or more analysts who covers us downgrades our stock or publishes inaccurate or unfavorable research about our business, the price of our common stock could decline. If one or more of the research analysts ceases coverage of our company or fails to publish reports on us regularly, demand for our common stock could decrease, which could cause our stock price or trading volume to decline.

Our principal stockholders, executive officers and directors own a significant percentage of our stock and will continue to have significant control of our management and affairs after the offering, and they can take actions that may be against your best interests.

Following the completion of this offering, our executive officers and directors, and entities that are affiliated with them, will beneficially own an aggregate of 61.4% of our outstanding common stock. Our two largest stockholders, U.S. Venture Partners and Bay Partners, will beneficially own an aggregate of 46.1% of our outstanding common stock. This significant concentration of share ownership may adversely affect the trading price for our common stock because investors often perceive disadvantages in owning stock in companies with stockholders who own significant percentages of a company’s outstanding stock. Also, as a result, these stockholders, if they were to act together, may be

 

32


Table of Contents

able to control our management and affairs and other matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as mergers, consolidations or the sale of substantially all of our assets. Consequently, this concentration of ownership may have the effect of delaying or preventing a change in control, including a merger, consolidation or other business combination involving us, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control, even if such a change in control would benefit our other stockholders.

Participation in this offering by one of our existing stockholders would reduce the available public float for our shares.

Battery Ventures, one of our existing stockholders, has indicated an interest in purchasing up to 400,000 shares of our common stock in this offering at the initial public offering price. Because this indication of interest is not a binding agreement or commitment to purchase, Battery Ventures may elect not to purchase shares in this offering or the underwriters may elect not to sell any shares in this offering to Battery Ventures. If Battery Ventures were to purchase all of these shares, it would beneficially own 6.7% of our outstanding common stock after this offering.

If Battery Ventures is allocated all or a portion of the shares in which it has indicated an interest in this offering and purchases any such shares, such purchase would reduce the available public float for our shares because Battery Ventures would be restricted from selling the shares by a lock-up agreement it has entered into with our underwriters. As a result, any purchase of shares by Battery Ventures in this offering may reduce the liquidity of our common stock relative to what it would have been had these shares been purchased by investors that were not affiliated with us.

Our stock price could decline due to the large number of outstanding shares of our common stock eligible for future sale.

Sales of substantial amounts of our common stock in the public market following this offering, or the perception that these sales could occur, could cause the market price of our common stock to decline. These sales could also make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate.

Assuming completion of this offering, as of October 31, 2011, we would have had an aggregate of 47,542,951 shares of common stock outstanding, assuming no exercise of the underwriters’ over-allotment option and no exercise of outstanding options or warrants. The 7,500,000 shares sold pursuant to this offering will be immediately tradable without restriction. Of the remaining shares:

 

  Ÿ  

no shares will be eligible for sale immediately upon completion of this offering;

 

  Ÿ  

40,032,202 shares will be eligible for sale upon the expiration of lock-up agreements, subject in some cases to volume and other restrictions of Rule 144 and Rule 701 under the Securities Act of 1933, as amended, or the Securities Act; and

 

  Ÿ  

10,749 shares will be eligible for sale in the public market from time to time thereafter upon the lapse of our right of repurchase with respect to any unvested shares.

The number of shares eligible for sale upon expiration of lock-up agreements assumes the conversion of all outstanding shares of our convertible preferred stock on a one-for-one basis into an aggregate of 25,357,721 shares of common stock.

The lock-up agreements expire 180 days after the date of this prospectus, subject to potential extension in the event we release earnings results or material news or a material event relating to us occurs near the end of the lock-up period. J.P. Morgan Securities LLC and Deutsche Bank Securities Inc., as representatives of the underwriters, may, in their discretion and at any time, release all or any

 

33


Table of Contents

portion of the securities subject to lock-up agreements. After the completion of this offering, we intend to register approximately 21,107,146 shares of our common stock that have been issued or reserved for future issuance under our stock incentive plans. Once we register the offer and sale of shares for the holders of registration rights and option holders, they can be freely sold in the public market upon issuance, subject to the lock-up agreements or unless they are held by “affiliates,” as that term is defined in Rule 144 of the Securities Act.

We may also issue shares of our common stock or securities convertible into our common stock from time to time in connection with a financing, acquisition or otherwise. Any such issuance could result in substantial dilution to our existing stockholders and cause the trading price of our common stock to decline.

Because our initial public offering price is substantially higher than the pro forma as adjusted net tangible book value per share of our outstanding common stock, new investors will incur immediate and substantial dilution.

The initial public offering price is substantially higher than the pro forma as adjusted net tangible book value per share of our common stock based on the expected total value of our total assets, less our goodwill and other intangible assets, less our total liabilities immediately following this offering. Therefore, if you purchase shares of our common stock in this offering, you will experience immediate and substantial dilution of $8.92 per share in the price you pay for our common stock as compared to the pro forma as adjusted net tangible book value as of October 31, 2011. To the extent outstanding options or warrants to purchase common stock are exercised, there will be further dilution. For a further description of the dilution that you will experience immediately after this offering, see “Dilution.”

Our management has broad discretion in the use of the net proceeds from this offering and our use of the net proceeds may not produce a positive rate of return.

Our management will have broad discretion in the application of the net proceeds of this offering. We cannot specify with certainty the uses to which we will apply the net proceeds we will receive from this offering and cannot assure you that our management will apply the net proceeds from this offering in ways that improve our results of operations or increase the value of your investment. The failure by our management to apply these funds in a manner that produces a positive rate of return could adversely affect our ability to continue to maintain and expand our business, which could cause our stock price to decline.

We currently do not intend to pay dividends on our common stock and, consequently, your only opportunity to achieve a return on your investment is if the price of our common stock appreciates.

We currently do not plan to declare dividends on shares of our common stock in the foreseeable future. See “Dividend Policy” for more information. Consequently, your only opportunity to achieve a return on your investment in our company will be if the market price of our common stock appreciates and you sell your shares at a profit. There is no guarantee that the price of our common stock that will prevail in the market after this offering will ever exceed the price that you pay.

Certain provisions of our certificate of incorporation and bylaws and of Delaware law could prevent a takeover that stockholders consider favorable and could also reduce the market price of our stock.

Our amended and restated certificate of incorporation and our amended and restated bylaws, which will be effective upon completion of this offering, contain provisions that could delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including

 

34


Table of Contents

transactions in which stockholders might otherwise receive a premium for their shares. These provisions may also prevent or delay attempts by stockholders to replace or remove our current management or members of our board of directors. These provisions include:

 

  Ÿ  

providing for a classified board of directors with staggered three-year terms, which could delay the ability of stockholders to change the membership of a majority of our board of directors;

 

  Ÿ  

not providing for cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates;

 

  Ÿ  

authorizing our board of directors to issue, without stockholder approval, preferred stock rights senior to those of common stock, which could be used to significantly dilute the ownership of a hostile acquiror;

 

  Ÿ  

prohibiting stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of our stockholders;

 

  Ÿ  

limiting the persons who may call special meetings of stockholders, which could delay the ability of our stockholders to force consideration of a proposal or to take action, including the removal of directors; and

 

  Ÿ  

requiring advance notification of stockholder nominations and proposals, which may discourage or deter a potential acquiror from conducting a solicitation of proxies to elect the acquiror’s own slate of directors or otherwise attempting to obtain control of us.

The affirmative vote of the holders of at least 66 2/3% of our shares of capital stock entitled to vote is generally necessary to amend or repeal the above provisions that are contained in our amended and restated certificate of incorporation. Also, absent approval of our board of directors, our amended and restated bylaws may only be amended or repealed by the affirmative vote of the holders of at least 50% of our shares of capital stock entitled to vote.

In addition, we will be subject to the provisions of Section 203 of the Delaware General Corporation Law upon completion of this offering. These provisions may prohibit large stockholders, in particular those owning 15% or more of our outstanding common stock, from engaging in certain business combinations without approval of substantially all of our stockholders for a certain period of time.

These and other provisions in our amended and restated certificate of incorporation, our amended and restated bylaws and under Delaware law could discourage potential takeover attempts, reduce the price that investors might be willing to pay for shares of our common stock in the future and result in the market price being lower than it would be without these provisions. See “Description of Capital Stock—Preferred Stock” and “Description of Capital Stock—Anti-Takeover Effects of Delaware Law and Our Certificate of Incorporation and Bylaws.”

 

35


Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus includes forward-looking statements. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future results of operations and financial position, business strategy and plans and our objectives for future operations, are forward-looking statements. You can generally identify forward-looking statements because they contain words such as “may,” “will,” “should,” “expects,” “plans,” “anticipates,” “could,” “intends,” “target,” “projects,” “contemplates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other similar expressions that concern our expectations, strategy, plans or intentions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in “Risk Factors.” It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this prospectus may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.

You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this prospectus to conform these statements to actual results or to changes in our expectations. You should read this prospectus and the documents that we reference in this prospectus and have filed with the SEC as exhibits to the registration statement of which this prospectus is a part with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect.

 

36


Table of Contents

INDUSTRY AND MARKET DATA

Unless otherwise indicated, information contained in this prospectus concerning our industry and the market in which we operate, including our general expectations and market position, market opportunity and market size, is based on information from various sources, on assumptions that we have made that are based on those data and other similar sources and on our knowledge of the markets for our solutions. These data involve a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. While we believe the market position, opportunity and market size information included in this prospectus is generally reliable, such information is inherently imprecise. In addition, projections, assumptions and estimates of our future performance and the future performance of the industry in which we operate are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors” and elsewhere in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

Some of the industry and market data contained in this prospectus are based on independent industry publications, including those generated by Gartner, Inc., IBISWorld Inc. or other publicly available information. This information involves a number of assumptions and limitations. The industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors.” These and other factors could cause results to differ materially from those expressed in these publications.

All statements in this prospectus attributable to Gartner represent our interpretation of data, research opinion or viewpoints published as part of a syndicated subscription service by Gartner, and have not been reviewed by Gartner. Each of the Gartner publications described herein, “MarketScope for North American Property and Casualty Insurance Claims Management Modules” by Kimberly Harris-Ferrante, January 27, 2011; and “Enterprise IT Spending for the Insurance Market Worldwide 2009-2015” by Derry Finkeldey, August 15, 2011 speaks as of its original publication date (and not as of the date of this prospectus). The opinions expressed in Gartner publications are not representations of fact, and are subject to change without notice.

 

37


Table of Contents

USE OF PROCEEDS

We estimate that the net proceeds from our sale of 7,500,000 shares of common stock in this offering at an assumed initial public offering price of $11.00 per share, the midpoint of the price range set forth on the front cover of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses, will be approximately $72.7 million, or $84.2 million if the underwriters’ over-allotment option is exercised in full. A $1.00 increase (decrease) in the assumed initial public offering price would increase (decrease) the net proceeds to us from this offering by $7.0 million, assuming the number of shares offered by us, as set forth on the front cover of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The principal purposes of this offering are to create a public market for our common stock and to facilitate our access to public equity markets, as well as to obtain additional capital. Except as set forth in this section, we have no specific plans as to the use of a specific portion of the proceeds of this offering. However, we anticipate that we will use the net proceeds of this offering primarily for general corporate purposes, including working capital. We also intend to use certain of the net proceeds to satisfy tax withholding obligations related to the vesting of RSUs held by current or former employees, which will begin to vest 180 days after the completion of this offering. We do not currently know the amount of net proceeds that will be used to satisfy these tax withholding obligations because it will be dependent on a number of factors, including our stock price on the date of vesting and the number of shares underlying RSUs that vest on such date. Assuming a stock price of $11.00 per share, the midpoint of the price range set forth on the front cover of this prospectus, 1,216,589 shares underlying RSUs vesting on such date and the statutory minimum income tax rate for our employees, we would use $4.8 million to satisfy these tax withholding obligations. A $1.00 increase (decrease) in the assumed price of our common stock on the date of vesting would increase (decrease) the amount we would be required to pay to satisfy these tax withholding obligations by $0.4 million.

In addition, we may use a portion of the net proceeds to acquire or invest in complementary companies, product lines, products or technologies. However, we have no understandings or agreements with respect to any such acquisition or investment.

Pending their use, we plan to invest our net proceeds from this offering in short-term, interest-bearing obligations, investment-grade instruments, certificates of deposit, or direct or guaranteed obligations of the U.S. government.

DIVIDEND POLICY

We have never declared or paid cash dividends on our common stock. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not anticipate paying any dividends on our common stock in the foreseeable future. Any future determination to declare dividends will be made at the discretion of our board of directors and will depend on our financial condition, results of operations, capital requirements, general business conditions and other factors that our board of directors may deem relevant.

 

38


Table of Contents

CAPITALIZATION

The following table sets forth our consolidated cash and cash equivalents and capitalization as of October 31, 2011 on:

 

  Ÿ  

an actual basis;

 

  Ÿ  

on a pro forma basis to reflect the conversion of all outstanding shares of our convertible preferred stock on a one-for-one basis into 25,357,721 shares of common stock, which we expect to occur immediately prior to the closing of this offering; and

 

  Ÿ  

on a pro forma as adjusted basis to reflect the conversion of our convertible preferred stock discussed in the prior bullet and our receipt of the net proceeds from our sale of 7,500,000 shares of common stock in this offering at an assumed initial public offering price of $11.00 per share, the midpoint of the price range set forth on the front cover of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses.

The information below is illustrative only and our capitalization following the completion of this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. You should read this table together with “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes appearing elsewhere in this prospectus.

 

      As of October 31, 2011  
      Actual     Pro Forma     Pro Forma  As
Adjusted(1)
 
     (unaudited)  
     (in thousands)  

Cash and cash equivalents

   $ 31,171      $ 31,171      $ 104,869   
  

 

 

   

 

 

   

 

 

 

Short-term and long-term debt

   $ —        $ —        $ —     

Convertible preferred stock, $0.0001 par value: 25,643,493 shares authorized, 25,357,721 shares issued and outstanding, actual; no shares authorized, none issued or outstanding, pro forma; no shares authorized, issued or outstanding, pro forma as adjusted

     36,500        —          —     

Common stock, $0.0001 par value; 55,000,000 shares authorized, 14,685,230 shares issued and outstanding, actual; 500,000,000 shares authorized, 40,042,951 shares issued and outstanding, pro forma; and 500,000,000 shares authorized, 47,542,951 shares issued and outstanding, pro forma as adjusted

     1        4        5   

Additional paid-in capital

     23,945        60,442        133,166   

Accumulated other comprehensive loss

     (218     (218     (218

Accumulated deficit

     (33,559     (33,559     (33,559
  

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

     26,669        26,669        99,394   
  

 

 

   

 

 

   

 

 

 

Total capitalization

   $ 26,669      $ 26,669      $ 99,394   
  

 

 

   

 

 

   

 

 

 

 

(1) We paid $973,000 of our initial public offering expenses as of October 31, 2011 in connection with the preparation of the registration statement of which this prospectus forms a part.

A $1.00 increase (decrease) in the assumed initial public offering price of $11.00 per share, the midpoint of the range set forth on the front cover of this prospectus, would increase (decrease) our pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ equity (deficit) and total capitalization by approximately $7.0 million, assuming the number of shares offered by us, as set forth on the front cover of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

39


Table of Contents

Each increase (decrease) of one million shares in the number of shares offered by us would increase (decrease) our pro forma as adjusted cash and cash equivalents, additional paid-in capital, total stockholders’ equity (deficit) and total capitalization by approximately $10.2 million, assuming the initial public offering price remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.

The number of shares of our common stock to be outstanding following this offering is based on 40,042,951 shares of our common stock outstanding as of October 31, 2011, assuming conversion of all outstanding shares of our convertible preferred stock on a one-for-one basis into 25,357,721 shares of common stock, and excludes:

 

  Ÿ  

8,181,978 shares of common stock issuable upon the exercise of options outstanding as of October 31, 2011, with a weighted average exercise price of $3.16 per share;

 

  Ÿ  

4,855,572 shares of common stock issuable upon the upon the vesting of RSUs outstanding as of October 31, 2011;

 

  Ÿ  

69,529 shares of common stock issuable upon the exercise of warrants to purchase convertible preferred stock outstanding as of October 31, 2011, assuming conversion of all outstanding shares of our convertible preferred stock, which we expect to occur immediately prior to the closing of this offering, with an exercise price of $5.03 per share; and

 

  Ÿ  

7,595,117 shares of our common stock reserved for future issuance under our stock-based compensation plans as of October 31, 2011, consisting of 25,168 shares of common stock reserved for issuance under our 2006 Stock Plan (on November 9, 2011 and January 3, 2012, our board of directors increased the shares available under the 2006 Stock Plan by 240,000 shares; options to purchase 235,000 shares and 30,000 shares were granted on November 11, 2011 and January 3, 2012, respectively), 521 shares of common stock reserved for issuance under our 2009 Stock Plan, 49,428 shares of common stock reserved for issuance under our 2010 Restricted Stock Unit Plan (on November 9, 2011, our board of directors increased the shares available under the 2010 Restricted Stock Unit Plan by 255,000 shares; 297,500 shares are subject to issuance upon vesting of RSUs granted on November 11, 2011) and, subject to and effective upon the closing of this offering, 7,500,000 shares of common stock reserved for issuance under our 2011 Stock Plan and any future increase in shares reserved for issuance under such plans.

 

40


Table of Contents

DILUTION

If you invest in our common stock in this offering, your interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the pro forma as adjusted net tangible book value per share of our common stock immediately after this offering.

Net tangible book value per share is determined by dividing our total tangible assets less our total liabilities by the number of shares of common stock outstanding. Our historical net tangible book value as of October 31, 2011 was $26.0 million, or $1.77 per share. Our pro forma net tangible book value as of October 31, 2011 was $26.0 million, or $0.65 per share, based on the total number of shares of our common stock outstanding as of October 31, 2011, after giving effect to the conversion of all outstanding shares of our convertible preferred stock on a one-for-one basis into 25,357,721 shares of common stock, which we expect to occur immediately prior to the closing of this offering.

After giving effect to our sale of 7,500,000 shares of common stock by us in this offering at an assumed initial public offering price of $11.00 per share, the midpoint of the price range set forth on the front cover of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses, our pro forma as adjusted net tangible book value as of October 31, 2011 will be $98.7 million, or $2.08 per share. This represents an immediate increase in net tangible book value of $1.43 per share to existing stockholders and an immediate dilution in net tangible book value of $8.92 per share to purchasers of common stock in this offering, as illustrated in the following table:

 

Assumed initial public offering price per share

      $ 11.00   

Pro forma net tangible book value per share as of October 31, 2011, before giving effect to this offering

   $ 0.65      

Increase in pro forma net tangible book value per share attributable to new investors in this offering

     1.43      
  

 

 

    

Pro forma as adjusted net tangible book value per share after giving effect to this offering

        2.08   
     

 

 

 

Dilution per share to investors in this offering

      $ 8.92   
     

 

 

 

A $1.00 increase (decrease) in the assumed initial public offering price of $11.00 per share would increase (decrease) our pro forma as adjusted net tangible book value per share after giving effect to this offering by approximately $0.15 and would increase (decrease) dilution per share to new investors by approximately $0.15 assuming the number of shares offered by us, as set forth on the front cover of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. In addition, to the extent any outstanding options or warrants are exercised, you will experience further dilution.

 

41


Table of Contents

The following table presents on a pro forma basis as of October 31, 2011, after giving effect to the conversion of all outstanding shares of our convertible preferred stock on a one-for-one basis into common stock, which we expect to occur immediately prior to the closing of this offering, and assuming Battery Ventures does not elect to purchase shares of our common stock in this offering, the difference between the existing stockholders and the purchasers of shares in this offering with respect to the number of shares purchased from us, the total consideration paid or to be paid to us, which includes net proceeds received from the issuance of common and convertible preferred stock, cash received from the exercise of stock options and the value of any stock issued for services and the average price paid per share or to be paid to us at an assumed initial public offering price of $11.00 per share, the midpoint of the price range set forth on the front cover of this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us:

 

     Shares Purchased     Total Consideration     Average
Price per
Share
 
     

Number

     Percent     Amount      Percent    

Existing stockholders

     40,042,951         84.2   $ 39,610,621         32.4   $ 0.99   

New investors

     7,500,000         15.8        82,500,000         67.6        11.00   
  

 

 

    

 

 

   

 

 

    

 

 

   

Totals

     47,542,951         100.0   $ 122,110,621         100.0   $ 2.57   
  

 

 

    

 

 

   

 

 

    

 

 

   

If the underwriters exercise their over-allotment option in full, and if Battery Ventures does not elect to purchase shares of our common stock in this offering, sales by us in this offering will reduce the percentage of shares held by existing stockholders to 82.3% and will increase the number of shares held by our new investors to 8,625,000, or 17.7%.

The foregoing calculations are based on 40,042,951 shares of our common stock outstanding as of October 31, 2011 assuming conversion of all outstanding convertible preferred stock on a one-for-one basis into 25,357,721 shares of common stock, and exclude:

 

  Ÿ  

8,181,978 shares of common stock issuable upon the exercise of options outstanding as of October 31, 2011, with a weighted average exercise price of $3.16 per share;

 

  Ÿ  

4,855,572 shares of common stock issuable upon the vesting of outstanding RSUs as of October 31, 2011;

 

  Ÿ  

69,529 shares of common stock issuable upon the exercise of warrants to purchase convertible preferred stock outstanding as of October 31, 2011, assuming conversion of all outstanding shares of our convertible preferred stock, which we expect to occur immediately prior to the closing of this offering, with an exercise price of $5.03 per share; and

 

  Ÿ  

7,575,117 shares of common stock reserved for future issuance under our stock-based compensation plans as of October 31, 2011, consisting of 25,168 shares of common stock reserved for issuance under our 2006 Stock Plan (on November 9, 2011 and January 3, 2012, our board of directors increased the shares available under the 2006 Stock Plan by 240,000 shares; options to purchase 235,000 shares and 30,000 shares were granted on November 11, 2011 and January 3, 2012, respectively), 521 shares of common stock reserved for issuance under our 2009 Stock Plan, 49,428 shares of common stock reserved for issuance under our 2010 Restricted Stock Unit Plan (on November 9, 2011, our board of directors increased the shares available under the 2010 Restricted Stock Unit Plan by 255,000 shares; 297,500 shares are subject to issuance upon vesting of RSUs granted on November 11, 2011) and, subject to and effective upon the closing of this offering, 7,500,000 shares of common stock reserved for issuance under our 2011 Stock Plan and any future increases in shares reserved for issuance under such plans.

 

42


Table of Contents

SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated statements of operations data for the years ended July 31, 2009, 2010 and 2011 and the consolidated balance sheet data as of July 31, 2010 and 2011 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected consolidated statements of operations data for the three months ended October 31, 2010 and 2011 and the consolidated balance sheet data as of October 31, 2011 are derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The selected consolidated statements of operations for the years ended July 31, 2007 and 2008 and the consolidated balance sheet data as of July 31, 2007, 2008 and 2009 are derived from our audited consolidated financial statements which are not included in this prospectus. The unaudited interim consolidated financial statements have been prepared on a basis consistent with the audited consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, that management considers necessary to present fairly the financial information set forth in those statements. Our historical results are not necessarily indicative of the results that may be expected in the future and the results for the three months ended October 31, 2011 are not necessarily indicative of results to be expected for the full year ending July 31, 2012 or any future annual or interim period. You should read the following selected consolidated historical financial data below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included elsewhere in this prospectus.

 

00,000,000 00,000,000 00,000,000 00,000,000 00,000,000 00,000,000 00,000,000
    Years Ended July 31,     Three Months
Ended October 31,
 
    2007     2008     2009     2010     2011     2010     2011  
          (unaudited)  
    (in thousands, except share and per share data)  

Consolidated Statements of Operations Data:

             

Total revenues

  $ 42,945      $ 70,656      $ 84,745      $ 144,691      $ 172,472      $ 34,670      $ 52,380   

Total cost of revenues(1)

    35,289        42,448        41,656        55,471        68,344        15,192        19,490   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gross profit

    7,656        28,208        43,089        89,220        104,128        19,478        32,890   

Operating expenses:

             

Research and development(1)

    16,108        21,162        22,356        28,273        34,773        7,519        10,959   

Sales and marketing(1)

    13,854        15,718        21,559        26,741        28,950        5,546        7,361   

General and administrative(1)

    6,170        8,506        9,646        16,192        23,534        4,628        6,438   

Litigation provision

    —          —          —          —          10,000        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    36,132        45,386        53,561        71,206        97,257        17,693        24,758   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    (28,476     (17,178     (10,472     18,014        6,871        1,785        8,132   

Interest income, net

    107        443        27        95        156        37        40   

Other income (expense), net

    —          —          (123     (391     1,269        193        (316
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before provision for income taxes

    (28,369     (16,735     (10,568     17,718        8,296        2,015        7,856   

Provision for (benefit from) income taxes

    84        148        398        2,199        (27,262     125        3,044   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (28,453   $ (16,883   $ (10,966   $ 15,519      $ 35,558      $ 1,890      $ 4,812   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share(2):

             

Basic

  $ (2.16   $ (1.28   $ (0.83   $ 0.32      $ 0.83      $ 0.03      $ 0.10   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  $ (2.16   $ (1.28   $ (0.83   $ 0.30      $ 0.76      $ 0.03      $ 0.09   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

43


Table of Contents
00,000,000 00,000,000 00,000,000 00,000,000 00,000,000 00,000,000 00,000,000
    Years Ended July 31,     Three Months
Ended October 31,
 
    2007     2008     2009     2010     2011     2010     2011  
          (unaudited)  
    (in thousands, except share and per share data)  

Shares used in computing net income (loss)(2):

             

Basic

    13,177,772        13,195,733        13,284,938        13,535,736        14,064,055        13,873,022        14,554,428   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

    13,177,772        13,195,733        13,284,938        15,933,374        17,763,859        16,046,865        21,153,441   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net income per share (unaudited)(2):

             

Basic

        $ 0.40      $ 0.90      $ 0.05      $ 0.12   
       

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

        $ 0.38      $ 0.82      $ 0.05      $ 0.10   
       

 

 

   

 

 

   

 

 

   

 

 

 

Shares used in computing pro forma net income per share (unaudited)(2):

             

Basic

          38,893,457        39,421,776        39,230,743        39,912,149   
       

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

          41,291,095        43,121,580        41,404,586        46,511,161   
       

 

 

   

 

 

   

 

 

   

 

 

 

Other Financial Data:

             

Adjusted EBITDA(3) (unaudited)

  $ (25,749   $ (12,869   $ (6,377   $ 22,744      $ 25,777      $ 3,050      $ 12,123   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating cash flows

  $ 1,396      $ (3,459   $ 11,379      $ 9,534      $ 27,686      $ (13,099   $ (27,085 )(4) 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Includes stock-based compensation as follows:

 

     Years Ended July 31,      Three Months
Ended
October 31,
 
     2007      2008      2009      2010      2011      2010      2011  
            (unaudited)  
     (in thousands)  

Cost of revenues

   $ 428       $ 737       $ 780       $ 925       $ 1,384       $ 306       $ 758   

Research and development

     638         872         688         769         1,372         248         845   

Sales and marketing

     300         825         857         755         903         135         497   

General and administrative

     542         690         464         905         3,021         334         1,212   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $ 1,908       $ 3,124       $ 2,789       $ 3,354       $ 6,680       $ 1,023       $ 3,312   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(2) 

See Note 9 to our consolidated financial statements for an explanation of the calculations of our actual basic and diluted and pro forma basic and diluted net income (loss) per share attributable to common stockholders. All shares to be issued in this offering were excluded from the unaudited pro forma basic and diluted net income per share calculation.

 

(3) 

We define Adjusted EBITDA as net income (loss) plus provision for (benefit from) income taxes, other (income) expense, net, interest (income) expense, net, litigation provision, depreciation and amortization and stock-based compensation. See “—Adjusted EBITDA” for more information and for a reconciliation of Adjusted EBITDA to net income (loss), the most directly comparable financial measure calculated and presented in accordance with GAAP.

 

(4) 

Includes $10.0 million litigation settlement payment.

 

44


Table of Contents
    As of July 31,     As of
October 31,
2011
 
    2007     2008     2009     2010     2011    
          (unaudited)  
   

(in thousands)

 

Consolidated Balance Sheet Data:

           

Cash, cash equivalents and short-term investments

  $ 4,634      $ 17,699      $ 27,585      $ 37,411      $ 59,625      $ 31,171   

Working capital (deficit)

    (9,696     (11,767     (13,523     (5,382     12,541        13,461   

Total assets

    22,748        37,277        54,741        60,055        126,540        102,795   

Convertible preferred stock

    11,678        11,678        36,500        36,500        36,500        36,500   

Total stockholders’ equity (deficit)

    (41,488     (36,775     (44,648     (25,145     18,152        26,669   

Adjusted EBITDA

We believe Adjusted EBITDA is useful in evaluating our operating performance compared to that of other companies in our industry, as this metric generally eliminates the effects of certain items that may vary for different companies for reasons unrelated to overall operating performance. We believe that:

 

  Ÿ  

Adjusted EBITDA provides investors and other users of our financial information consistency and comparability with our past financial performance, facilitates period-to-period comparisons of operations and facilitates comparisons with other companies, many of which use similar non-GAAP financial measures to supplement their GAAP results; and

 

  Ÿ  

it is useful to exclude non-cash charges, such as depreciation and amortization, stock-based compensation and one-time charges such as our litigation provision from Adjusted EBITDA because the amount of such expense in any specific period may not directly correlate to the underlying performance of our business operations and these expenses can vary significantly between periods.

We use Adjusted EBITDA in conjunction with traditional GAAP measures as part of our overall assessment of our performance, including the preparation of our annual operating budget and quarterly forecasts, to evaluate the effectiveness of our business strategies and to communicate with our board of directors concerning our financial performance.

Adjusted EBITDA should not be considered as a substitute for other measures of financial performance reported in accordance with GAAP. There are limitations to using non-GAAP financial measures, including that other companies may calculate these measures differently than we do. We compensate for the inherent limitations associated with using Adjusted EBITDA through disclosure of these limitations, presentation of our financial statements in accordance with GAAP and reconciliation of Adjusted EBITDA to the most directly comparable GAAP measure, net income (loss).

The following provides a reconciliation of net income (loss) to Adjusted EBITDA:

 

    Years Ended July 31,     Three Months
Ended October 31,
 
    2007     2008     2009     2010     2011     2010     2011  
   

(unaudited)

 
    (in thousands)  

Reconciliation of Adjusted EBITDA:

             

Net income (loss)

  $ (28,453   $ (16,883   $ (10,966   $ 15,519      $ 35,558      $ 1,890      $ 4,812   

Non-GAAP adjustments:

             

Provision for (benefit from) income taxes

    84        148        398        2,199        (27,262     125        3,044   

Other (income) expense, net

    —          —          123        391        (1,269     (193     316   

Interest (income) expense, net

    (107     (443     (27     (95     (156     (37     (40

Litigation provision

    —          —          —          —          10,000        —          —     

Depreciation and amortization

    819        1,185        1,306        1,376        2,226        242        679   

Total stock-based compensation

    1,908        3,124        2,789        3,354        6,680        1,023        3,312   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ (25,749   $ (12,869   $ (6,377   $ 22,744      $ 25,777      $ 3,050      $ 12,123   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

45


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with the “Selected Consolidated Financial Data” and the consolidated financial statements and related notes that are included elsewhere in this prospectus. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” or in other parts of this prospectus. Our fiscal year end is July 31 and our fiscal quarters end on October 31, January 31, April 30 and July 31. Our fiscal years ended July 31, 2009, 2010 and 2011 are referred to herein as fiscal year 2009, fiscal year 2010 and fiscal year 2011, respectively.

Overview

We are a leading provider of core system software to the global P&C insurance industry. Our solutions serve as the transactional systems-of-record for, and enable the key functions of, a P&C insurance carrier’s business: underwriting and policy administration, claims management and billing. Since our inception, our mission has been to empower P&C insurance carriers to transform and improve their businesses by replacing their legacy core systems with our innovative modern software platform.

We derive our revenues from licensing our software applications, providing maintenance support and providing professional services to the extent requested by our customers. Our license revenues are primarily generated through annual license fees that recur during the term of our multi-year contracts. These multi-year contracts have an average term of approximately five years and are renewed on an annual or multi-year basis. In certain cases, when required by a customer, we license our software on a perpetual basis. In addition, certain of our multi-year term licenses provide the customer with the option to purchase a perpetual license at the end of the initial contract term, which we refer to as a perpetual buyout right. We generally price our licenses based on the amount of direct written premiums, or DWP, that will be managed by our solutions. We typically invoice our customers annually in advance for both term license and maintenance fees, and we invoice our perpetual license customers either in full at contract signing or on an installment basis.

Since August 2010, our license revenues from new orders and subsequent annual payments have generally been recognized when payment is due from our customers. Historically, and to a lesser extent during fiscal year 2011, our license revenues from existing orders have been recognized under three methods: under the residual method when payment is due and payable from our customers, under the percentage-of-completion method as we complete customer implementations of our software or under the zero gross margin method as we complete customer implementations of our software. Our license revenues accounted for 32%, 42%, 43% and 40% of our total revenues during fiscal years 2009, 2010 and 2011 and the three months ended October 31, 2011, respectively.

Our maintenance revenues are generally recognized annually over the committed maintenance term. Our maintenance fees are typically priced as a fixed percentage of the associated license fees and generate lower gross margins than our license revenues. Our maintenance revenues accounted for 11%, 13%, 12% and 13% of our total revenues during fiscal years 2009, 2010 and 2011 and the three months ended October 31, 2011, respectively.

We charge services fees on a time and materials basis and revenues are typically recognized upon delivery of our services. We derive our services revenues primarily from implementation services performed for our customers, revenues related to reimbursable travel expenses and training fees. Our services revenues generate lower gross margins than our license and maintenance revenues and accounted for 57%, 45%, 45% and 47% of our total revenues during fiscal years 2009, 2010 and 2011 and the three months ended October 31, 2011, respectively.

 

46


Table of Contents

We enter into multi-year renewable contracts to license our software. Regardless of contract length, we typically invoice our customers for annual amounts at the beginning of the corresponding period. Our deferred revenues consist only of amounts that have been invoiced, but not yet recognized as revenues. As a result, deferred revenues and change in deferred revenues are incomplete measures of the strength of our business and not necessarily indicative of our future performance.

We have historically experienced seasonal variations in our revenues as a result of increased customer orders in our second and fourth fiscal quarters and subsequent annual fees. We generally see increased orders in our second fiscal quarter, which is the quarter ended January 31, due to customer buying patterns. We also see increased orders in our fourth fiscal quarter due to efforts by our sales team to achieve annual incentives. As a result, a significantly higher percentage of our annual license fees are invoiced and recognized as revenues during those quarters at contract inception or in the subsequent quarter when the annual license payment is due and in subsequent years upon the anniversary of the contract date. We generally expect these seasonal trends to continue in the future, which may cause quarterly fluctuations in our results of operations and certain financial metrics.

Our quarterly growth in revenues may not match up to new orders we receive in a given quarter. This mismatch is primarily due to the following reasons:

 

  Ÿ  

for the initial year of a multi-year term license, we generally recognize revenues when payment is due and payment may not be due until a subsequent fiscal quarter;

 

  Ÿ  

we may enter into license agreements with specified terms for product upgrades or functionality, which may require us to delay revenue recognition for the initial period; and

 

  Ÿ  

we may enter into license agreements with other contractual terms that may affect the timing of revenue recognition.

For example, we received new orders for both term and perpetual licenses in the fourth fiscal quarter of 2011 that committed future product functionality that was delivered in the first fiscal quarter of 2012. As a result, our license revenues in the first fiscal quarter of 2012 were $7.2 million higher than they would have been had the functionality been delivered in the fourth fiscal quarter of 2011 and we currently expect our revenues for the second and third fiscal quarters of 2012 to be down or flat as compared to the first fiscal quarter of 2012.

We also see quarterly fluctuations in revenues related to large perpetual licenses that we enter into from time to time. These large perpetual licenses cause large one-time increases in revenues that do not recur in future quarters, which causes our quarterly revenues to fluctuate.

To extend our technology leadership position in our market, we intend to continue to focus on product innovation through research and development, aggressively pursue new customers and up-sell additional products within our existing customer base. This will require us to make continued investment in our research and development and sales and marketing functions to capitalize on opportunities for growth. We expect research and development and sales and marketing expenses to continue to increase in absolute dollars for the foreseeable future to support this strategy. Research and development expenses are also expected to increase as a percentage of revenues in future periods as we focus on expanding our technological leadership.

We face a number of risks in the execution of our strategy, including reliance on sales to a relatively small number of large customers, variances in the mix amongst our components of revenues, which could result in lower gross margin from services revenues as compared to license and maintenance revenues, and the overall impact of weakening economic conditions on the insurance industry. We believe that our focus on continued product innovation and customer wins and renewals will support the expansion of our license sales and reduce the impact from weakened economic conditions.

 

47


Table of Contents

We sell our core system software primarily through our direct sales force. Our sales cycle for new customers is typically 12 to 24 months. Product implementations, the primary driver of our services revenues, typically last 6 to 24 months and can take longer. For fiscal years 2009, 2010 and 2011 and the three months ended October 31, 2011, no single customer accounted for more than 10% of our revenues, and our ten largest customers accounted for 42%, 48%, 41% and 51% of our total revenues, respectively. We count as customers distinct buying entities, which may include multiple national or regional subsidiaries of large, global P&C insurance carriers.

We generated revenues of $84.7 million, $144.7 million, $172.5 million and $52.4 million in fiscal years 2009, 2010, 2011 and the three months ended October 31, 2011, respectively. We generate the majority of our revenues in the United States and Canada. Our revenues from outside the United States and Canada as a percentage of total revenues were 16%, 30%, 34% and 29% during fiscal years 2009, 2010 and 2011 and the three months ended October 31, 2011, respectively. We experienced our first profit on a quarterly basis in the second quarter of fiscal year 2010 and generated a net loss of $11.0 million during fiscal year 2009 and net income of $15.5 million and $35.6 million in fiscal years 2010 and 2011, respectively, including a benefit of $27.2 million related to the release of a significant portion of our tax valuation allowance during fiscal year 2011, and $4.8 million in the three months ended October 31, 2011.

Key Business Metrics

We use certain key metrics to evaluate and manage our business, including rolling four-quarter recurring revenues from term licenses and total maintenance. In addition, we present select GAAP and non-GAAP financial metrics that we use internally to manage the business and we believe are useful for investors. These metrics include Adjusted EBITDA and operating cash flow.

Four-Quarter Recurring Revenues

We measure four-quarter recurring revenues by adding the total term license revenues and total maintenance revenues recognized in the preceding four quarters ended in the stated period and excluding perpetual license revenues, revenues from perpetual buyout rights and services revenues. This metric allows us to better understand the trends in our recurring revenues because it typically reduces the variations in any particular quarter caused by seasonality, the effects of the annual invoicing of our term licenses and certain effects of contractual provisions that may accelerate or delay revenue recognition in some cases. Our four-quarter recurring revenues for each of the six periods presented were:

 

    Four Quarters Ended  
    July 31,
2010
    October 31,
2010
    January 31,
2011
    April 30,
2011
    July 31,
2011
    October 31,
2011
 
   

(unaudited)

(in thousands)

 

Term license revenues

  $ 47,933      $ 51,354      $ 53,121      $ 54,797      $ 60,541      $ 64,174   

Total maintenance revenues

    18,702        20,190        19,658        20,188        21,321        23,818   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total four-quarter recurring revenues

  $ 66,635      $ 71,544      $ 72,779      $ 74,985      $ 81,862     

$

87,992

  

 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

We define Adjusted EBITDA as net income (loss) plus provision for (benefit from) income taxes, other (income) expense, net, interest (income) expense, net, litigation provision, depreciation and amortization and stock-based compensation. We believe Adjusted EBITDA provides investors and other users of our financial information consistency and comparability with our past financial

 

48


Table of Contents

performance and facilitates period-to-period comparisons of operations. Adjusted EBITDA was $(6,377), $22,744, $25,777 and $12,123 for fiscal years 2009, 2010 and 2011 and the three months ended October 31, 2011, respectively. For a further discussion of Adjusted EBITDA and a reconciliation of net income (loss) to Adjusted EBITDA, see Footnote 3 to “Selected Consolidated Financial Data.”

Operating Cash Flows

We monitor our cash flows from operating activities, or operating cash flows, 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 and amortization and stock-based compensation expenses. Additionally, operating cash flows takes into account the impact of changes in deferred revenues, which reflects the receipt of cash payment for products before they are recognized as revenues. Our operating cash flows are significantly impacted by changes in deferred revenues, timing of bonus payments and collections of accounts receivable. They were also impacted by the payment of a litigation settlement during the three months ended October 31, 2011. As a result, our operating cash flows fluctuate significantly on a quarterly basis. Operating cash flows were $11,379, $9,534, $27,686 and $(27,085) for fiscal years 2009, 2010 and 2011 and the three months ended October 31, 2011, respectively. For a further discussion of our operating cash flows, see “—Liquidity and Capital Resources—Cash Flows from Operating Activities.”

Components of Consolidated Statements of Operations

Revenues

We derive our revenues from licensing our software applications, providing maintenance support and providing professional services, principally consisting of implementation and training services. As discussed further in “—Critical Accounting Policies and Estimates—Revenue Recognition”, we recognize revenues when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable and collection is probable. Our sales arrangements require us to deliver multiple products or services (multiple-elements). Our customers license our software through master software licensing agreements and submit orders for specific software applications and related maintenance within a territory and/or line of business. Many of our customers also enter into services agreements and submit statements of work defining the scope and deliverables of each services engagement.

We apply software revenue recognition rules and allocate total revenues among elements based on the VSOE of fair value of each element. Beginning in fiscal year 2008, our license arrangements generally included stated annual renewal rates for maintenance, thereby establishing VSOE of fair value for maintenance services. Additionally, beginning in fiscal year 2008, we determined that implementation services generally were not essential to the functionality of ClaimCenter software primarily due to the availability of other third parties or system integrators who could implement ClaimCenter for our customers. Beginning in fiscal year 2011, we determined that implementation services were not essential to the functionality of PolicyCenter and BillingCenter software primarily due to the availability of other third parties or system integrators who could implement PolicyCenter or BillingCenter for our customers. For multiple-element arrangements originating prior to our establishment of VSOE and determination that our services are non-essential, our accounting treatment requires us to defer significant portions of revenues until our essential services are completed pursuant to the zero gross margin method. Under the zero gross margin method, we only recognize revenues to the extent of project costs during the project implementation and, upon completion of the project, all remaining revenues from the arrangement are recognized on a ratable basis over the remaining committed maintenance period. For multiple-element arrangements originating after we had established VSOE for maintenance and services, but prior to our determination

 

49


Table of Contents

that our services are non-essential, our accounting treatment requires us to recognize license and services on a percentage-of-completion basis over the implementation period. The establishment of VSOE of fair value and non-essential services over the last three years generally allows us to recognize license revenues as payments become due and payable, thereby deferring less revenues initially and recognizing revenues more consistently over the term of a contract.

Our total revenues are comprised of the following:

 

  Ÿ  

License revenues.    We license our software applications, PolicyCenter, ClaimCenter and BillingCenter, separately or combined as InsuranceSuite, to customers on either a multi-year renewable term basis with recurring annual billing periods or, to a limited extent, a perpetual basis when required by our customers. A portion of our term-based licenses contain a perpetual buyout right at the end of the initial contract term. Our pricing arrangements are based on the amount of DWP that will be managed by our solutions and may include beneficial volume-based pricing for customers managing a higher amount of DWP with our solutions. We expect that our annual license revenues will continue to grow in absolute dollars and as a percentage of total revenues on an annual basis. However, we expect volatility across quarters for our license revenues as a percentage of total revenues due to the timing of annual billings, timing of perpetual license sales and the exercise of perpetual buyout rights in term licenses.

 

  Ÿ  

Maintenance revenues.    We offer maintenance under renewable, fee-based contracts that include unspecified software updates and upgrades released when and if available, software patches and fixes and email and phone support. Maintenance contracts usually have a term of one to five years. We expect that our maintenance revenues will continue to grow along with the increase in the size and penetration of our customer base.

 

  Ÿ  

Services revenues.    Services revenues are primarily comprised of revenues from implementation, reimbursable travel expenses and training services. We bill for our services on a time and materials basis. We expect our services revenues to grow in absolute dollars but decrease as a percentage of total revenues as we continue to expand our network of third-party system integrators with whom our customers can contract for services related to our products.

Cost of Revenues and Gross Profit

Our cost of revenues and gross profit are variable and depend on the type of revenues earned in each period. Our cost of license revenues is primarily comprised of royalty fees paid to third parties. Our cost of maintenance revenues is comprised of personnel-related expenses for our technical support team, including stock-based compensation for our support engineers and allocated employee benefits and facility costs. Our cost of services revenues is primarily comprised of personnel-related expenses for our professional service employees and contractors, including stock-based compensation and allocated employee benefits and travel-related costs. We expect our cost of revenues to increase in absolute dollars as we continue to hire personnel to provide technical support and consulting services to our growing customer base.

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-related expenses for our employees, including stock-based compensation, and, to a lesser extent, professional services costs, rent and facilities costs. Professional services costs consist primarily of fees for outside legal, accounting and tax services. We expect our operating expenses to continue to grow in absolute dollars in the near term due to projected increases in facilities costs, although these expenses are likely to fluctuate on a quarterly basis as a percentage of revenues.

 

50


Table of Contents

Research and Development

Our research and development expenses consist primarily of costs incurred for personnel-related expenses for our technical staff as well as professional services costs, facilities and engineering costs. We expense all of our software development costs as incurred. Our research and development efforts are focused primarily on enhancing and extending the functionality of our products. Because our products are complex and require extensive testing, development cycles can be lengthy. We expect our research and development expenses to continue to increase in absolute dollars for the foreseeable future as we continue to dedicate substantial internal resources to develop, improve and expand the functionality of our solutions.

Sales and Marketing

Our sales and marketing expenses consist primarily of costs incurred for personnel-related expenses for our sales and marketing employees as well as commission payments to our sales employees, facilities costs, sales travel expenses and professional services for marketing costs. We expect our sales and marketing expenses to continue to increase in absolute dollars for the foreseeable future as we increase the number of our sales and marketing employees to support the growth in our business and as we incur additional external marketing communication costs.

General and Administrative

Our general and administrative expenses consist primarily of personnel-related expenses as well as professional services and facilities costs related to our executive, finance, human resources, information technology and legal functions. We also expect to incur significant additional stock-based compensation expense in future periods. Following the completion of this offering, we expect to incur significant additional accounting and legal costs related to compliance with rules and regulations enacted by the SEC, including the additional costs of achieving and maintaining compliance with the Sarbanes-Oxley Act, as well as additional insurance, investor relations and other costs associated with being a public company.

Other Income (Expense)

Interest Income (Expense), Net

Interest income represents interest earned on our cash, cash equivalents and short-term investments. We expect income will vary each reporting period depending on our average investment balances during the period and market interest rates.

Interest expense consists of interest accrued or paid on letters of credit held by certain of our customers. Interest expense was not significant in our prior periods; however, we recently recognized interest expense related to a letter of credit issued during fiscal year 2011. Therefore, we expect interest expense to increase in the near term.

Other Income (Expense), Net

Other income (expense), net consists primarily of fluctuations in foreign exchange rates on receivables and payables denominated in currencies other than the U.S. dollar.

 

51


Table of Contents

Provision for Income Taxes

We are subject to taxes in the United States as well as other tax jurisdictions or 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 current U.S. income tax.

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We record a valuation allowance to reduce deferred tax assets to an amount whose realization is more likely than not.

We recognize tax benefits from uncertain tax positions when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits of the position. We record interest and penalties related to unrecognized tax benefits in our provision for income taxes.

As of July 31, 2010, we recorded a full valuation allowance on our deferred tax assets. During fiscal year 2011, based on an accumulation of positive evidence such as cumulative profits over the prior three years and projections for future growth, management determined that it is more likely than not that the benefits of our deferred tax assets will be realized, and a significant portion of the tax valuation allowance was removed.

 

52


Table of Contents

Results of Operations

The following tables set forth our results of operations for the periods presented and as a percentage of our total revenues for those periods. The period-to-period comparison of financial results is not necessarily indicative of financial results to be achieved in future periods.

 

     Years Ended July 31,     Three Months
Ended October 31,
 
     2009     2010     2011     2010      2011  
                       (unaudited)  
     (in thousands)  

Revenues:

           

License

   $ 26,996      $ 60,315      $ 73,883        $10,153       $ 20,815   

Maintenance

     9,572        18,702        21,321        4,610         7,106   

Services

     48,177        65,674        77,268        19,907         24,459   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total revenues

     84,745        144,691        172,472        34,670         52,380   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Cost of revenues:

           

License

     349        267        1,264        201         299   

Maintenance

     2,628        3,685        4,063        886         1,266   

Services

     38,679        51,519        63,017        14,105         17,925   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total cost of revenues

     41,656        55,471        68,344        15,192         19,490   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Gross profit:

           

License

     26,647        60,048        72,619        9,952         20,516   

Maintenance

     6,944        15,017        17,258        3,724         5,840   

Services

     9,498        14,155        14,251        5,802         6,534   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total gross profit

     43,089        89,220        104,128        19,478         32,890   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Operating expenses:

           

Research and development

     22,356        28,273        34,773        7,519         10,959   

Sales and marketing

     21,559        26,741        28,950        5,546         7,361   

General and administrative

     9,646        16,192        23,534        4,628         6,438   

Litigation provision

     —          —          10,000        —           —     
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total operating expenses

     53,561        71,206        97,257        17,693         24,758   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Income (loss) from operations

     (10,472     18,014        6,871        1,785         8,132   

Interest income, net

     27        95        156        37         40   

Other income (expense), net

     (123     (391     1,269        193         (316
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Income (loss) before provision for income taxes

     (10,568     17,718        8,296        2,015         7,856   

Provision for (benefit from) income taxes

     398        2,199        (27,262     125         3,044   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Net income (loss)

   $ (10,966   $ 15,519      $ 35,558        $1,890       $ 4,812   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

53


Table of Contents
     Years Ended July 31,          Three Months
Ended October 31,
 
         2009             2010             2011                  2010             2011      
                            (unaudited)  
     (percent of total revenues)  

Revenues:

             

License

     32     42     43        29     40

Maintenance

     11        13        12           13        13   

Services

     57        45        45           58        47   
  

 

 

   

 

 

   

 

 

      

 

 

   

 

 

 

Total revenues

     100        100        100           100        100   
  

 

 

   

 

 

   

 

 

      

 

 

   

 

 

 

Total cost of revenues

     49        38        40           44        37   
  

 

 

   

 

 

   

 

 

      

 

 

   

 

 

 

Total gross profit

     51        62        60           56        63   
  

 

 

   

 

 

   

 

 

      

 

 

   

 

 

 

Operating expenses:

             

Research and development

     26        20        20           22        21   

Sales and marketing

     25        18        17           16        14   

General and administrative

     12        11        13           13        12   

Litigation provision

     —          —          6           —          —     
  

 

 

   

 

 

   

 

 

      

 

 

   

 

 

 

Total operating expenses

     63        49        56           51        47   
  

 

 

   

 

 

   

 

 

      

 

 

   

 

 

 

Income (loss) from operations

     (12     12        4           5        16   

Interest income, net

     —          —          —             —          —     

Other income (expense), net

     —          —          1           1        (1
  

 

 

   

 

 

   

 

 

      

 

 

   

 

 

 

Income (loss) before provision for income taxes

     (12     12        5           6        15   

Provision for (benefit from) income taxes

     1        1        (16        —          6   
  

 

 

   

 

 

   

 

 

      

 

 

   

 

 

 

Net income (loss)

     (13 )%      11     21        6     9
  

 

 

   

 

 

   

 

 

      

 

 

   

 

 

 

Comparison of the Three Months Ended October 31, 2010 and 2011

Revenues

 

     Three Months Ended October 31,        
     2010     2011     Change  
     Amount      % of Total
revenues
    Amount      % of Total
revenues
    ($)      (%)  
     (unaudited)  
     (in thousands, except percentages)  

Revenues:

               

License

   $ 10,153         29   $ 20,815         40   $ 10,662         105

Maintenance

     4,610         13        7,106         13        2,496         54   

Services

     19,907         58        24,459         47        4,552         23   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

Total revenues

   $ 34,670         100   $ 52,380         100   $ 17,710         51
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

54


Table of Contents

License Revenues

The $10.7 million increase in license revenues was primarily driven by continued adoption of our ClaimCenter software and increased sales and marketing efforts in the United States, Canada and Australia.

 

     Three Months Ended October 31,               
     2010     2011     Change  
     Amount      % of
License
revenues
    Amount      % of
License
revenues
    ($)      (%)  
     (unaudited)  
     (in thousands, except percentages)  

License revenues:

               

Term

   $ 8,726         86   $ 12,358         59   $ 3,632         42

Perpetual

     1,427         14        8,457         41        7,030         493   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

Total license revenues

   $ 10,153         100   $ 20,815         100   $ 10,662         105
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

The $3.6 million increase in term license revenues was primarily driven by $1.5 million of revenues recognized from new orders during the three months ended October 31, 2011 and $2.4 million of revenues recognized upon attainment of the required revenue recognition criteria related to prior year orders during the three months ended October 31, 2011, which included $1.8 million of revenues recognized upon delivery of specified upgrades and $0.6 million of revenues recognized when VSOE of fair value of maintenance was established for an arrangement with a customer.

The $7.0 million increase in perpetual license revenues was primarily driven by $6.9 million of revenues recognized upon attainment of the required revenue recognition criteria related to prior year orders during the three months ended October 31, 2011 and $0.7 million of revenues recognized from new orders during the three months ended October 31, 2011. These increases were partially offset by a decrease of $0.6 million of revenues recognized in the three months ended October 31, 2010 for existing orders entered into in prior fiscal years.

Our perpetual license revenues are not consistent from quarter to quarter. We do not expect perpetual license revenues to be as high in the quarter ended January 31, 2012 as they were in the quarter ended October 31, 2011 so we may not experience sequential license revenues growth in the upcoming quarter.

Maintenance Revenues

The $2.5 million increase in maintenance revenues was primarily driven by $1.6 million of revenues recognized from new orders during the three months ended October 31, 2011 and $0.9 million of revenues recognized upon attainment of the required revenue recognition criteria related to prior fiscal year orders during the three months ended October 31, 2011.

Services Revenues

The $4.6 million increase in service revenues was primarily driven by an additional $4.5 million revenues related to implementation of our software. Included in this increase is $1.5 million of revenues recognized from project implementations pursuant to the zero gross margin method during three months ended October 31, 2011 and $1.1 million of revenues recognized when VSOE of fair value of maintenance was established for one customer during three months ended October 31, 2011.

 

55


Table of Contents

Deferred Revenues

 

     As of               
     July 31,
2011
     October 31,
2011
     Change  
     Amount      Amount      ($)     (%)  
     (unaudited)  
     (in thousands, except percentages)  

Deferred revenues:

          

Deferred license revenues

   $ 41,248       $ 31,838       $ (9,410     (23 )% 

Deferred maintenance revenues

     18,719         16,566         (2,153     (12

Deferred services revenues

     13,828         11,229         (2,599     (19
  

 

 

    

 

 

    

 

 

   

Total deferred revenues

   $ 73,795       $ 59,633       $ (14,162     (19 )% 
  

 

 

    

 

 

    

 

 

   

The $9.4 million decrease in deferred license revenues was primarily driven by $10.3 million of revenues recognized from existing orders entered into in prior fiscal years where we attained the required revenue recognition criteria during the three months ended October 31, 2011, partially offset by $0.8 million of revenues deferred for billings of new orders during the three months ended October 31, 2011.

The $2.2 million decrease in deferred maintenance revenues was primarily driven by a $1.4 million decrease resulting from the timing of annual maintenance billings for new and existing orders during the three months ended October 31, 2011 and $0.9 million of revenues recognized from existing orders entered into in prior fiscal years upon attainment of the required revenue recognition criteria during the three months ended October 31, 2011.

The $2.6 million decrease in deferred services revenues was primarily driven by $1.5 million of revenues recognized pursuant to the zero gross margin method during the three months ended October 31, 2011 and $1.1 million of revenues recognized when VSOE of fair value of maintenance was established for one customer during the three months ended October 31, 2011.

Cost of Revenues and Gross Profit

 

     Three Months Ended
October 31,
               
     2010      2011      Change  
     Amount      Amount      ($)      (%)  
     (unaudited)  
     (in thousands, except percentages)  

Cost of revenues:

           

License

   $ 201       $ 299       $ 98         49

Maintenance

     886         1,266         380         43   

Services

     14,105         17,925         3,820         27   
  

 

 

    

 

 

    

 

 

    

Total cost of revenues

   $ 15,192       $ 19,490       $ 4,298         28
  

 

 

    

 

 

    

 

 

    

Includes stock-based compensation of:

           

Cost of revenues

   $ 306       $ 758       $ 452      
  

 

 

    

 

 

    

 

 

    

The $4.3 million increase in cost of revenues was primarily due to an increase of $2.3 million in personnel-related expenses as a result of 40 additional employees mainly to provide implementation services to our customers, a $1.5 million increase in billable and non-billable travel related expenses, administrative expenses and professional services and a $0.5 million increase in stock-based compensation.

 

56


Table of Contents
     Three Months Ended October 31,               
     2010     2011     Change  
     Amount      Margin
%
    Amount      Margin
%
    ($)      (%)  
     (unaudited)  
     (in thousands, except percentages)  

Gross profit:

               

License

   $ 9,952         98   $ 20,516         99   $ 10,564         106

Maintenance

     3,724         81        5,840         82        2,116         57   

Services

     5,802         29        6,534         27        732         13   
  

 

 

      

 

 

      

 

 

    

Total gross profit

   $ 19,478         56   $ 32,890         63   $ 13,412         69
  

 

 

      

 

 

      

 

 

    

Gross profit increased by $13.4 million primarily reflecting increased license revenues during the three months ended October 31, 2011. Gross margin improved from 56% to 63% for the three months ended October 31, 2010 and 2011, respectively, primarily due to the increase in higher gross margin license revenue.

Operating Expenses

 

     Three Months Ended October 31,               
     2010     2011     Change  
     Amount      % of Total
revenues
    Amount      % of Total
revenues
    ($)      (%)  
     (unaudited)  
     (in thousands, except percentages)  

Operating expenses:

               

Research and development

   $ 7,519         22   $ 10,959         21   $ 3,440         46

Sales and marketing

     5,546         16        7,361         14        1,815         33   

General and administrative

     4,628         13        6,438         12        1,810         39   

Litigation provision

                                          
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

Total operating expenses

   $ 17,693         51   $ 24,758         47   $ 7,065         40
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

Includes stock-based compensation of:

               

Research and development

   $ 248         $ 845         $ 597      

Sales and marketing

     135           497           362      

General and administrative

     334           1,212           878      
  

 

 

      

 

 

      

 

 

    

Total

   $ 717         $ 2,554         $ 1,837      
  

 

 

      

 

 

      

 

 

    

The $7.1 million increase in operating expenses was primarily driven by increased personnel-related and operational expenses as a result of 70 additional employees in these functional areas, higher stock-based compensation, professional services costs including accounting and legal services, travel-related costs and marketing programs. We expect all of our operating expense line items to increase in absolute dollars in future periods to support our future growth strategy.

Research and Development

The $3.4 million increase in research and development expenses was primarily due to an increase of $2.2 million in personnel-related expenses as a result of 39 additional employees, a $0.6 million increase in stock-based compensation and a $0.6 million increase in administrative and other professional services expenses.

 

57


Table of Contents

Sales and Marketing

The $1.8 million increase in sales and marketing expenses was primarily due to an increase of $0.8 million in employee travel costs, marketing programs and other expenses, an increase of $0.6 million in personnel-related expenses as a result of 14 additional employees and an increase of $0.4 million in stock-based compensation.

General and Administrative

The $1.8 million increase in general and administrative expenses was primarily due to a $0.9 million increase in stock-based compensation, a $0.5 million increase in personnel-related expenses as a result of 17 additional employees and a $0.4 million increase in professional services costs including accounting and legal services. These higher costs primarily supported the growth of our business and preparation for our initial public offering process.

Other Income (Expense)

 

     Three Months
Ended October 31,
             
     2010      2011     Change  
     Amount      Amount     ($)     (%)  
     (unaudited)  
     (in thousands, except percentages)  

Interest income (expense), net

   $ 37       $ 40      $ 3        *   

Other income (expense), net

     193         (316     (509     *   
  

 

 

    

 

 

   

 

 

   

Total

   $ 230       $ (276   $ (506     *   
  

 

 

    

 

 

   

 

 

   

 

* Not meaningful

Interest Income, Net

Interest income and interest expense remained relatively flat during the three months ended October 31, 2011 and consistent with the prior year’s period.

Other Income (Expense), Net

Other expense increased by $0.5 million primarily due to higher currency exchange losses resulting from the U.S. dollar strengthening against the Canadian dollar, Australia dollar and Euro during the three months ended October 31, 2011 compared to the prior year’s period.

Provision for (Benefit From) Income Taxes

We recognized an income tax provision of $3.0 million for the three months ended October 31, 2011 compared to an income tax provision of $0.1 million for the three months ended October 31, 2010. The change was primarily due to no valuation allowance as of October 31, 2011 compared to a full valuation allowance as of October 31, 2010. In addition, the increase in profitability resulted in additional foreign and U.S. federal and state taxes during the three months ended October 31, 2011.

 

58


Table of Contents

Comparison of the Years Ended July 31, 2010 and 2011

Revenues

 

     Years Ended July 31,               
     2010     2011     Change  
     Amount      % of Total
revenues
    Amount      % of Total
revenues
    ($)          (%)      
    

(in thousands, except percentages)

 

Revenues:

               

License

   $ 60,315         42   $ 73,883         43   $ 13,568         22

Maintenance

     18,702         13        21,321         12        2,619         14   

Services

     65,674         45        77,268         45        11,594         18   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

Total revenues

   $ 144,691         100   $ 172,472         100   $ 27,781         19
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

License Revenues

The $13.6 million increase in license revenues was primarily driven by continued adoption of our ClaimCenter software and increased sales and marketing efforts in the United States and Canada.

 

     Years Ended July 31,               
     2010     2011     Change  
     Amount      % of
License
revenues
    Amount      % of
License
revenues
    ($)          (%)      
               
    

(in thousands, except percentages)

 

License revenues:

               

Term

   $ 47,933         79   $ 60,541         82   $ 12,608         26

Perpetual

     12,382         21        13,342         18        960         8   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

Total license revenues

   $ 60,315         100   $ 73,883         100   $ 13,568         22
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

The $12.6 million increase in term license revenues was driven by $14.9 million of revenues recognized during fiscal year 2011 from new orders and $1.5 million due to the attainment of revenue recognition criteria related to prior years orders. The $1.5 million change due to attainment of revenue recognition criteria included $0.4 million recognized upon completion of project implementations and $0.5 million recognized upon release of a contractual contingency. The increase was partially offset by $3.8 million recognized in fiscal year 2010 upon delivery of product functionality for orders entered into prior to fiscal year 2010.

The $1.0 million increase in perpetual license revenues was primarily driven by $9.5 million of revenues recognized during fiscal year 2011 from new orders, partially offset by $8.7 million recognized in fiscal year 2010 due to attainment of revenue recognition criteria related to orders entered into prior to fiscal year 2010.

Maintenance Revenues

The $2.6 million increase in maintenance revenues was primarily driven by $4.1 million of revenues recognized during fiscal year 2011 associated with new orders, partially offset by $1.8 million recognized upon completion of project implementations during fiscal year 2010 pursuant to the zero gross margin method.

 

59


Table of Contents

Services Revenues

The $11.6 million increase in services revenues was primarily driven by an additional $9.7 million related to implementation of our software, an additional $1.5 million related to reimbursable travel expenses that were recognized as revenues and an additional $0.4 million related to training revenues.

Deferred Revenues

 

     As of                
     July 31,
2010
     July 31,
2011
     Change  
     Amount      Amount      ($)          (%)       
     (in thousands, except percentages)  

Deferred revenues:

           

Deferred license revenues

   $ 33,968       $ 41,248       $ 7,280         21

Deferred maintenance revenues

     13,629         18,719         5,090         37   

Deferred services revenues

     12,552         13,828         1,276         10   
  

 

 

    

 

 

    

 

 

    

Total deferred revenues

   $ 60,149       $ 73,795       $ 13,646         23
  

 

 

    

 

 

    

 

 

    

The $7.3 million increase in deferred license revenues was due to $15.6 million of new orders during fiscal year 2011 and $2.5 million of additional billings related to existing orders in prior fiscal years where revenue recognition criteria was not met in fiscal year 2011. These increases were partially offset by $10.8 million of revenues recognized from existing orders entered into during a prior fiscal year where we attained the required revenue recognition criteria during fiscal year 2011.

The $5.1 million increase in deferred maintenance revenues was primarily due to $5.8 million of revenues deferred for billing of new orders during fiscal year 2011, partially offset by $0.7 million of revenues recognized upon attainment of the required revenue recognition criteria during fiscal year 2011.

The increase in deferred services revenues of $1.3 million was due to $5.6 million of services revenues that were deferred for ongoing project implementations as of July 31, 2011 pursuant to the zero gross margin method and those deals where we did not attain the required revenue recognition criteria during fiscal year 2011, offset by $4.3 million of deferred services revenues recognized pursuant to the zero gross margin method when we completed project implementations during fiscal year 2011.

Cost of Revenues and Gross Profit

 

     Years Ended July 31,      Change  
     2010      2011     
     Amount      Amount      ($)          (%)      
     (in thousands, except percentages)  

Cost of revenues:

           

License

   $ 267       $ 1,264       $ 997         373

Maintenance

     3,685         4,063         378         10   

Services

     51,519         63,017         11,498         22   
  

 

 

    

 

 

    

 

 

    

Total cost of revenues

   $ 55,471       $ 68,344       $ 12,873         23
  

 

 

    

 

 

    

 

 

    

Includes stock-based compensation of:

           

Cost of revenues

   $ 925       $ 1,384       $ 459      
  

 

 

    

 

 

    

 

 

    

 

60


Table of Contents

The $12.9 million increase in cost of revenues was primarily the result of an additional $9.6 million of personnel-related expenses due to an increase in our headcount to provide implementation services to our customers, a $2.2 million increase in travel expenses related to billable projects, a $1.4 million increase in bonus expense, a $0.7 million amortization expense related to the acquisition of certain patents during the fourth quarter of fiscal year 2011 and $0.5 million in stock-based compensation. These increases were partially offset by a $0.8 million decrease in third-party contractor costs and a $0.7 million compensation cost savings from a holiday shut down in December 2010.

 

     Years Ended July 31,     Change  
     2010     2011    
     Amount      Margin %     Amount      Margin %           ($)                (%)      
     (in thousands, except percentages)  

Gross profit:

               

License

   $ 60,048         100   $ 72,619         98   $ 12,571         21

Maintenance

     15,017         80        17,258         81        2,241         15   

Services

     14,155         22        14,251         18        96         1   
  

 

 

      

 

 

      

 

 

    

Total gross profit

   $ 89,220         62   $ 104,128         60   $ 14,908         17
  

 

 

      

 

 

      

 

 

    

Gross profit increased by $14.9 million reflecting the general growth and profitability of our business during fiscal year 2011, especially in license revenues, while gross margin declined slightly from 62% to 60% for fiscal years 2010 and 2011, respectively, due to increases in services costs described above.

Operating Expenses

 

     Years Ended July 31,         
     2010   2011   Change
     Amount    % of Total
revenues
  Amount    % of Total
revenues
        ($)              (%)    
     (in thousands, except percentages)

Operating expenses:

         

Research and development

     $ 28,273          20 %     $ 34,773          20 %     $ 6,500          23 %

Sales and marketing

       26,741          18         28,950          17         2,209          8  

General and administrative

       16,192          11         23,534          13         7,342          45  

Litigation provision

       —            —           10,000          6         10,000          *  
    

 

 

      

 

 

     

 

 

      

 

 

     

 

 

      

Total operating expenses

     $ 71,206          49 %     $ 97,257          56 %     $ 26,051          37 %
    

 

 

      

 

 

     

 

 

      

 

 

     

 

 

      

Includes stock-based compensation of:

                           

Research and development

     $ 769            $ 1,372            $ 603       

Sales and marketing

       755              903              148       

General and administrative

       905              3,021              2,116       
    

 

 

          

 

 

          

 

 

      

Total

     $ 2,429            $ 5,296            $ 2,867