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Filed Pursuant to Rule 424(b)(4)
Registration No. 333-240050

 

Prospectus

15,000,000 Shares

LOGO

Duck Creek Technologies, Inc.

Common Stock

 

 

This is an initial public offering of shares of common stock of Duck Creek Technologies, Inc. We are offering 15 million shares of our common stock. The initial public offering price is $27.00 per share. Currently, no public market exists for our common stock.

We intend to use (i) $43.1 million of the net proceeds that we receive from this offering to redeem all of the outstanding limited partnership units (“LP Units”) of Disco Topco Holdings (Cayman), L.P. (the “Operating Partnership”) held by certain of the Existing Holders (as defined below) immediately prior to the consummation of this offering, which includes $43.1 million paid to Accenture (as defined below), after giving effect to the contributions that are part of the Reorganization Transactions (as defined below), (ii) $64.7 million of the net proceeds that we receive from this offering to repurchase from Apax (as defined below) a portion of the shares of common stock of the Company that will be received by Apax in the Reorg Merger (as defined below) and (iii) $6.3 million of net proceeds that we receive from this offering to cash settle outstanding equity awards of certain international employees. We intend to use the remaining net proceeds from this offering for general corporate purposes, including acquisitions and other strategic transactions and to repay any amounts outstanding under our revolving credit facility (but not a permanent reduction of any commitments thereunder).

We have granted the underwriters an option for a period of 30 days after the date of this prospectus to purchase up to an additional 2,250,000 shares of common stock from us at the initial public offering price less the underwriting discounts and commissions.

One or more entities affiliated with, advised by or that serve as investment adviser to certain of our existing investors, (i) Dragoneer Investment Group, LLC (“Dragoneer”), (ii) Neuberger Berman Investment Advisers LLC and (iii) Insight Venture Management, LLC (“Insight”), have indicated non-binding interest in purchasing up to $50 million, $25 million and $25 million, respectively, in shares of our common stock being offered in this offering at the initial public offering price. Because none of these indications of interest are an agreement or commitment by such entities to purchase shares, one or more of these entities may ultimately choose to purchase more, less or no shares in this offering. The underwriters will receive the same discount from any of our shares of common stock purchased by one or more funds affiliated with Dragoneer, Neuberger Berman Investment Advisers LLC and/or Insight as they will from any other shares of common stock sold to the public in this offering.

Following this offering, we will have one class of authorized common stock. Holders of our common stock will be entitled to one vote per share on all matters to be voted on by stockholders. Upon the completion of this offering, investors purchasing common stock in this offering will own approximately 11.7% of our common stock (or approximately 13.2% if the underwriters exercise their option to purchase additional shares of common stock in full), funds advised by Apax Partners L.P., a global private equity firm (collectively, with its affiliates, “Apax”), will own approximately 33.7% of our common stock (or approximately 33.1% if the underwriters exercise their option to purchase additional shares of common stock in full) and Accenture will own approximately 22.5% of our common stock (or approximately 22.1% if the underwriters exercise their option to purchase additional shares of common stock in full). After the completion of this offering, pursuant to the Stockholders’ Agreement (as defined below), Apax and Accenture will control a majority of the voting power of shares eligible to vote in the election of our directors. As a result, we will be a “controlled company” within the meaning of the corporate governance standards of the NASDAQ Global Select Stock Market (“NASDAQ”). See “Management—Controlled Company Exemption” and “Certain Relationships and Related Party Transaction—Stockholders’ Agreement.”

Our common stock has been approved for listing on NASDAQ under the symbol “DCT.”

We are an “emerging growth company” as that term is defined in the Jumpstart Our Business Startups Act of 2012 and, as such, will be subject to certain reduced public company reporting requirements. See “Prospectus Summary—Implications of Being an Emerging Growth Company.”

Investing in our common stock involves risks. See “Risk Factors” beginning on page 23 to read about certain factors you should consider before buying our common stock.

Neither the Securities and Exchange Commission (the “SEC”) nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

 

     Per
Share
     Total  

Initial public offering price

   $ 27.0000      $ 405,000,000.00  

Underwriting discounts and commissions(1)

   $ 1.6875      $ 25,312,500.00  

Proceeds, before expenses, to us

   $ 25.3125      $ 379,687,500.00  

 

(1)

See “Underwriting” for a description of the compensation payable to the underwriters.

The underwriters expect to deliver the shares of common stock against payment on or about August 18, 2020.

 

 

(Lead bookrunners listed in alphabetical order)

 

Goldman Sachs & Co. LLC   J.P. Morgan

BofA Securities

 

Barclays   RBC Capital Markets

 

JMP Securities   Needham & Company   Stifel   William Blair

 

D.A. Davidson & Co   Raymond James   Loop Capital Markets

 

 

Prospectus dated August 13, 2020


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LOGO

The leading SaaS platform for the property & casualty insurance industry


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TABLE OF CONTENTS

 

Prospectus Summary

     1  

Risk Factors

     23  

Special Note Regarding Forward-Looking Statements

     57  

Organizational Structure

     59  

Use of Proceeds

     62  

Dividend Policy

     63  

Capitalization

     64  

Dilution

     66  

Unaudited Pro Forma Consolidated Financial Information

     67  

Selected Consolidated Financial Data

     75  

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

     76  

Letter from Michael Jackowski, Chief Executive Officer

     102  

Business

     104  

Management

     121  

Executive Compensation

     128  

Certain Relationships and Related Party Transactions

     138  

Principal Stockholders

     143  

Description of Capital Stock

     146  

Shares Eligible for Future Sale

     151  

U.S. Federal Income Tax Considerations for Non-U.S. Holders

     153  

Underwriting

     156  

Legal Matters

     163  

Experts

     163  

Where You Can Find Additional Information

     164  

Index to Consolidated Financial Statements

     F-1  

Through and including September 7, 2020 (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.

You should rely only on the information contained in this prospectus, any amendment or supplement to this prospectus and any free writing prospectus prepared by us or on our behalf that we have referred you to. We have not, and the underwriters have not, authorized anyone to provide you with different or additional information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have authorized for use with respect to this offering. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you or any representation that others may make to you. We are not making an offer of these securities in any state, country or other jurisdiction where the offer is not permitted. You should not assume that the information in this prospectus or any free writing prospectus is accurate as of any date other than the date of the applicable document regardless of its time of delivery or the time of any sales of our common stock. Our business, financial condition, results of operations or cash flows may have changed since the date of the applicable document.

 

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PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus and does not contain all the information you should consider before making an investment decision. You should read the entire prospectus carefully, including the sections entitled “Risk Factors,” “Special Note Regarding Forward-Looking Statements,” “Unaudited Pro Forma Consolidated Financial Information,” “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the accompanying notes included elsewhere in this prospectus, before making an investment decision. Unless otherwise indicated or the context otherwise requires, all references in this prospectus to “we,” “us,” “our,” the “Company,” “Duck Creek” and similar terms refer to Duck Creek Technologies, Inc. and its consolidated subsidiaries as a combined entity immediately following the Reorganization Transactions. See “—About this Prospectus—Basis of Presentation” for additional terms and the basis for certain information used herein. Unless otherwise noted, any reference to a year preceded by the word “fiscal” refers to the fiscal year ended August 31 of that year.

Our Mission

We empower property and casualty insurance carriers to transform their information technology, business practices, insurance products, and customer experiences, making their organizations stronger and their customers safer and more satisfied. The SaaS solutions we provide are helping to modernize one of the most important industries in the world and, ultimately, revolutionizing insurance for the greater good.

Company Overview

We are the leading Software-as-a-Service (“SaaS”) provider of core systems for the P&C insurance industry. We have achieved our leadership position by combining over twenty years of deep domain expertise with the differentiated SaaS capabilities and low-code configurability of our technology platform. We believe we are the first company to provide carriers with an end-to-end suite of enterprise-scale core system software that is purpose-built as a SaaS solution. Our product portfolio is built on our modern technology foundation, the Duck Creek Platform, and works cohesively to improve the operational efficiency of carriers’ core processes (policy administration, claims management and billing) as well as other critical functions. The Duck Creek Platform enables our customers to be agile and rapidly capitalize on market opportunities, while reducing their total cost of technology ownership.

The core business functions of carriers are complex and data intensive, requiring large ongoing investments in domain specific technology. Heightened end-user expectations, increased competition, and new and evolving risks pose new challenges for carriers, creating the need for software that fosters agility, innovation and speed to market. However, a large portion of the P&C insurance market continues to rely on legacy technology systems that are costly and inefficient to maintain, difficult to upgrade, and lacking in functional flexibility. In recent years, some carriers have turned to newer alternatives to legacy systems. These systems have been designed for on-premise environments and lack the inherent benefits of purpose-built SaaS solutions, perpetuating the limitations, inflexibility and cost of legacy systems. By contrast, our SaaS solutions, offered through Duck Creek OnDemand, accelerate carriers’ agility and speed to market by enabling rapid, low-code product development, and protecting carriers’ unique content configurations and integrations while providing upgrades and updates via continuous delivery. We have developed a substantial SaaS customer base and believe that we have established a meaningful first-mover advantage by demonstrating the superiority of SaaS solutions for core systems in the P&C insurance industry. We began offering SaaS solutions for core systems in the P&C insurance industry in 2013 and signed our first customer in 2014.

Our deep understanding of the P&C insurance industry has enabled us to develop a single, unified suite of insurance software products that is tailored to address the key challenges faced by carriers. Our solutions



 

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promote carriers’ nimbleness by enabling rapid integration and streamlining the ability to capture, access and utilize data more effectively. The Duck Creek Suite includes several products that support the P&C insurance process lifecycle, such as:

 

   

Duck Creek Policy: enables carriers to develop and launch new insurance products and manage all aspects of policy administration, from product definition to quoting, binding and servicing

 

   

Duck Creek Billing: supports fundamental payment and invoicing capabilities (such as billing and collections, commission processing, disbursement management and general ledger capabilities) for all insurance lines and bill types

 

   

Duck Creek Claims: supports the entire claims lifecycle from first notice of loss (“FNOL”) through investigation, payments, negotiations, reporting and closure

 

   

In addition, we offer other innovative solutions, which provide additional features and functionalities

Our customers purchase and deploy Duck Creek OnDemand, our SaaS solution, either individually or as a suite. Historically, we have also sold our products through perpetual and term license arrangements, substantially all of which include maintenance and support arrangements. We offer professional services, primarily related to implementation of our products, in connection with both our SaaS solutions and perpetual and term license arrangements. Substantially all of our new bookings come from the sale of SaaS subscriptions of Duck Creek OnDemand. For the twelve months ended August 31, 2017, 2018 and 2019, SaaS ACV bookings represented 48%, 71% and 86% of our total ACV bookings, respectively, and for the nine months ended May 31, 2019 and 2020, SaaS ACV bookings represented 82% and 95% of our total ACV bookings, respectively.

Our customer base is comprised of a range of carriers, including some of the largest companies in the P&C insurance industry, such as Progressive, Liberty Mutual, AIG, The Hartford, Berkshire Hathaway Specialty Insurance, GEICO and Munich Re Specialty Insurance, as well as regional carriers, such as UPC, Coverys, Avant Mutual, IAT Insurance Group and Mutual Benefit Group. We have over 150 insurance customers worldwide, including the top five North American carriers.

We have a broad partner ecosystem that includes third-party solution partners who provide complementary capabilities as well as system integrators (“SIs”) who provide implementation and other related services to our customers. These partnerships help us grow our business more efficiently by enhancing our sales force through co-marketing efforts and giving us scale to service our growing customer base. We maintain longstanding partnerships with leading SIs, such as Accenture, Capgemini and Cognizant, as well as leading technology companies, such as Microsoft and Salesforce, and Insurtech start-ups, such as Arity, SPLICE Software, and Cape Analytics.

Our subscription revenues have grown significantly in recent years, both in absolute terms and as a percentage of our business. For the fiscal year ended August 31, 2019, we generated subscription revenues of $56 million, an increase of 32% compared to subscription revenues of $42 million for the fiscal year ended August 31, 2018, and for the nine months ended May 31, 2020, we generated subscription revenues of $59 million, an increase of 49% compared to subscription revenues of $40 million for the nine months ended May 31, 2019. We generated total revenues of $171 million for the fiscal year ended August 31, 2019, an increase of 7% compared to total revenues of $160 million for the fiscal year ended August 31, 2018, and we generated total revenues of $153 million for the nine months ended May 31, 2020, an increase of 24% compared to total revenues of $123 million for the nine months ended May 31, 2019. We have made significant investments in our software platform and sales and marketing organization, and incurred net losses of $17 million and $8 million for the fiscal years ended August 31, 2019 and 2018, respectively, and $8 million and $14 million for the nine months ended May 31, 2020 and 2019, respectively. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for more information.



 

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P&C Insurance Industry Overview

The P&C insurance industry is large, complex and highly regulated. In 2018, the industry serviced approximately $2.4 trillion of DWP spanning thousands of carriers globally. In addition to being one of the largest global industries, we believe it is also one of the most resilient. For a majority of businesses and consumers, insurance is a necessity rather than an amenity. As a result, overall spend on insurance products has continued to grow steadily over the long-term, even across periods of economic volatility.

Core systems, including policy, billing and claims, power carriers’ critical operations. Core systems house the insurance product structure, such as rates, rules and forms, and generate data that allows the actuarial and underwriting staff of carriers to continuously modify and improve product offerings and provide more personalized customer service. They also manage the claims lifecycle, from first notice of loss to settlement. In addition, core systems integrate with agent and broker portals, operational data stores and data warehouses as well as business intelligence and analytics systems.

It is not uncommon for a single carrier to use multiple vendors (or internally developed applications) to provide core systems for different insurance lines or geographies, or for discrete core system processes (e.g., policy, billing, claims) within a single insurance line and geography. A carrier may use our software for certain parts of its business, and deploy solutions from different vendors for other parts of its business. As a result, we have a market opportunity to both achieve greater penetration within our existing customer base as well as increase our customer base by servicing new customers who are not currently using our products. The following diagram provides a framework for understanding the multifaceted processes of carriers:

 

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Our Market Opportunity

Carriers invest substantial time and resources to develop and maintain their information technology (“IT”) operations. We estimate that our total addressable market, representing the portion of this spending that is focused specifically on core system software, is approximately $6 billion in the United States and $15 billion globally. To estimate our total addressable market, we categorized the P&C insurance market into tiers based on DWP per carrier as reported by S&P Global, A.M. Best and Swiss Re, both within the United States and globally. We then estimated average price per DWP for our core systems solutions, accounting for tiered price discounts at different tiers, and multiplied the price per DWP by the total amount of DWP at each tier available both in the United States and globally.



 

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Challenges Facing the P&C Insurance Industry and the Limitations of Legacy Systems

We believe reliance on legacy systems and other systems designed for on-premise environments limit carriers’ ability to respond to many of the significant challenges facing their industry, including:

 

   

Heightened end-user expectations

 

   

Increased competition in the marketplace

 

   

New and evolving risks

 

   

Increased size of losses in assets and the number of catastrophic events

 

   

The rise of the Internet of Things (“IoT”)

 

   

Emerging capabilities and advancing technologies

These challenges are placing increased pressure on insurance carriers to improve consumer experience, business agility and speed to market. However, many carriers rely on legacy systems or alternatives designed for on-premise environments that are difficult to change, update or integrate without significant incremental custom-code development. Carriers relying upon these systems are generally unable to manage and analyze data at the pace required to effectively guide operational and risk decisions. These systems are difficult to update without significant IT spend and efforts, resulting in higher operating costs and slower speed to market for carriers.

We believe that carriers will increasingly look to adopt SaaS solutions, like Duck Creek OnDemand, that are designed to enhance their organizational agility, product innovation and consumer experience, allowing them to react quickly to evolving consumer preferences and efficiently capture market opportunity, while reducing their total cost of ownership. According to an October 2019 Novarica survey, more than 60% of insurance carriers plan to expand their migration of applications to the cloud in 2020.

The Duck Creek Approach

Our solutions provide us with a sustainable competitive advantage by helping our customers overcome the limitations of existing systems to meet the challenges of the current P&C insurance industry.

 

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Deep domain expertise. With more than twenty years of operating experience in the P&C insurance industry, we have developed deep industry-specific domain expertise. This enables us to offer a broad range of integrated solutions embedded with smart, intuitive pre-built functionality, designed to meet the precise use-case requirements of carriers.

 

   

Comprehensive, future-ready offerings. Our comprehensive suite of enterprise-scale core system software is comprised of leading applications that are designed to meet the full range of our customers’ needs. We deliver upgrades that can be applied across our suite, improving common functionality across our customers’ systems. We continuously update industry content, allowing our customers to efficiently keep pace with market and regulatory changes.

 

   

Scalability to all carriers. Our solutions are designed to meet the most complex and sophisticated technology needs of the largest carriers, but can also be scaled to cost-effectively serve the needs of smaller carriers.

 

   

Low-code configurability. Using low-code tools designed for ease, speed and accuracy, both technical and non-technical users can tailor our solutions to meet their business needs. These intuitive tools allow our customers to create new products and make changes to existing products and related workflows without custom coding, accelerating their speed to market and improving productivity.

 

   

Differentiated SaaS architecture. Our technical architecture is designed to keep our customers’ content configuration and business rules separated from our primary Duck Creek application and platform code. This framework allows continuous delivery of updates and upgrades to our software without disrupting a carrier’s specific business rules and definitions. By contrast, existing legacy systems and alternatives to legacy systems designed for on-premise environments typically require costly and disruptive system-wide re-coding and testing projects with each upgrade cycle.

 

   

Open architecture. Our Duck Creek Anywhere integration strategy provides fast, easy access to the third-party data and services that customers need, all designed to enable our customers to efficiently leverage the services that best match their strategy.

 

   

Unique insights. We enable carriers to use data as a strategic asset. Using Duck Creek Insights, carriers are able to efficiently gather a consolidated picture of their business across internal and third-party data sources, deliver critical information to execute business decisions and employ new methods of automated decision making.

 

   

Mission-focused organization. We are driven by our mission to empower carriers to extend and improve the coverage they provide to their customers and to enhance the end-user experience. Our strong culture and organizational ethos, coupled with a management team that has decades of leadership in the insurance software industry and is actively involved in the development of our products, drives our company to continue to innovate and deliver high-quality solutions to our customers.

Our Growth Strategy

We intend to extend our position as the leading provider of SaaS solutions for the core systems of the P&C insurance industry. The key components of our strategy are:

 

   

Growing our customer base. We believe there is substantial opportunity to continue to grow our customer base across the P&C insurance industry. We are investing in our sales and marketing force, specifically targeting key accounts and leveraging current customers as references. For each of fiscal 2018 and 2019, our win rate for new SaaS opportunities was approximately 60%, and for the nine months ended May 31, 2020, our win rate for new SaaS opportunities was approximately 67%.

 

   

Deepening relationships with our existing customers. We have deep engagement with our customers; on average, each of our customers uses 2.7 of our products, with each SaaS customer using 4.9 of our products. In addition to pursuing new customers, we intend to leverage our track record of success with our existing customers by selling additional products and targeting new opportunities within these carriers.



 

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Expanding our partner ecosystem. We have a large and expanding network of partnerships that is comprised of third-party solution partners who provide complementary capabilities as well as third-party SIs who provide implementation and other related services to our customers. We intend to extend our network of partners who are able to drive meaningful interest in, and adoption of, our products.

 

   

Continuing to innovate and add new solutions. We have made significant investments in research and development and intend to continue to do so. We are focused on enhancing the functionality and breadth of our current solutions as well as developing and launching new products and tools to address the evolving needs of the P&C insurance industry.

 

   

Broadening our geographical presence. We believe there is significant need for our solutions on a global basis and, accordingly, opportunity for us to grow our business through further international expansion. We are broadening our global footprint and intend to establish a presence in additional international markets.

 

   

Transitioning our term and perpetual license customers to SaaS. Some of our customers use versions of our solutions that were purchased via perpetual or term licenses and typically are installed on-premise. We will seek to transition these customers to our current SaaS solutions, which we believe will generate increased long-term economic value.

 

   

Pursuing acquisitions. We have acquired and successfully integrated several businesses complementary to our own to enhance our software and technology capabilities. We intend to continue to pursue targeted acquisitions that further complement our product portfolio or provide us access to new markets.

Recent Developments

On November 13, 2019, the Operating Partnership issued and sold 31,059,222 Class E Preferred Units to Drake DF Holdings, LP, an entity affiliated with Dragoneer, Insight and certain accounts and funds advised by Neuberger Berman Investment Advisers LLC in a private offering for $90.0 million. On November 27, 2019, the Operating Partnership used $72.0 million of such proceeds from the sale to redeem 14,908,429 Class A Units and 9,938,949 Class B Units held by Apax and Accenture, respectively. On November 27, 2019, the Operating Partnership issued and sold 10,353,074 Class E Preferred Units to an accredited investor in a private offering for $30.0 million. On November 29, 2019, the Operating Partnership used $26.0 million of such proceeds from the sale to redeem 5,383,600 Class A Units and 3,589,064 Class B Units from Apax and Accenture, respectively. On February 18, 2020, the Operating Partnership issued and sold 27,199,913 Class E Preferred Units to certain accredited investors in a private offering for $90.0 million. On February 26, 2020, the Operating Partnership issued and sold 3,022,213 Class E Preferred Units to an accredited investor in a private offering for $10.0 million. On February 27, 2020, the Operating Partnership used $100.0 million of the proceeds from the February 18, 2020 and February 26, 2020 sales to redeem 18,133,278 Class A Units and 12,088,848 Class B Units from Apax and Accenture, respectively. On June 5, 2020, the Operating Partnership issued and sold 50,603,459 Class E Preferred Units to certain accredited investors in a private offering for $200.0 million. On June 8, the Operating Partnership issued and sold 7,590,517 Class E Preferred Units to an accredited investor in a private offering for $30.0 million. On June 8, 2020, the Operating Partnership used $200.0 million of the proceeds from the sales on June 5, 2020 and June 8, 2020 to redeem 30,362,073 Class A Units and 20,241,374 Class B Units from Apax and Accenture, respectively. For additional information, see “Certain Relationships and Related Party Transactions—Sale of Class E Preferred Units.”

On October 2, 2019, we amended certain of the financial covenants and extended our revolving credit facility for two years to a maturity date of October 2, 2021.



 

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COVID-19 Update

In December 2019, a novel strain of coronavirus (“COVID-19”) was reported to have surfaced in Wuhan, China. In January 2020, COVID-19 spread to other countries, including the United States and others in which we operate, and efforts to contain the spread of COVID-19 intensified. In March 2020, the World Health Organization declared COVID-19 a global pandemic. The outbreak and certain preventative or protective actions that governments, businesses and individuals have taken in respect of COVID-19 have resulted in extended global business disruptions. The severity and duration of these business disruptions remain largely fluid and ultimately will depend on many factors, including the speed and effectiveness of containment efforts throughout the world.

In March 2020, we implemented various measures to ensure the safety of our employees, customers and suppliers. Over a two day period, we shifted 100% of our employee base to work from home. Additionally, our operational model has enabled us to minimize the impact to sales productivity or delivery of our solutions to customers to date. Since shifting to working remotely, we have successfully completed several product live launches and initiated new projects applying a fully virtual model.

While the full impact of COVID-19 remains unknown and COVID-19 has impacted certain companies’ decisions regarding technology spending, we have not experienced a material disruption on our bookings or sales to date. During the three months ended May 31, 2020, we generated growth of 9% in total revenue, 43% in subscription revenue and 76% in SaaS ARR as compared to the comparable period in 2019. Our ability to grow revenue within our existing customer accounts has remained strong, with a SaaS Net Dollar Retention Rate of 113% for the quarter ended May 31, 2020. Additionally, we generated net cash provided by operating activities of $18.8 million and Free Cash Flow of $17.5 million for the three months ended May 31, 2020, compared to $6.9 million and $5.7 million, respectively, for the three months ended May 31, 2019. However, due to COVID-19 we delayed certain of our planned investments, primarily related to our international expansion initiatives and restricted hiring in the short-term to revenue critical roles.

As of June 30, 2020, we had $82.6 million of liquidity, including $53.6 million in cash and cash equivalents and $29.0 million of availability under our revolving credit facility.

The magnitude of the effect of COVID-19 on our business will depend, in part, on the length and severity of the restrictions (including the effects of recently announced “re-opening” plans following a recent slowdown of the virus infection rate in certain countries and localities) and other limitations on our ability to conduct our business in the ordinary course. The longer the pandemic continues or resurges, the more severe the impacts described above will be on our business. In addition, because COVID-19 did not begin to affect our financial results until after the beginning of the third quarter of fiscal 2020, its impact on our results for the three months ended May 31, 2020 may not be indicative of its impact on our results for the remainder of fiscal 2020 or future periods. The extent, length and consequences of the pandemic are uncertain and impossible to predict, but could be material. See “Risk Factors—Risks Related to Our Business and Industry—Public health outbreaks, epidemics or pandemics, including the global COVID-19 outbreak, could harm our business, results of operations, and financial condition.”

Relationship with Apax

Apax is one of the world’s leading private equity investment groups. Apax operates globally and has more than 43 years of investing experience. As of December 31, 2018, Apax has raised private equity funds totaling $50 billion. Funds advised by Apax invest in companies across its global sectors of Tech & Telecom, Retail & Consumer, Media, Healthcare and Financial & Business Services. These funds provide long-term equity financing to build and strengthen world-class companies. Upon the completion of this offering, Apax will own approximately 33.7% of our common stock (or approximately 33.1% if the underwriters exercise their option to purchase additional shares of common stock in full).



 

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Certain Agreements with Our Existing Investors

Pursuant to the Stockholders’ Agreement to be entered into prior to the consummation of this offering in connection with the Reorganization Transactions, we will be required to take all necessary action to cause our board of directors to include individuals designated by Apax and Accenture pursuant to certain ownership thresholds. Apax and Accenture, individually, will be required to vote all of their shares, and take all other necessary actions, to cause our board of directors to include the individuals designated as directors by Apax and Accenture (as applicable). Accordingly, after the completion of this offering, Apax and Accenture will control a majority of the voting power of shares of our common stock with respect to the election of our directors.

Following the completion of this offering, we will also have a registration rights agreement that will provide a framework for our ongoing relationship with certain of the Existing Holders.

For a description of these agreements, see “Certain Relationships and Related Party Transactions—Stockholders’ Agreement” and “Certain Relationships and Related Party Transactions—Registration Rights Agreement.”

Summary Risk Factors

Our ability to implement our business strategy is subject to numerous risks, as more fully described under the heading “Risk Factors” in this prospectus. These risks include, among others, that:

 

   

the global COVID-19 outbreak and the public health measures undertaken to contain the spread have, and continue to, result in global business disruptions that may adversely affect us, our customers and SI partners, which could ultimately impact our own financial performance;

 

   

we have a history of losses and may not achieve or maintain profitability in the future;

 

   

changes in our product revenue mix and gross margins as we continue to focus on sales of our SaaS solutions will cause fluctuations in our results of operations and cash flows between periods;

 

   

we rely on orders and renewals from a relatively small number of customers for a substantial portion of our revenue and our large customers have substantial negotiating leverage;

 

   

our growth strategy focused on SaaS solutions may prove unsuccessful and if we are unable to develop or sell our existing SaaS solutions into new markets or further penetrate existing markets, our revenue may not grow as expected;

 

   

we may not effectively manage our growth of operations;

 

   

we face intense competition in our market;

 

   

third parties may assert that we are infringing or violating their intellectual property rights;

 

   

U.S. and global market and economic conditions may materially impact our operations;

 

   

we will likely face additional complexity, burdens and volatility in connection with our international sales and operations;

 

   

our sales and implementation are lengthy and variable, which could cause us to expend significant time and resources before generating any income;

 

   

we may experience data breaches, unauthorized access to customer data or other disruptions in connection with our solutions;

 

   

control of our Company by Apax and Accenture may give rise to actual or perceived conflicts of interests; and



 

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after the completion of this offering, we will be a “controlled company” within the meaning of the corporate governance standards of NASDAQ and, as a result, will qualify for and intend to rely on exemptions from certain corporate governance requirements.

Implications of Being an Emerging Growth Company

We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). As an emerging growth company, we may take advantage of certain reduced disclosure and other requirements that are otherwise applicable generally to public companies. These provisions include:

 

   

not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”);

 

   

only two years of audited financial statements are required in addition to any required interim financial statements, and correspondingly reduced disclosure in management’s discussion and analysis of financial condition and results of operations; and

 

   

(i) reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements and (ii) exemptions from the requirements of holding a non-binding advisory vote on executive compensation, including golden parachute compensation.

When we are no longer deemed to be an emerging growth company, we will not be entitled to the exemptions provided in the JOBS Act discussed above. We will remain an emerging growth company until the earliest of: (1) the last day of the fiscal year in which we have more than $1.07 billion in annual revenue; (2) the date we qualify as a “large accelerated filer,” which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of the most recently completed second fiscal quarter; (3) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt securities; and (4) the last day of the fiscal year ending after the fifth anniversary of our initial public offering.

We have availed ourselves in this prospectus of the reduced reporting requirements described above. We expect to continue to avail ourselves of the emerging growth company exemptions described above for so long as we remain an emerging growth company. As a result, the information that we provide to stockholders will be less comprehensive than what you might receive from other public companies.

In addition, Section 107 of the JOBS Act also provides that an emerging growth company can use the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the “Securities Act”), for complying with new or revised accounting standards. This permits an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.

We have irrevocably elected not to avail ourselves of the exemption that allows emerging growth companies to extend the transition period for complying with new or revised financial accounting standards.

Corporate Information

Duck Creek Technologies, Inc. was formed as a Delaware corporation on November 15, 2019. We are a newly formed corporation, have no material assets and have not engaged in any business or other activities except in connection with our incorporation and with the Reorganization Transactions described under “Organizational Structure—Reorganization Transactions.” The address of our principal executive offices is currently 22 Boston Wharf Road, Floor 10, Boston, MA, 02210 and our phone number is (888) 724-3509. Our website is currently www.duckcreek.com. The information contained in, or that can be accessed through, our website is not incorporated by reference in, and is not part of, this prospectus.



 

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Our Structure

Concurrently with or immediately following the consummation of this offering, we will execute a series of transactions, which we refer to herein as the “Reorganization Transactions” (as described under “Organizational Structure—Reorganization Transactions”).

Immediately following this offering and the use of proceeds therefrom:

 

   

our common stock will be held as follows: 15,000,000 shares by investors in this offering, 43,282,953 shares by Apax, and 28,855,302 shares by Accenture; and

 

   

the combined voting power in the Company will be as follows: (i) 11.7% by investors in this offering (or 13.2% if the underwriters exercise their option to purchase additional shares of common stock in full); (ii) 33.7% by Apax (or 33.1% if the underwriters exercise their option to purchase additional shares of common stock in full); and (iii) 22.5% by Accenture (or 22.1% if the underwriters exercise their option to purchase additional shares of common stock in full).



 

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ABOUT THIS PROSPECTUS

Basis of Presentation

In connection with the completion of this offering, we will effect certain Reorganization Transactions. Unless otherwise stated or the context otherwise requires, all information in this prospectus reflects the consummation of the Reorganization Transactions and this offering. See “Organizational Structure” in this prospectus for a description of the Reorganization Transactions. Our fiscal year ends on August 31. Unless otherwise noted, any reference to a year preceded by the word “fiscal” refers to the fiscal year ended August 31 of that year. For example, references to “fiscal 2019” refer to the fiscal year ended August 31, 2019. Any reference to a year not preceded by “fiscal” refers to a calendar year. Certain amounts, percentages and other figures presented in this prospectus have been subject to rounding adjustments. Accordingly, figures shown as totals, dollars or percentage amounts of changes may not represent the arithmetic summation or calculation of the figures that precede them. When we state that we are the leading SaaS provider of core systems for the P&C insurance industry, we are basing our leadership on our subscription revenue for fiscal 2019.

As used throughout this prospectus, the following terms have the meanings or are calculated as set forth below:

 

   

We define “subscription revenue” as the revenue derived from the sale of our SaaS solutions through recurring fee arrangements for the period indicated.

 

   

We define annual contract value (“ACV”) as the committed total contract value of new software sales in dollar terms divided by the corresponding minimum number of committed months, with the resultant minimum monthly commitment being multiplied by twelve.

 

   

We define “carriers” as property and casualty (“P&C”) insurance carriers.

 

   

We define “carve-out” as our divestiture from Accenture plc, a public limited company incorporated in Ireland (collectively, with its affiliates, “Accenture”), in August 2016.

 

   

We define “core systems” as the following key functions of carriers: policy administration, claims management and billing.

 

   

We define “customers” as buying entities that contract individually for our products and services. For example, multiple subsidiaries of a single carrier may each constitute a customer if each entity contracts with us separately. By contrast, an carrier that uses our products across multiple subsidiaries under a single enterprise license agreement would constitute a single customer.

 

   

We define direct written premiums (“DWP”) as the gross dollar value of total premiums paid to carriers by policyholders.

 

   

We define the “Existing Holders” as the direct equity holders of the Operating Partnership immediately prior to the Reorganization Transactions, including Apax and Accenture.

 

   

Munich Re Specialty Insurance (“MRSI”) is a description for the insurance business operations of affiliated companies in the Munich Re Group that share a common directive to offer and deliver specialty property and casualty insurance products and services in North America.

 

   

We calculate our win rate by dividing (i) the total number of new deals we contract in a fiscal year by (ii) the total number of newly contracted deals in the overall U.S. P&C insurance market, which includes deals in which we did not compete, based on our internal research.

Market and Industry Data

Certain market and industry data included in this prospectus has been obtained from third party sources that we believe to be reliable. Market estimates are calculated by using independent industry publications, government publications, and third party forecasts in conjunction with our assumptions about our markets. We have not independently verified such third party information. While we are not aware of any misstatements regarding any market, industry or similar data presented herein, such data involves risks and uncertainties and is



 

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subject to change based on various factors, including those discussed under the headings “Special Note Regarding Forward-Looking Statements” and “Risk Factors” in this prospectus.

Trademarks, Service Marks and Trade Names

We own or have rights to various trademarks, service marks and trade names that we use in connection with the operation of our business. We use our Duck Creek trademark and related design marks in this prospectus. This prospectus may also contain trademarks, service marks and trade names of third parties, which are the property of their respective owners. Our use or display of third parties’ trademarks, service marks, trade names or products in this prospectus is not intended to, and does not imply a relationship with, or endorsement or sponsorship by us. Solely for convenience, the trademarks, service marks and trade names referred to in this prospectus may appear without the ®, TM or SM symbols, but the omission of such references is not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable owner of these trademarks, service marks and trade names.

Non-GAAP Financial Measures

We report our financial results in accordance with accounting principles generally accepted in the United States (“GAAP”); however, management believes evaluating the Company’s ongoing operating results may be enhanced if investors have additional non-GAAP financial measures. Specifically, management reviews Adjusted EBITDA, Free Cash Flow, Non-GAAP Gross Margin, Non-GAAP (Loss) Income from Operations and Non-GAAP Net (Loss) Income, each of which is a non-GAAP financial measure, to manage our business, make planning decisions, evaluate our performance and allocate resources and, for the reasons described below, considers them to be effective indicators, for both management and investors, of our financial performance over time.

We believe that Adjusted EBITDA, Free Cash Flow, Non-GAAP Gross Margin, Non-GAAP (Loss) Income from Operations and Non-GAAP Net (Loss) Income help investors and analysts in comparing our results across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. These non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation from, or as a substitute for, the analysis of other GAAP financial measures, including net income and cash flows from operating activities. For example, with respect to Adjusted EBITDA, some of these limitations include:

 

   

it does not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;

 

   

it does not reflect changes in, or cash requirements for, our working capital needs;

 

   

it does not reflect interest expense, or the cash requirements necessary to service interest or principal payments, on our indebtedness;

 

   

it does not reflect our income tax expense or the cash requirements to pay our taxes; and

 

   

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for such replacements.

These non-GAAP financial measures are not universally consistent calculations, limiting their usefulness as comparative measures. Other companies may calculate similarly titled financial measures differently than we do or may not calculate them at all. Additionally, these non-GAAP financial measures are not measurements of financial performance or liquidity under GAAP. In order to facilitate a clear understanding of our consolidated historical operating results, you should examine our non-GAAP financial measures in conjunction with our historical combined financial statements and notes thereto included elsewhere in this prospectus.



 

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For definitions of Adjusted EBITDA, Free Cash Flow, Non-GAAP Gross Margin, Non-GAAP (Loss) Income from Operations and Non-GAAP Net (Loss) Income and a reconciliation of each such non-GAAP financial measure to the most directly comparable GAAP financial measure, see “Prospectus Summary—Summary Consolidated Financial Information.”



 

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THE OFFERING

 

Issuer

   Duck Creek Technologies, Inc.

Common stock offered by us

   15,000,000 shares (or 17,250,000 shares, if the underwriters exercise their option to purchase additional shares of common stock in full).

Common stock to be outstanding immediately after this offering

   128,437,830 shares (or 130,687,830 shares, if the underwriters exercise their option to purchase additional shares of common stock in full).

Option to purchase additional shares of common stock

   We have granted the underwriters an option to purchase up to 2,250,000 additional shares of common stock. The underwriters may exercise this option at any time within 30 days from the date of this prospectus. See “Underwriting.”

Use of Proceeds

  

We will receive net proceeds of approximately $373.2 million (or approximately $430.1 million if the underwriters exercise their option to purchase additional shares of common stock in full) from the sale of the common stock by us and after deducting estimated offering expenses and underwriting discounts and commissions payable by us.

 

We intend to use (i) $43.1 million of the net proceeds that we receive from this offering to redeem all of the outstanding LP Units of the Operating Partnership retained by certain of the Existing Holders, after giving effect to the contributions that are part of the Reorganization Transactions, which includes $43.1 million paid to Accenture, as described under “Organizational Structure,” at a redemption price per LP Unit equal to the initial public offering price of this offering after deducting underwriting discounts and commissions payable by us, (ii) $64.7 million of the net proceeds that we receive from this offering to repurchase from Apax a portion of the shares of common stock received by Apax in the Reorg Merger at a repurchase price per share equal to the initial public offering price of this offering after deducting underwriting discounts and commissions payable by us and (iii) $6.3 million of net proceeds that we receive from this offering to cash settle outstanding equity awards of certain international employees. For additional information, see “Organizational Structure—Reorganization Transactions and “Certain Relationships and Related Party Transactions—The Reorganization Transactions.” We intend to use the remaining net proceeds from this offering for general corporate purposes, including acquisitions and other strategic transactions and to repay any amounts outstanding under our revolving credit facility (but not a permanent reduction of any commitments thereunder).

 

See “Use of Proceeds.”



 

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Voting

  

Each share of our common stock will entitle its holder to one vote on all matters to be voted on by stockholders generally.

 

Upon the completion of this offering, investors purchasing common stock in this offering will own approximately 11.7% of our common stock and will have approximately 11.7% of the voting power in Duck Creek Technologies, Inc. (or approximately 13.2% and 13.2%, respectively, if the underwriters exercise their option to purchase additional shares of common stock in full), Apax will own approximately 33.7% of our common stock and will have approximately 33.7% of the voting power in Duck Creek Technologies, Inc. (or approximately 33.1% and 33.1%, respectively, if the underwriters exercise their option to purchase additional shares of common stock in full), and Accenture will own approximately 22.5% of our common stock and will have approximately 22.5% of the voting power in Duck Creek Technologies, Inc. (or approximately 22.1% and 22.1%, respectively, if the underwriters exercise their option to purchase additional shares of common stock in full).

 

Pursuant to the Stockholders’ Agreement, Apax and Accenture will control a majority of the voting power of shares of our common stock eligible to vote in the election of our directors. As a result, we will be a “controlled company” within the meaning of the corporate governance standards of NASDAQ. See “Management—Controlled Company Exemption” and “Certain Relationships and Related Party Transaction—Stockholders’ Agreement.”

Dividends

   We do not currently anticipate paying dividends on our common stock. Any declaration and payment of future dividends to holders of our common stock will be at the sole discretion of our board of directors and will depend on many factors, including our financial condition, earnings, capital requirements, level of indebtedness, statutory and contractual restrictions applicable to the payment of dividends and other considerations that our board of directors deems relevant. Because we are a holding company and have no direct operations, we will only be able to pay dividends from our available cash on hand and any funds we receive from our subsidiaries. Certain of our debt agreements limit the ability of certain of our subsidiaries to pay dividends. In addition, Delaware law may impose requirements that may restrict our ability to pay dividends. See “Dividend Policy.”


 

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Stockholders’ Agreement

   Following the completion of this offering, we will have a stockholders’ agreement with Accenture and Apax that will provide certain rights to Accenture and Apax. See “Certain Relationships and Related Party Transactions—Stockholders’ Agreement.”

Registration Rights Agreement

   Following the completion of this offering, we will have a registration rights agreement with Apax, Accenture and certain of our other Existing Holders whereby, following this offering and the expiration of the related 180-day lock-up period, we may be required to register under the Securities Act the sale of shares of our common stock issued to such Existing Holders immediately prior to the Reorganization Transactions in connection with the Reorganization Transactions. See “Certain Relationships and Related Party Transactions—Registration Rights Agreement.”

Indications of Interest

   One or more entities affiliated with or advised by or that serve as investment adviser to certain of our existing investors, including (i) Dragoneer, (ii) Neuberger Berman Investment Advisers LLC and (iii) Insight have indicated non-binding interests in purchasing up to an aggregate of up to $50 million, $25 million and $25 million, respectively, in shares of our common stock in this offering at the initial public offering price. Because none of these indications of interest are an agreement or commitment by such entities to purchase, one or more of these entities may choose to purchase more, less or no shares in this offering or seek to purchase additional shares. The underwriters will receive the same discount from any of our shares of common stock purchased by one or more funds affiliated with Dragoneer, Neuberger Berman Investment Advisers LLC and/or Insight as they will from any other shares of common stock sold to the public in this offering.

Reserved Share Program

  

At our request, an affiliate of BofA Securities, Inc., an underwriter in this offering, has reserved for sale, at the initial public offering price, approximately 5% of the shares offered by this prospectus for sale to some of our directors, officers, employees, distributors, dealers, business associates and related persons. If these persons purchase reserved shares it will reduce the number of shares available for sale to the general public. Any reserved shares that are not so purchased will be offered by the underwriters to the general public on the same terms as the other shares offered by this prospectus. See “Underwriting.”



 

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NASDAQ Symbol

   “DCT.”

Risk Factors

   See “Risk Factors” for a discussion of factors you should carefully consider before deciding to invest in our common stock.

The number of shares of our common stock to be outstanding immediately after this offering excludes:

 

   

1,858,441 shares of common stock issuable upon vesting of Class D incentive units to be issued under our 2020 Omnibus Incentive Plan in connection with the completion of this offering;

 

   

1,803,280 shares of common stock issuable upon exercise of stock options to be issued under our 2020 Omnibus Incentive Plan in connection with the completion of this offering at an exercise price equal to the fair market value on the date of grant;

 

   

960,523 shares of common stock issuable upon vesting of restricted stock awards to be issued under our 2020 Omnibus Incentive Plan in connection with the completion of this offering; and

 

   

5,232,274 shares of common stock reserved for issuance under our 2020 Omnibus Incentive Plan.

Unless otherwise indicated, the information in this prospectus assumes the following:

 

   

no exercise by the underwriters of their option to purchase additional shares;

 

   

the filing and effectiveness of our amended and restated certificate of incorporation and the adoption of our amended and restated bylaws each of which will occur immediately prior to the closing of this offering; and

 

   

the consummation of the Reorganization Transactions.



 

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SUMMARY CONSOLIDATED FINANCIAL INFORMATION

The following table presents the selected consolidated financial information of the Operating Partnership for the periods and as of the dates indicated. The Operating Partnership is considered our predecessor for accounting purposes, and its consolidated financial information will be our consolidated financial information following this offering. The summary historical financial data of Duck Creek Technologies, Inc. has not been presented because Duck Creek Technologies, Inc. is a newly incorporated entity and has not engaged in any business or other activities except in connection with its formation and initial capitalization.

The summary consolidated statements of operations and statements of cash flows data for the years ended August 31, 2017, 2018 and 2019 and the summary consolidated balance sheet data as of August 31, 2018 and 2019 have been derived from the audited financial statements of the Operating Partnership included elsewhere in this prospectus. The summary consolidated statements of operations and statements of cash flows data for the nine months ended May 31, 2019 and 2020 and the consolidated balance sheet data as of May 31, 2020 have been derived from the unaudited financial statements of the Operating Partnership included elsewhere in this prospectus. The unaudited financial statements have been prepared on the same basis as the audited financial statements and reflect, in the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the financial information in those statements. Historical results for any prior period are not necessarily indicative of results to be expected in any future period, and our results for any interim period are not necessarily indicative of results that may be expected for any full fiscal year. You should read the selected financial data presented below in conjunction with the information included under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and the related notes included elsewhere in this prospectus.

 

     Year Ended August 31,      Nine Months Ended
May 31,
 
($ in thousands, except per share data)    2017      2018      2019      2019     2020  

Consolidated Statements of Operations Data

             

Revenue

             

Subscription

   $ 33,453      $ 42,451      $ 55,909      $ 39,932     $ 59,368  

License

     25,457        20,969        13,776        9,539       5,431  

Maintenance and support

     22,650        26,034        23,896        18,098       17,791  

Professional services

     75,161        70,215        77,692        55,785       70,760  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total revenue

     156,721        159,669        171,273        123,354       153,350  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Cost of revenue

             

Subscription

     17,028        22,272        24,199        16,988       24,871  

License

     2,402        2,121        1,970        1,467       1,347  

Maintenance and support

     1,913        2,456        2,781        2,171       2,475  

Professional services

     42,057        37,483        43,228        31,304       38,839  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total cost of revenue

     63,400        64,332        72,178        51,930       67,532  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Gross margin

     93,321        95,337        99,095        71,424       85,818  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Operating expenses

             

Research and development

     42,815        36,056        35,936        26,339       29,424  

Sales and marketing

     30,725        34,158        40,189        29,962       33,539  

General and administrative

     39,262        30,670        36,493        27,074       29,916  

Change in fair value of contingent consideration

     3,828        801        628        (212     21  

Transaction expenses of acquirer

     220        —          —          —         —    
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total operating expense

     116,850        101,685        113,246        83,163      
92,900
 
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 


 

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     Year Ended August 31,     Nine Months Ended
May 31,
 
($ in thousands, except per share data)    2017     2018     2019     2019     2020  

Loss from operations

     (23,529     (6,348     (14,151     (11,739     (7,082

Other income (expense), net

     77       (533     (565     (312     (96

Interest expense, net

     (330     (567     (1,030     (1,015     (386
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (23,782     (7,448     (15,746     (13,066     (7,564

Provision for income taxes

     1,008       354       1,150       1,007       889  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (24,790   $ (7,802   $ (16,896   $ (14,073   $ (8,453
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share (unaudited)(1):

          

Basic and Diluted

       $ (0.15     $ (0.07
      

 

 

     

 

 

 

Shares used in computing pro forma net loss per share (unaudited)(1):

          

Basic and Diluted

         111,052,080         114,093,671  
      

 

 

     

 

 

 

Consolidated Statements of Cash Flows Data

          

Net cash (used in) provided by operating activities

   $ (11,869   $ 11,833     $ 14,833     $ (2,259   $ 8,247  

Net cash used in investing activities

     (4,042     (8,594     (19,911     (13,786     (5,604

Net cash provided by (used in) financing activities

     759       (901     3,198       12,000       4,553  

Consolidated Balance Sheets Data (at period end)

          

Cash and cash equivalents

     $ 13,879     $ 11,999       $ 19,195  

Total current assets

       49,100       58,514         72,811  

Total assets

       449,237       467,277         496,873  

Total current liabilities

       41,382       59,890         72,663  

Total liabilities

       47,370       78,211         100,029  

Total redeemable partners’ interest

       401,867       389,066         396,844  

Other Financial Data and Key Metrics

          

Adjusted EBITDA(2)

   $ (1,124   $ 13,659     $ 6,829     $ 3,237     $ 8,880  

Free Cash Flow(3)

     (13,399     3,239       6,563       (6,231     2,643  

Non-GAAP Gross Margin(4)

     98,022       100,092       103,927       75,042       89,698  

Non-GAAP (Loss) Income from Operations(5)

     (2,524     11,744       4,431       1,507       6,530  

Non-GAAP Net (Loss) Income(6)

     (9,456     5,405       (3,331     (4,403     1,484  

SaaS Net Dollar Retention Rate(7)

     —         107%       114%       118%       113%  

SaaS ARR(8)

     21,346       30,138       51,650       43,202       75,848  

 

(1)

See Note 19 to our audited consolidated financial statements and Note 17 to our unaudited financial statements for an explanation of the calculations of our pro forma basic and diluted net loss per share attributable to the Company.

 

(2)

Adjusted EBITDA is a non-GAAP financial measure and should not be considered an alternative to net loss as a measure of operating performance or as a measure of liquidity. We define Adjusted EBITDA as net loss before interest expense, net; other (income) expense, net; provision for income taxes; depreciation of property and equipment; amortization of intangible assets; amortization of capitalized internal-use software; share-based compensation expense; and the change in fair value of contingent consideration. For additional information regarding non-GAAP financial measures, see “Non-GAAP Financial Measures” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Other Financial Data and Key Metrics.”



 

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A reconciliation of Adjusted EBITDA to net loss, the most directly comparable GAAP financial measure, is presented below for the periods indicated.

 

     Year Ended August 31,     Nine Months Ended May 31,  
($ in thousands)    2017     2018     2019             2019                     2020          

Net loss

   $ (24,790   $ (7,802   $ (16,896   $ (14,073   $ (8,453

Provision for income taxes

     1,008       354       1,150       1,007       889  

Other (income) expense, net

     (77     533       565       312       96  

Interest expense, net

     330       567       1,030       1,015       386  

Depreciation of property and equipment

     1,400       1,915       2,398       1,730       2,350  

Amortization of intangible assets

     15,503       15,552       15,884       11,964       11,982  

Amortization of capitalized internal-use software

     —         —         —         —         205  

Share-based compensation expense

     1,674       1,739       2,070       1,494       1,404  

Change in fair value of contingent consideration

     3,828       801       628       (212     21  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ (1,124   $ 13,659     $ 6,829     $ 3,237     $ 8,880  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(3)

Free Cash Flow is a non-GAAP financial measure and should not be considered an alternative to net cash provided by (used in) operating activities as a measure of cash generated by operating activities. We define Free Cash Flow as net cash provided by (used in) operating activities, less purchases of property and equipment, including capitalized internal use software. For additional information regarding non-GAAP financial measures, see “Non-GAAP Financial Measures” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Other Financial Data and Key Metrics.”

A reconciliation of Free Cash Flow to net cash provided by (used in) operating activities, the most directly comparable GAAP financial measure, is presented below for the periods indicated.

 

     Year Ended August 31,      Nine Months
Ended May 31,
 
($ in thousands)    2017     2018     2019      2019     2020  

Net cash (used in) provided by operating activities

   $ (11,869   $ 11,833     $ 14,833      $ (2,259   $ 8,247  

Purchases of property and equipment

     (1,530     (7,138     (5,314      (1,797     (3,164

Capitalized internal-use software

     —         (1,456     (2,956      (2,175     (2,440
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Free Cash Flow

   $ (13,399   $ 3,239     $ 6,563      $ (6,231   $ 2,643  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

(4)

Non-GAAP Gross Margin is a non-GAAP financial measure and should not be considered an alternative to gross margin as a measure of operating performance. We define Non-GAAP Gross Margin as GAAP gross margin before the portion of share-based compensation expense, amortization of intangible assets and amortization of capitalized internal-use software that is included in cost of revenue. For additional information regarding non-GAAP financial measures, see “Non-GAAP Financial Measures” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Other Financial Data and Key Metrics.”



 

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A reconciliation of Non-GAAP Gross Margin to gross margin, the most directly comparable GAAP financial measure, is presented below for the periods indicated.

 

     Year Ended August 31,      Nine Months Ended
May 31,
 
($ in thousands)    2017      2018      2019      2019      2020  

Gross margin

   $ 93,321      $ 95,337      $ 99,095      $ 71,424      $ 85,818  

Share-based compensation expense

     228        233        152        101        116  

Amortization of intangible assets

     4,473        4,522        4,680        3,517        3,559  

Amortization of capitalized internal-use software

     —          —          —          —          205  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Non-GAAP Gross Margin

   $ 98,022      $ 100,092      $ 103,927      $ 75,042      $ 89,698  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(5)

Non-GAAP (Loss) Income from Operations is a non-GAAP financial measure and should not be considered an alternative to loss from operations as a measure of operating performance. We define Non-GAAP (Loss) Income from Operations as GAAP loss from operations before share-based compensation expense; amortization of intangible assets; amortization of capitalized internal-use software; and the change in fair value of contingent consideration. For additional information regarding non-GAAP financial measures, see “Non-GAAP Financial Measures” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Other Financial Data and Key Metrics.”

A reconciliation of Non-GAAP (Loss) Income from Operations to loss from operations, the most directly comparable GAAP financial measure, is presented below for the periods indicated.

 

     Year Ended August 31,     Nine Months Ended
May 31,
 
($ in thousands)    2017     2018     2019     2019     2020  

Loss from operations

   $ (23,529   $ (6,348   $ (14,151   $ (11,739   $ (7,082

Share-based compensation expense

     1,674       1,739       2,070       1,494       1,404  

Amortization of intangible assets

     15,503       15,552       15,884       11,964       11,982  

Amortization of capitalized internal-use software

     —         —         —         —         205  

Change in fair value of contingent consideration

     3,828       801       628       (212     21  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP (Loss) Income from Operations

   $ (2,524   $ 11,744     $ 4,431     $ 1,507     $ 6,530  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(6)

Non-GAAP Net (Loss) Income is a non-GAAP financial measure and should not be considered an alternative to net loss as a measure of operating performance. We define Non-GAAP Net (Loss) Income as GAAP net loss before amortization of intangible assets; amortization of capitalized internal-use software; share-based compensation expense; change in fair value of contingent consideration; and the tax effect of amortization of intangible assets, share-based compensation expense and the change in fair value of contingent consideration as well as related tax effects. For additional information regarding non-GAAP financial measures, see “Non-GAAP Financial Measures” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Other Financial Data and Key Metrics.”

A reconciliation of Non-GAAP Net (Loss) Income to net loss, the most directly comparable GAAP financial measure, is presented below for the periods indicated.

 

     Year Ended August 31,     Nine Months Ended
May 31,
 
($ in thousands)    2017     2018     2019     2019     2020  

Net loss

   $ (24,790   $ (7,802   $ (16,896   $ (14,073   $ (8,453

Share-based compensation expense

     1,674       1,739       2,070       1,494       1,404  

Amortization of intangible assets

     15,503       15,552       15,884       11,964       11,982  

Amortization of capitalized internal-use software

     —         —         —         —         205  

Change in fair value of contingent consideration

     3,828       801       628       (212     21  

Tax effect of adjustments(a)

     (5,671     (4,885     (5,017     (3,576     (3,675
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP Net (Loss) Income

   $ (9,456   $ 5,405     $ (3,331   $ (4,403   $ 1,484  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 


 

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  (a)

Includes tax effects of share-based compensation expense, amortization of intangible assets, amortization of capitalized internal-use software and the change in fair value of contingent consideration. The tax effect was calculated using a rate of 27%.

 

(7)

SaaS Net Dollar Retention Rate is one of the key metrics we use in managing our business because, in addition to providing a measure of retention, it indicates our ability to grow customers within our existing customer accounts. SaaS Net Dollar Retention Rate is included in a set of metrics that we calculate quarterly to review with management as well as periodically with members of our board of directors. We calculate SaaS Net Dollar Retention Rate by annualizing revenue recorded in the last month of the measurement period for those revenue-generating customers in place throughout the entire measurement period (the latest twelve-month period). We divide the result by annualized revenue from the month that is immediately prior to the beginning of the measurement period, for all revenue-generating customers in place at the beginning of the measurement period. Our calculation excludes one existing contract for a service no longer offered on a standalone basis by the Company. The Company is not able to calculate a SaaS Net Dollar Retention Rate for periods prior to fiscal 2018 due to data limitations associated with the carve-out from Accenture. For additional information regarding key metrics, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Other Financial Data and Key Metrics.”

 

(8)

SaaS Annual Recurring Revenue (“ARR”) is one of the key metrics we use in managing our business because it illustrates our ability to acquire new subscription customers and to maintain and expand our relationship with existing subscription customers. SaaS ARR is included in a set of metrics that we calculate quarterly to review with management as well as periodically with members of our board of directors. We calculate SaaS ARR by annualizing the recurring subscription revenue recognized in the last month of the measurement period (the latest twelve-month period). Our calculation excludes one existing contract for a service no longer offered on a standalone basis by the Company. For additional information regarding key metrics, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Other Financial Data and Key Metrics.”



 

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RISK FACTORS

An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below together with other information set forth in this prospectus before investing in our common stock. If any of the following risks or uncertainties actually occur, our business, financial condition, prospects, results of operations and cash flow could be materially and adversely affected. In that case, the market price of our common stock could decline and you may lose all or a part of your investment. The risks discussed below are not the only risks we face. Additional risks or uncertainties not currently known to us, or that we currently deem immaterial, may also have a material adverse effect on our business, financial condition, prospects, results of operations or cash flows. We cannot assure you that any of the events discussed in the risk factors below will not occur.

Risks Related to Our Business and Industry

Public health outbreaks, epidemics or pandemics, including the global COVID-19 outbreak, could harm our business, results of operations, and financial condition.

Public health outbreaks, epidemics or pandemics, could materially and adversely impact our business. For example, in March 2020, the World Health Organization declared the COVID-19 virus outbreak a global pandemic, and numerous countries, including the United States, have declared national emergencies with respect to COVID-19. The outbreak and certain intensified preventative or protective public health measures undertaken by governments, businesses and individuals to contain the spread of COVID-19, including orders to shelter-in-place and restrictions on travel and permitted business operations, have, and continue to, result in global business disruptions that adversely affect workforces, organizations, economies, and financial markets globally, leading to an economic downturn and increased market volatility. The ongoing outbreak has disrupted, and will continue to disrupt, the normal operations of many businesses, including our customers, as well as the ability of our technical support teams and sales force to travel to existing customers and new business prospects, and the operations of our customers and SI partners. We have also limited our in-person marketing activities. For example, we converted our 2020 user conference, Formation, into an online forum called vFormation. While our business has not, to date, experienced a material disruption in bookings or sales from the COVID-19 pandemic, a continued or intensifying outbreak over the short- or medium-term could result in delays in services delivery, delays in implementations, delays in critical development and commercialization activities, including delays in the introduction of new products and services and further international expansion, interruptions in sales and marketing activity, furloughs of employees and disruptions of supply chains. Additionally, we may incur increased costs in the future when employees return to work and we implement measures to ensure their safety.

The related impact on the global economy could also decrease technology spending by our existing and prospective customers and adversely affect their demand for our solutions. Further, our sales and implementation cycles could increase, resulting in providing contract terms more favorable to customers and a potentially longer delay between incurring operating expenses and the generation of corresponding revenue or in difficulty in accurately predicting our financial forecasts. Additionally, the economic downturn and rising unemployment rates resulting from COVID-19 have the potential to significantly reduce individual and business disposable income and depress consumer confidence, which could limit the ability or willingness of some consumers to obtain and pay for insurance products in both the short- and medium-term, which may negatively impact the ability of our customers to pay for our services or require such customers to request amended payment terms for their outstanding invoices. Furthermore, we are unable to predict the impact that COVID-19 may have going forward on the business, results of operations or financial position of any of our major customers, which could impact each customer to varying degrees and at different times and could ultimately impact our own financial performance. Certain of our competitors may also be better equipped to weather the impact of COVID-19 both domestically and abroad and better able to address changes in customer demand.

The outbreak also presents operational challenges as our workforce is currently working remotely and shifting to assisting customers who are also generally working remotely. We have also suspended international and domestic travel. We depend on key officers and employees; should any of them become ill and unable to work, it could impact our productivity and business continuity. Although we continue to monitor the situation

 

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and may adjust our current policies as more information and public health guidance become available, it is not possible for us to predict the duration or magnitude of these business disruptions and the adverse results of the outbreak, which ultimately will depend on many factors, including the speed and effectiveness of containment efforts throughout the world. These disruptions could negatively affect our operations or internal controls over financial reporting and may require us to implement new processes, procedures and controls to respond to further changes in our business environment.

Additionally, COVID-19 could increase the magnitude of many of the other risks described herein and have other adverse effects on our operations that we are not currently able to predict. For example, we have, and may continue to delay or limit our internal strategies in the short- and medium-term by, for example, redirecting significant resources and management attention away from implementing our strategic priorities or executing opportunistic corporate development transactions (including our international expansion).

The magnitude of the effect of COVID-19 on our business will depend, in part, on the length and severity of the restrictions (including the effects of recently announced “re-opening” plans following a recent slowdown of the virus infection rate in certain countries and localities) and other limitations on our ability to conduct our business in the ordinary course. The longer the pandemic continues or resurges, the more severe the impacts described above will be on our business. The extent, length and consequences of the pandemic on our business are uncertain and impossible to predict, but could be material. COVID-19 and other similar outbreaks, epidemics or pandemics could have a material adverse effect on our business, financial condition, results of operations, cash flows and prospects and could cause significant volatility in the trading prices of our common stock as a result of any of the risks described above and other risks that we are not able to predict.

To the extent the COVID-19 pandemic adversely affects our business and financial results, it may also have the effect of heightening many of the other risks described in this “Risk Factors” section, such as those relating to our liquidity.

We have a history of losses and may not achieve or maintain profitability in the future.

We have incurred net losses of $24.8 million, $7.8 million and $16.9 million in fiscal 2017, 2018 and 2019, respectively, and $14.1 million and $8.5 million in the nine months ended May 31, 2019 and 2020, respectively. We must generate and sustain higher revenue levels in future periods to become profitable, and, even if we do, we may not be able to maintain or increase our profitability. We expect to continue to incur losses for the foreseeable future as we expend substantial financial and other resources on, among other things:

 

   

sales and marketing, including expanding our direct sales team and online marketing programs, particularly for larger customers;

 

   

investments in the development of new products and new features for, and enhancements of, our existing product portfolio;

 

   

expansion of our operations and infrastructure organically and through acquisitions and strategic partnerships, both domestically and internationally; and

 

   

general administration, including legal, risk management, accounting, and other expenses related to being a public company.

These expenditures may not result in additional revenue or the growth of our business. Accordingly, we may not be able to generate sufficient revenue to offset our expected cost increases and achieve and sustain profitability. If we fail to achieve and sustain profitability, the market price of our common stock could decline.

Changes in our product revenue mix and gross margins as we continue to focus on sales of our SaaS solutions will cause fluctuations in our results of operations and cash flows between periods, which may cause our stock price to decline.

We have recently experienced strong growth in subscriptions to our SaaS solutions and, in particular, our subscription revenue has continued to increase in comparison with our license revenue for our term and perpetual

 

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licenses. Our subscription revenue grew 27% from $33.5 million in fiscal 2017 to $42.5 million in fiscal 2018, and 32% to $55.9 million in fiscal 2019. Our subscription revenue grew 49% from $39.9 million in the nine months ended May 31, 2019 to $59.4 million in the nine months ended May 31, 2020. Our subscription revenue is recognized ratably over the term of the contract, unlike the license revenue from our term and perpetual licenses, which is typically recognized upfront. We expect the portion of our subscription revenue will grow as we continue to focus on driving sales of our SaaS solutions to new customers and existing term and perpetual license customers, as well as to our existing customers with SaaS arrangements who do not utilize the full Duck Creek Suite. As a result, our product revenue mix has changed, and will continue to change over time as the portion of upfront license revenue decreases and the portion of ratable subscription revenue increases, which may make our results in any one period difficult to compare to any other period. This change of revenue mix could adversely impact our gross and operating margins. For instance, as we continue to increase our focus on SaaS customers, we expect our overall gross margin percentage to decrease due to our subscription gross margin percentages being lower than our license gross margin percentages.

Additionally, the growth of our business is dependent on winning a relatively small number of higher value contracts, and our quarterly results of operations may be volatile because we cannot control in which quarter, if any, a new contract will be signed in a given year. Our revenue may also fluctuate versus comparable prior periods or prior quarters within the same fiscal year based on the terms of the agreements and the timing of new orders executed in the quarter. In addition, as subscription revenue is recognized ratably over the term of the contract, most of the subscription revenue we report in each quarter is the result of SaaS arrangements entered into during previous quarters. Consequently, a decline in new or renewed subscriptions in any one quarter will not be fully reflected in our revenue results for that quarter. Any such decline, however, will negatively affect our revenue in future quarters.

These factors may cause significant fluctuations in our results of operations and cash flows, may make it challenging for an investor to predict our performance and may prevent us from meeting or exceeding the expectations of research analysts or investors, which in turn 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 revenue, and the loss of any of these customers or a reduction in revenue from any of these customers would significantly harm our business, results of operations and financial condition.

Our revenue is dependent on orders from customers in the P&C insurance industry and a relatively small number of customers have historically accounted for a significant portion of our revenue. We have over 150 insurance customers. We had one customer, State Farm, that accounted for approximately 10% of our total revenue in fiscal 2019. No single customer accounted for more than 10% of our total revenue for the nine months ended May 31, 2020. We also assess customer concentration by combining customers that are under common control and considering them as one entity. On this basis we had two consolidated entities that each represented in excess of 10% of our total revenue in fiscal 2019, a large multinational corporation that does business with us through multiple subsidiaries at approximately 13% and State Farm at approximately 10%, respectively. The same multinational corporation represented approximately 11% of our total revenue for the nine months ended May 31, 2020. While we expect this reliance to decrease over time, we expect that we will continue to depend upon a relatively small number of customers for a significant portion of our revenue for the foreseeable future. As a result, if we fail to successfully sell our solutions and professional services to one or more of these anticipated customers in any particular period or fail to identify additional potential customers or such customers purchase fewer of our solutions or professional services, defer or cancel orders, fail to renew their subscription arrangements or license agreements or otherwise terminate their relationship with us, our business, results of operations and financial condition would be harmed. Additionally, if our sales to one or more of these anticipated customers in any particular period is for SaaS arrangements or maintenance and support and are ratable in nature, or if we fail to achieve the required performance criteria or service levels for one or more of these relatively small number of customers, our quarterly and annual results of operations may fluctuate significantly. Some of

 

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our SaaS arrangements and license agreements with our customers can be canceled and not renewed by the customer after the expiration of the SaaS or license term, as applicable, on relatively short notice. Moreover, one of our SaaS customers has a right to terminate its contract with us at its discretion by providing notice and paying a termination fee based on a proportion of the remaining SaaS fees otherwise payable by that customer for the balance of the committed term of its contract, while one of our other SaaS customers has a right to terminate its contract with us at its discretion only during the first year of the committed term of its contract by providing notice and paying a termination fee equal to the SaaS fees otherwise payable by that customer for the balance of the first year of the committed term of its contract. In addition, another SaaS customer has the ability to elect during the last year of the committed term of its contract to discontinue its access to certain SaaS capabilities made available to it under such contract by providing notice and receiving up to an approximately 7% reduction in annual SaaS fees that would have otherwise been payable by that customer during the last year of the committed term of its contract. The loss of business from any of our significant customers, including from cancellations, could seriously harm our business, results of operations and financial condition.

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 revenue and lower average selling prices and gross margin percentages, all of which would harm our results of operations.

Some of our customers include the world’s largest carriers. These customers have significant bargaining power when negotiating new SaaS arrangements or term licenses, or renewals of existing agreements, and have the ability to buy similar solutions from other vendors or develop such systems internally. These customers have and may continue to seek advantageous pricing and other commercial terms and may require us to develop additional features in the solutions we sell to them. We have been required to, and may continue to be required to, reduce the average selling price of our solutions in response to these pressures. These customers may also require us to implement their purchased products on an expedited basis. If we are unable to implement our products to our customer’s satisfaction or avoid reducing our average selling prices and gross margin percentages, our results of operations would be harmed.

Our business depends on customers renewing and expanding their SaaS arrangements, term licenses or maintenance and support arrangements for our solutions. A decline in our customer renewals and expansions could harm our future results of operations.

Our customers have no obligation to renew their SaaS arrangements, term licenses or maintenance and support arrangements after they expire, and these arrangements or licenses may not be renewed on the same or more favorable terms. Moreover, one of our SaaS customers has a right to terminate its contract with us at its discretion by providing notice and paying a termination fee based on a proportion of the remaining SaaS fees otherwise payable by that customer for the balance of the committed term of its contract, while one of our other SaaS customers has a right to terminate its contract with us at its discretion only during the first year of the committed term of its contract by providing notice and paying a termination fee equal to the SaaS fees otherwise payable by that customer for the balance of the first year of the committed term of its contract. In addition, another SaaS customer has the ability to elect during the last year of the committed term of its contract to discontinue its access to certain SaaS capabilities made available to it under such contract by providing notice and receiving up to an approximately 7% reduction in annual SaaS service fees that would have otherwise been payable by that customer during the last year of the committed term of its contract. We have limited historical data with respect to rates of customer renewals, upgrades and expansions of our SaaS solutions, 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 and support arrangements after the expiration of the initial contractual period, which has historically been for three to six years, and more recently has been reduced to two years. Our customers’ renewal rates may fluctuate or decline because of several factors, including their satisfaction or dissatisfaction with our solutions and professional services, the prices of our solutions and professional services, the prices of solutions and professional services offered by our competitors or reductions in our customers’ spending levels due to the macroeconomic environment or other factors. If our customers do not renew their

 

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SaaS arrangements or term licenses for our solutions or renew on less favorable terms, our revenue may decline or grow more slowly than expected and our profitability will be harmed.

Our growth strategy is focused on continuing to develop our SaaS solutions, which may increase our costs. In addition, if we are unable to successfully grow our SaaS business or navigate our growth strategy, our reputation and results of operations could be harmed.

To address demand trends in the P&C insurance industry, we have focused on and plan to continue focusing on the growth and expansion of our SaaS business. This growth strategy has required and will continue to require a considerable investment of technical, financial and sales resources. We have no assurance that such investments will result in an increase in subscription revenue or that we will be able to scale such investments efficiently, or at all, to meet customer demand and expectations. Our focus on our SaaS business may increase our costs, such as the cost of public infrastructure, in any given period and may be difficult to predict over time. Further, we have experienced and may continue to experience reduced term or perpetual license revenue as we increasingly focus on our SaaS business.

Our SaaS arrangements also contain service level agreement clauses, for matters such as failing to meet stipulated service levels, which represent new risks we are not accustomed to managing. Should these penalties be triggered, our results of operations may be adversely affected. Furthermore, we may assume greater responsibilities for implementation related services as we continue to focus on our SaaS business. As a result, we may face risks associated with new and complex implementations, the cost of which may differ from original estimates. The consequences in such circumstances could include: monetary credits for current or future service engagements, reduced fees for additional product sales, cancellations of planned purchases and a customer’s refusal to pay their contractually-obligated SaaS or professional service fees. Any factor adversely affecting sales of our SaaS solutions, including application release cycles, delays or failures in new product functionality, market acceptance, product competition, performance and reliability, reputation, price competition and economic and market conditions, would have a material adverse effect on our business, financial condition and results of operations. Additionally, the entry into new markets or the introduction of new features, functionality or applications beyond our current markets and functionality may not be successful. If we are unable to successfully grow our SaaS business and navigate our growth strategy in light of the foregoing uncertainties, our reputation could suffer and our results of operations would be harmed, which may cause our stock price to decline.

Failure to manage our expanding operations effectively could harm our business.

We have expanded our operations and expect to continue to do so, including the number of employees and the locations and scope of our operations. Additionally, the COVID-19 pandemic and related shelter in-place orders have resulted in our employees and contractors working from home, bringing new challenges to managing our business and work force. This expansion and changing work environment has placed, and will continue to place, a significant strain on our operational and financial resources and our personnel. We will also need to identify, add and retain additional qualified personnel across our operations. To manage our anticipated future operational expansion effectively, we must continue to maintain and expect to enhance our IT infrastructure, financial and accounting systems and controls and manage expanded operations and employees in geographically distributed locations. Our growth could require significant capital expenditures and may divert financial resources from other projects, such as the development of new solutions. If we increase the size of our organization without experiencing an increase in sales of our solutions, we will experience reductions in our gross and operating margins and net income. We may also deem it advisable in the near-term or later to downsize certain of our offices in order to reduce costs, which may cause us to incur related charges. If we are unable to effectively manage our expanding operations or manage the increase in remote employees, our expenses may increase more than expected, our revenue could decline or grow more slowly than expected and we may be unable to implement our business strategy.

 

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If we are unable to develop or sell our solutions into new markets or to further penetrate existing markets, our revenue will not grow as expected.

Our ability to increase revenue will depend, in large part, on our ability to further penetrate our existing markets and to attract new customers, as well as our ability to transition our existing term and perpetual license customers to our SaaS solutions and to increase sales from existing customers who do not utilize the full Duck Creek Suite. The success of any enhancement or new solution or service depends on several factors, including the timely completion, introduction and market acceptance of enhanced or new solutions, adaptation to new industry standards and technological changes, the ability to maintain and to develop relationships with third parties and the ability to attract, retain and effectively train sales and marketing personnel. Any new solutions we develop or acquire may not be introduced in a timely or cost-effective manner and may not achieve the market acceptance necessary to generate significant revenue. Any new industry standards or practices that emerge, or any introduction by competitors of new solutions embodying new services or technologies, may cause our solutions to become obsolete. Any new markets in which we attempt to sell our solutions, including new countries or regions, may not be receptive or implementation may be delayed due to COVID-19. Additionally, any expansion into new markets will require commensurate ongoing expansion of our monitoring of local laws and regulations, which increases our costs as well as the risk of the solution not incorporating in a timely fashion or at all due to a failure of the solution to comply with such local laws or regulations. Our ability to further penetrate our existing markets depends on the quality of our solutions and our ability to design our solutions to meet changing consumer demands and industry standards, as well as our ability to assure that our customers will be satisfied with our existing and new solutions. If we are unable to sell our solutions into new markets or to further penetrate existing markets, or to increase sales from existing customers by selling them additional software and services, our revenue will not grow as expected, which would have a material adverse effect on our business, financial condition and results of operations.

Failure of any of our established solutions to satisfy customer demands or to maintain market acceptance would harm our business, results of operations, financial condition and growth prospects.

We derive a significant majority of our revenue and cash flows from our established solutions, including Duck Creek Policy, Duck Creek Rating, Duck Creek Billing and Duck Creek Claims. We expect to continue to derive a substantial portion of our revenue from these sources. As such, continued market acceptance of these solutions is critical to our growth and success. Demand for our solutions is affected by a number of factors, some of which are beyond our control, including the successful implementation of our solutions, the timing of development and release of new solutions by us and our competitors, technological advances which reduce the appeal of our solutions, changes in regulations that our customers must comply with in the jurisdictions in which they operate and the 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, to achieve and maintain a technological advantage over competitors, or to maintain market acceptance of our solutions, our business, results of operations, financial condition and growth prospects would be adversely affected.

If the market for enterprise cloud computing, including SaaS solutions, develops slower than we expect or declines, it could have a material adverse effect on our business, financial condition and results of operations.

While the market for cloud computing, including SaaS solutions, for the P&C insurance industry is growing, it is not as mature as the market for legacy on-premise applications. It is uncertain whether cloud computing, including SaaS solutions, will achieve and sustain high levels of customer demand and market acceptance, particularly in our industry. Our success substantially depends on the adoption of cloud computing and SaaS solutions in the P&C insurance industry, which may be affected by, among other things, the widespread acceptance of cloud computing and SaaS solutions in other industries and in general. Market acceptance of our SaaS solutions may be affected by a variety of factors, including but not limited to: price, security, reliability, performance, customer preference, public concerns regarding privacy and the enactment of restrictive laws or regulations. Many carriers have invested substantial personnel and financial resources to integrate traditional enterprise software into

 

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their businesses and therefore may be reluctant or unwilling to migrate to cloud computing. It is difficult to predict customer adoption rates and demand for our SaaS solutions, the future growth rate and size of the cloud computing market or the entry of other competitive applications. As our business practices in this area continue to develop and evolve over time, we may be required to revise the SaaS solutions we have developed, which may result in revised terms and conditions that impact how we recognize revenue and the costs and risks associated with these offerings. Whether our product development efforts or focus on SaaS solutions will prove successful and accomplish our business objectives is subject to numerous uncertainties and risks, including but not limited to, customer demand, our ability to further develop and scale infrastructure, our ability to include functionality and usability in such offerings that address customer requirements, tax and accounting implications and our costs. If we or other providers of cloud-based computing in general, and in the P&C insurance industry in particular, experience security incidents, loss of customer data, disruptions in delivery or other problems, the market for cloud computing applications as a whole, including our SaaS solutions, may be negatively affected. If cloud computing does not achieve widespread adoption or there is a reduction in demand for cloud computing caused by a lack of customer acceptance, technological challenges, weakening economic conditions, security or privacy concerns, competing technologies and solutions, reductions in corporate spending or otherwise, it could have a material adverse effect on our business, financial condition, and results of operations.

We may not be able to obtain capital when desired on favorable terms, if at all, and we may not be able to obtain capital or complete acquisitions through the use of equity without dilution to our stockholders.

We may need additional financing to execute on our current or future business strategies, including to develop new or enhance existing solutions, acquire businesses and technologies or otherwise respond to competitive pressures. Our ability to raise capital in the future may be limited, and if we fail to raise capital when needed, we could be prevented from growing and executing our business strategy.

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 newly-issued securities may have rights, preferences or privileges senior to those of existing stockholders. If we accumulate 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, develop or enhance our solutions, invest in future growth opportunities or otherwise respond to competitive pressures would be significantly limited. Any of these factors could harm our results of operations.

Increases in professional services revenue as a percentage of total revenue or lower professional services margin percentages could adversely affect our overall gross margins and profitability.

Our professional services revenue was 48%, 44% and 45% of total revenue for fiscal 2017, 2018 and 2019, respectively, and 45% and 46% for the nine months ended May 31, 2019 and 2020, respectively. Our professional services revenue produces lower gross margin percentages than our subscription revenue and license revenue. The gross margin percentages of our professional services revenue was 44%, 47% and 44% for fiscal 2017, 2018 and 2019, respectively, and 44% and 45% for the nine months ended May 31, 2019 and 2020, respectively. The gross margin percentages for license revenue was 91%, 90% and 86% for fiscal 2017, 2018 and 2019, respectively, and 85% and 75% for the nine months ended May 31, 2019 and 2020, respectively. The gross margin percentages for subscription revenue was 49%, 48% and 57% for each of fiscal 2017, 2018 and 2019, respectively, and 58% for each of the nine months ended May 31, 2019 and 2020, respectively. We expect our professional services revenue to grow over time in absolute dollars due to customer growth and an increasing need for implementation services but decrease as a percentage of total revenue. Any increase in the percentage of total revenue represented by professional services revenue would reduce our overall gross margins and operating margins. Such a trend can be the result of several factors, some of which may be beyond our control, including increased customer demand for

 

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our professional service team’s involvement in new solutions, the rates we charge for our professional services, our ability to bill our customers for all time incurred to complete a project, and the extent to which SI partners are willing and able to provide services directly to customers. Erosion in our professional services margin percentages would also adversely affect our gross and operating margin percentages. Professional services margin percentages may erode for a period of time as we work to grow our business and overall revenue; for instance, professional services margin percentages may erode if we hire and train additional professional services personnel to support new solutions, if we require additional professional service personnel to support entry into new markets, or if we require additional personnel on unexpectedly difficult projects to ensure customer success, perhaps without commensurate compensation due to the terms of the arrangement.

Professional services margins may also decline if we are required to defer professional services revenue in connection with an engagement. This may happen for a number of reasons, including if there is a specific product deliverable associated with a broader professional services engagement. In these situations, we would defer only the direct costs associated with the engagement, although other indirect costs could be recognized. Deferring all revenue but only direct costs will reduce margins. Lower professional services margins could adversely affect our overall gross margins and profitability.

Real or perceived errors or failures in our solutions or implementation services may affect our reputation, cause us to lose customers and reduce sales which may harm our business and results of operations and subject us to liability for breach of warranty claims.

Because we offer solutions that operate in complex environments, undetected errors or failures may exist or occur, especially when solutions are first introduced or when new versions are released, implemented or integrated into other systems. Our solutions 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 solutions or may expose undetected errors, failures or bugs in our solutions. Despite testing by us, we may not identify all errors, failures or bugs in new solutions or releases until after commencement of commercial sales or installation. In the past, we have discovered errors, failures and bugs in some of our solutions after their introduction. We may not be able to fix errors, failures and bugs without incurring significant costs or an adverse impact to our business. We believe that our reputation and name recognition are critical factors in our ability to compete and generate additional sales. Promotion and enhancement of our name will depend largely on our success in continuing to provide effective solutions and services. The occurrence of errors in our solutions or the detection of bugs by our customers may damage our reputation in the market and our relationships with our existing customers, and as a result, we may be unable to attract or retain customers. Any of these events may result in the loss of, or delay in, market acceptance of our solutions and services, which could seriously harm our sales, results of operations and financial condition.

The license and support of our software creates the risk of significant liability claims against us. Our SaaS arrangements and term and perpetual licenses 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 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 harm our results of operations and financial condition.

Our sales and implementation cycles are lengthy and variable, depend upon factors outside our control, and could cause us to expend significant time and resources prior to generating revenue.

The typical sales cycle for our solutions 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. While sales cycles can vary and such differences can be material, the typical buying process for a customer purchasing core system software takes approximately twelve to fifteen months. Our sales efforts involve educating our customers about the use and benefits of our solutions, including the technical

 

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capabilities of our solutions and the potential cost savings achievable by organizations using our solutions. Potential customers typically undertake a rigorous pre-purchase decision-making and evaluation process, and sales to new customers involve extensive customer due diligence and reference checks. We invest a substantial amount of time and resources on our sales efforts without any assurance that our efforts will produce sales. Even if we succeed at completing a sale, we may be unable to predict the size of an initial SaaS arrangement or term or perpetual license until very late in the sales cycle. 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 subscription or license revenue until the specific functions have been added to our solutions. Providing this additional functionality may be time consuming and may involve factors that are outside of our control. Customers may also insist that we commit to certain time frames in which systems built around our solutions will be operational, or that once implemented our solutions will be able to meet certain operational requirements. Our ability to meet such timeframes and requirements may involve factors that are outside of our control, and failure to meet such timeframes and requirements could result in us incurring penalties, costs and/or additional resource commitments, which would adversely affect our business and results of operations.

Unexpected delays and difficulties can occur as customers implement and test our solutions. Implementing our solutions typically involves integration with our customers’ and third-party’s systems, as well as adding customer and third-party data to our platform. This can be complex, time consuming and expensive for our customers and can result in delays in the implementation of our solutions. We also provide our customers with upfront estimates regarding the duration, resources and costs associated with the implementation of our solutions. Failure to meet these upfront estimates and the expectations of our customers for the implementation of our solutions could result in a loss of customers and negative publicity about us and our solutions and professional services. Such failure could result from deficiencies in our solution capabilities or inadequate professional service engagements performed by us, our SI partners or our customers’ employees, the latter two of which are beyond our direct control. Time-consuming implementations may also increase the amount of services personnel we must allocate to each customer, thereby increasing our costs and consequently the cost to our customers and adversely affecting our business, results of operations and financial condition.

Furthermore, our sales and implementation cycles could be disrupted by factors outside of our control. We are closely monitoring the COVID-19 pandemic and the public health measures undertaken to contain the spread and its impacts on our business. We have implemented formal restrictions on travel in accordance with recommendations by the U.S. federal government and the Centers for Disease Control and Prevention. Our customers, SI partners and prospective customers are enacting their own preventative policies and travel restrictions, and may be adversely impacted by the COVID-19 pandemic. Widespread restrictions on travel and in-person meetings could affect services delivery, delay implementations and interrupt sales activity. We are unable to predict the impact that COVID-19 may have going forward on our business, results of operations or financial position. See “Risk Factors—Risks Related to Our Business and Industry—Public health outbreaks, epidemics or pandemics, including the global COVID-19 outbreak, could harm our business, results of operations, and financial condition.”

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 holding such intellectual property rights, including leading companies, competitors, patent holding companies and/or non-practicing entities, 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 solutions do not infringe upon the intellectual property rights of third parties, we cannot assure that third parties will not assert infringement or misappropriation claims against us with respect

 

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to current or future solutions, 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. Infringement assertions from third parties may involve patent holding companies or other patent owners who have no relevant product revenue, 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.

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. Regardless of the merits or eventual outcome, such a claim could harm our brand and business. 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 solutions that are alleged to infringe or misappropriate the intellectual property of others; expend additional development resources to redesign our solutions; 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. Any of these events could seriously harm our business, results of operations and financial condition.

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.

In the future we may file patent applications related to certain of our innovations. We do not know whether those 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 these patents. Therefore, the extent of the protection afforded by 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. 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.

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 solutions 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

 

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trade secret rights against such parties. Existing United States 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. Even if we are successful in defending our claims, litigation could result in substantial costs and diversion of resources and could negatively affect our business, reputation, results of operations and financial condition. To the extent that we seek to enforce our rights, we could be subject to claims that an intellectual property right is invalid, otherwise not enforceable, or is licensed to the party against whom we are pursuing a claim. In addition, our assertion of intellectual property rights may result in the other party seeking to assert alleged intellectual property rights or assert other claims against us, which could harm our business. If we are not successful in defending such claims in litigation, we may not be able to sell or license a particular solution due to an injunction, or we may have to pay damages that could, in turn, harm our results of operations. In addition, governments may adopt regulations, or courts may render decisions, requiring compulsory licensing of intellectual property to others, or governments may require that products meet specified standards that serve to favor local companies. Our inability to enforce our intellectual property rights under these circumstances may harm our competitive position and our business. 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 solutions that have enabled us to be successful to date.

If our solutions or third-party cloud providers 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.

If our security measures are breached or unauthorized access to customer data is otherwise obtained, our solutions may be perceived as not being secure, customers may reduce the use of or stop using our solutions, and we may incur significant liabilities. Our solutions involve the storage and transmission of data, in some cases to third-party cloud providers, which may include personal data, and security breaches, including at third-party cloud providers, could result in the loss of this information, which in turn could result in litigation, breach of contract claims, indemnity obligations, reputational damage and other liability for our company. Despite the measures that we have or may take, our infrastructure will be potentially vulnerable to physical or electronic break-ins, computer viruses or similar problems, and in the case of third-party cloud providers, may be outside of our control. If a person circumvents our security measures, that person could misappropriate proprietary information or disrupt or damage our operations. Security breaches that result in access to confidential information could damage our reputation and subject us to a risk of loss or liability. We may be required to make significant expenditures to protect against or remediate security breaches. Additionally, if we are unable to adequately address our customers’ concerns about security, we will have difficulty selling our solutions and professional services.

We rely on third-party technology and systems for a variety of services, including, without limitation, third-party cloud providers to host our websites and web-based services, encryption and authentication technology, employee email, content delivery to customers, back-office support and other functions, and our ability to control or prevent breaches of any of these systems may be beyond our control. Because techniques used to obtain unauthorized access or sabotage systems change frequently and generally are not identified until they are launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. Although we have developed systems and processes that are designed to protect customer information and prevent data loss and other security breaches, including systems and processes designed to reduce the impact of a security breach at a third-party vendor, such measures cannot provide absolute security. In addition, we may

 

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have to introduce such protective systems and processes to acquired companies, who may not correctly implement them at first or at all. Any or all of these issues could negatively impact our ability to attract new customers or to increase engagement by existing customers, could cause existing customers to elect not to renew their SaaS arrangements or term licenses, or could subject us to third-party lawsuits, regulatory fines or other action or liability, thereby adversely affecting our results of operations.

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 maintenance and support services.

Our SaaS arrangements and license agreements sometimes 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 applicable solutions in escrow with a third-party. As of May 31, 2020, we have source code license agreements in place with 44% of our customers who have either SaaS or term and perpetual license arrangements with us. 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 or the discontinuance of our ability to perform our obligations, or if we otherwise breach certain of our representations, warranties or covenants under our agreements with our customers.

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

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

We use technology and intellectual property licensed from unaffiliated third parties in certain of our solutions, 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 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 solutions and might require us to redesign our solutions.

We expect to continue to expand through acquisitions 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.

We expect to continue to grow, in part, by making targeted acquisitions. Our business strategy includes the potential acquisition of shares or assets of companies with software, technologies or businesses complementary to ours, both domestically and globally. Our strategy also includes alliances with such companies. For example, in August 2016, we acquired Agencyport Software, a provider of intuitive, digital experiences between carriers and their agents, brokers, consumers and policyholders; in January 2017, we acquired Yodil, LLC, a pioneer in insurance data management solutions; in October 2018, we acquired Outline Systems LLC, a provider of P&C distribution channel management software and longstanding member of our partner ecosystem; and in June 2019, we acquired the CedeRight Products business, a provider of reinsurance management software, from DataCede LLC. Each of these acquisitions was initially dilutive to earnings. Acquisitions and alliances may result in unforeseen operating difficulties and expenditures and may not result in the benefits anticipated by such corporate activity.

 

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In particular, we may fail to assimilate or integrate the businesses, technologies, services, products, personnel or operations of the acquired companies, retain key personnel necessary to favorably execute the combined companies’ business plan, or retain existing customers or sell acquired products to new customers. Additionally, the assumptions we use to evaluate acquisition opportunities may not prove to be accurate, and intended benefits may not be realized. Our due diligence investigations may fail to identify all of the problems, liabilities or other challenges associated with an acquired business which could result in increased risk of unanticipated or unknown issues or liabilities, including with respect to environmental, competition and other regulatory matters, and our mitigation strategies for such risks that are identified may not be effective. As a result, we may not achieve some or any of the benefits, including anticipated synergies or accretion to earnings, that we expect to achieve in connection with our acquisitions, or we may not accurately anticipate the fixed and other costs associated with such acquisitions, or the business may not achieve the performance we anticipated, which may materially adversely affect our business, prospects, financial condition, results of operations, cash flows, as well as our stock price. Further, if we fail to achieve the expected synergies from our acquisitions and alliances, we may experience impairment charges with respect to goodwill, intangible assets or other items, particularly if business performance declines or expected growth is not realized. Any future impairment of our goodwill or other intangible assets could have an adverse effect on our financial condition and results of operations.

Acquisitions and alliances 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. In addition, we may be required to make additional capital investments or undertake remediation efforts to ensure the success of our acquisitions, which may reduce the benefits of such acquisitions. We also may be required to use a substantial amount of our cash or issue debt or equity securities to complete an acquisition or realize the potential of an alliance, which could deplete our cash reserves and/or dilute our existing stockholders. Following an acquisition or the establishment of an alliance offering new solutions, we may be required to defer the recognition of revenue that we receive from the sale of solutions that we acquired or that result from the alliance, or from the sale of a bundle of solutions that includes such new solutions. In addition, our ability to maintain favorable pricing of new solutions may be challenging if we bundle such solutions with sales of existing solutions. A delay in the recognition of revenue from sales of acquired or alliance solutions, or reduced pricing due to bundled sales, may cause fluctuations in our quarterly financial results, may adversely affect our operating margins and may reduce the benefits of such acquisitions or alliances.

Additionally, competition within the software industry for acquisitions of businesses, technologies and assets has been, and is expected to continue to be, intense. As such, even if we are able to identify an acquisition that we would like to pursue, the target may be acquired by another strategic buyer or financial buyer such as a private equity firm, or we may otherwise not be able to complete the acquisition on commercially reasonable terms, if at all. Moreover, in addition to our failure to realize the anticipated benefits of any acquisition, including our revenue or return on investment assumptions, we may be exposed to unknown liabilities or impairment charges as a result of acquisitions we do complete.

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 solutions and services is intensely competitive. The competitors we face in any sale may change depending on, among other things, the line of business purchasing the solution, the solution being sold, the geography in which we are operating and the size of the carrier to which we are selling. For example, we are more likely to face competition from small independent firms when addressing the needs of small insurers. These competitors may compete on the basis of price, the time and cost required for software implementation, custom development, or unique product features or functions. Outside of the United States, we are more likely to compete against vendors that may differentiate themselves based on local advantages in language, market knowledge and pre-built content applicable to that jurisdiction. We also compete with vendors of horizontal software products that may be customized to address needs of the P&C insurance industry.

 

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Additionally, many of our prospective customers operate firmly entrenched legacy systems, some of which have been in operation for decades. Our implementation cycles are lengthy, variable and require the investment of significant time and expense by our customers. These expenses and associated operating risks attendant on any significant process of re-engineering and technology implementation exercise, may cause customers to prefer maintaining legacy systems. Also, maintaining 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 solutions. We also compete against technology consulting firms that either helped create such legacy systems or may own, in full or in part, subsidiaries that develop software and systems for the P&C insurance industry. As we expand our portfolio of solutions, we may begin to compete with software and service providers we have not competed against previously. Such potential competitors offer data and analytics tools that may, in time, become more competitive with our offerings. In addition, instead of purchasing P&C software products from a third party, including one of our direct competitors, our customers may decide to internally develop their own systems.

We expect the intensity of competition to remain high in the future. In addition to existing competitors, we believe investment in emerging Insurtech companies, which seek to innovate and disrupt the insurance industry, is growing rapidly and could produce new competitive threats. Continuing intense competition could result in increased pricing pressure, increased sales and marketing expenses, and greater investments in research and development, each of which could negatively impact our profitability. In addition, the failure to increase, or the loss of market share, would harm our business, results of operations, financial condition and/or future prospects. Some of our current and potential competitors may have longer operating histories and greater financial, technical, sales, marketing and other resources than we do, as well as larger installed customer bases. As a result, such competitors may be able to devote greater resources to the development, promotion and sale of their solutions than we can devote to ours, which could allow them to respond more quickly than we can to new or emerging technologies and changes in customer needs, thus leading to their wider market acceptance. To the extent any competitor has existing relationships with potential customers for other applications, those customers may be unwilling to purchase our solutions because such existing relationships create customer “stickiness.” For instance, if a potential customer uses one product from a competitor that powers a critical element of the customer’s day-to-day operations, they may be more likely to turn to such competitor in the future to the extent they require further product solutions, rather than purchasing one or more solutions from our suite. 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 revenue and profitability.

In addition, our industry is evolving rapidly and we anticipate the market for solutions will become increasingly competitive. If our current and potential customers move a greater proportion of their data and computational needs to the cloud, new competitors may emerge that offer services either comparable or better suited than ours to address the demand for such solutions, which could reduce demand for our offerings. To compete effectively we will likely be required to increase our investment in our product development and technology, as well as the personnel and third-party services required to improve reliability and lower the cost of delivery of our SaaS solutions. This may increase our costs more than we anticipate and may adversely impact our results of operations.

Our current and potential competitors may also establish cooperative relationships among themselves or with third parties to further enhance their resources and offerings. Current or potential competitors may be acquired by other vendors or third parties with greater available resources. As a result of such acquisitions, our current or potential competitors might be more able than we are to adapt quickly to new technologies and customer needs, to devote greater resources to the promotion or sale of their products and services, to initiate or withstand substantial price competition, or to take advantage of emerging opportunities by developing and expanding their product and service offerings more quickly than we can. Additionally, they may hold larger portfolios of patents and other intellectual property rights as a result of such relationships or acquisitions. If we are unable to compete effectively with these evolving competitors for market share, our business, results of operations and financial condition would be materially and adversely affected.

 

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Our estimates of certain operational metrics, as well as of total addressable market and market growth, are subject to inherent challenges in measurement.

We make certain estimates with regard to certain operational metrics, such as win rate for new SaaS opportunities, which we track using internal systems that are not independently verified by any third party. While the metrics presented in this prospectus are based on what we believe to be reasonable assumptions and estimates, our internal systems have a number of limitations, and our methodologies for tracking these metrics may change over time.

Additionally, total addressable market and growth estimates are subject to significant uncertainty and are based on assumptions and estimates that may not prove to be accurate. Our estimates relating to size and expected growth of our market may prove to be inaccurate. Even if the market in which we compete meets our size and growth estimates, our business could fail to grow at similar rates. If investors do not perceive our estimates of total addressable market and market growth or our operational metrics to be accurate, or if we discover material inaccuracies with respect to these figures, our reputation may be significantly harmed, and our results of operations and financial condition could be adversely affected.

We may not receive significant revenue from our current research and development efforts for several months or years, if at all.

Developing software is expensive, and the investment in product development may involve a long payback cycle. Our research and development expenses were $42.8 million, or 27% of our total revenue in fiscal 2017, $36.1 million, or 23% of our total revenue in fiscal 2018, and $35.9 million, or 21% of our total revenue in fiscal 2019. Our research and development expenses were $26.3 million, or 21% of our total revenue in the nine months ended May 31, 2019, and $29.4 million, or 19% of our total revenue in the nine months ended May 31, 2020. Costs incurred in the preliminary design and development stages of our projects are generally expensed as incurred. Once a project has reached the application development stage, certain internal, external, direct and indirect costs may be subject to capitalization. Generally, costs are capitalized until the technology is available for its intended use. Subsequent costs incurred for the development of future upgrades and enhancements, which are expected to result in additional functionality, follow the same protocol for capitalization. Our future plans include significant investments to develop, improve and expand the functionality of our solutions. We believe that we must continue to dedicate a significant amount of resources to our research and development efforts to maintain our competitive position. However, we may not recognize significant revenue from these investments for several months or years, if at all.

If we are unable to develop, introduce and market new and enhanced versions of our solutions, we may be put at a competitive disadvantage and our operating results could be adversely affected.

Our ability to attract new customers and increase revenue from our existing customers depends, in part, on our continued ability to enhance the functionality of our existing solutions by developing, introducing and marketing new and enhanced versions of our solutions that address the evolving needs of our customers and changing industry standards. Because some of our solutions are complex and require rigorous testing, development cycles can be lengthy and can require months or even years of development, depending upon the solution and other factors. As we expand internationally, our products and services must be modified and adapted to comply with regulations and other requirements of the countries in which our customers do business.

Additionally, market conditions, including heightened pressure on carriers from end-users relating to mobile computing devices and speed of delivery, may dictate that we change the technology platform underlying our existing solutions or that new solutions be developed on different technology platforms, potentially adding material time and expense to our development cycles. 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 revenue, if any, from such expenses.

 

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If we fail to develop new solutions or enhancements to our existing solutions, our business could be adversely affected, especially if our competitors are able to introduce solutions with enhanced functionality. 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 solutions to meet our customers’ and prospective customers’ needs on a timely basis. We have invested and intend to continue to make significant investments in research and development to meet these challenges. Our estimates of research and development expenses may be too low, revenue may not be sufficient to support the future product development that is required for us to remain competitive and development cycles may be longer than anticipated. Further, there is no assurance that research and development expenditures will lead to successful solutions or enhancements to our existing solutions. If we fail to develop solutions in a timely manner that are competitive in technology and price or develop solutions that fail to meet customer demands, our market share will decline and our business and results of operations would be harmed.

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 solutions and professional services to customers located outside the United States, and we are continuing to expand our international operations as part of our growth strategy. In fiscal 2017, 2018 and 2019, 4%, 8% and 5% of our revenue, respectively, was derived from outside of the United States. In each of the nine months ended May 31, 2019 and 2020, 5% of our revenue was derived from outside of the United States. Revenue by geography is determined based on the country in which a customer contract is executed. Some of our contracts allow for usage of our solutions in multiple countries. Our current international operations and our plans to expand our international operations subject us to a variety of risks, including:

 

   

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

 

   

unique terms and conditions in contract negotiations imposed by customers in foreign countries;

 

   

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

 

   

the need to localize our licensing and SaaS solutions for international customers;

 

   

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

 

   

increased exposure to fluctuations in currency exchange rates;

 

   

highly inflationary international economies;

 

   

the burdens and costs of complying with a wide variety of foreign laws and legal standards, including the General Data Protection Regulation (“GDPR”) in the European Union;

 

   

compliance with the U.S. Foreign Corrupt Practices Act of 1977, as amended, the U.K. Bribery Act and other anti-corruption regulations, particularly in emerging market countries;

 

   

compliance by international staff with accounting practices generally accepted in the United States, including adherence to our accounting policies and internal controls;

 

   

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

 

   

increased financial accounting and reporting burdens and complexities;

 

   

weaker protection of intellectual property rights in some countries;

 

   

multiple and possibly overlapping tax regimes;

 

   

the application of the respective local laws and regulations to our business in each of the jurisdictions in which we operate;

 

   

government sanctions that may interfere with our ability to sell into particular countries;

 

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disruption to our operations caused by epidemics or pandemics, such as COVID-19; and

 

   

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.

Our business may be materially adversely impacted by U.S. and global market and economic conditions adverse to the insurance industry.

We expect to continue to derive most of our revenue from solutions and additional services we provide to the P&C insurance industry. Given the concentration of our business activities in this industry, we will be particularly exposed to certain economic downturns affecting the insurance industry, in particular the P&C insurance industry. U.S. and global market and economic conditions have been, and continue to be, disrupted and volatile. General business and economic conditions that could affect us and our customers include fluctuations in economic growth, debt and equity capital markets, liquidity of the global financial markets, the availability and cost of credit, investor and consumer confidence, and the strength of the economies in which our customers operate. A poor economic environment could result in significant decreases in demand for our solutions and professional services, including the delay or cancellation of current or anticipated projects, or could present difficulties in collecting accounts receivables from our customers due to their deteriorating financial condition. Our existing customers may be acquired by or merged into other entities that use our competitors’ products, or they may decide to terminate their relationships with us for other reasons. As a result, our sales could decline if an existing customer is merged with or acquired by another company that has a poor economic outlook, or is closed.

Our customers may defer or forego purchases of our solutions or professional services in the event of weakened global economic conditions and political instability.

General worldwide economic conditions remain unstable, making it difficult for our customers and us to forecast and plan future business activities accurately. Prolonged economic uncertainties or downturns could harm our business operations or financial results. For example, the decision by referendum to withdraw the United Kingdom from the European Union (“Brexit”) in June 2016 caused significant volatility in global stock markets and fluctuations in currency exchange rates. The United Kingdom’s formal notification to the European Counsel required under Article 50 of the Treaty on European Union was made on March 29, 2017, triggering a two year negotiation period, subject to extension. The United Kingdom formally left the European Union on January 31, 2020, and is now in a transition period through December 31, 2020. Although the United Kingdom will remain in the European Union single market and customs union during the transition period, the long-term nature of the United Kingdom’s relationship with the European Union is unclear and there is considerable uncertainty as to when any agreement will be reached and implemented. The political and economic instability created by Brexit has caused and may continue to cause significant volatility in global financial markets and uncertainty regarding the regulation of data protection in the United Kingdom. In particular, although the United Kingdom enacted a Data Protection Act in May 2018 that is consistent with the GDPR, uncertainty remains regarding how data transfers to and from the United Kingdom will be regulated. The full effect of Brexit is uncertain and depends on any agreements the United Kingdom may make with the European Union and others.

Brexit or other global events, such as the recent imposition of various trade tariffs and the COVID-19 pandemic, may continue to create global economic, political and regulatory uncertainty not only in the United Kingdom, but in other regions in which we have significant operations. These conditions could cause our customers to reevaluate their decision to purchase our solutions and professional services, which could delay and lengthen our sales cycles or result in cancellations of planned purchases. Furthermore, during challenging

 

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economic times our customers may face issues in gaining timely access to sufficient credit, which could result in an impairment of their ability to make timely payments to us. If that were to occur, we may not receive amounts owed to us and may be required to record an allowance for doubtful accounts, which would adversely affect our financial results. A substantial downturn in the P&C insurance industry may cause firms to react to worsening conditions by reducing their capital expenditures, reducing their spending on IT, delaying or canceling IT projects, or seek to lower their costs by renegotiating vendor contracts. Negative or worsening conditions in the general economy both in the United States and abroad, including conditions resulting from financial and credit market fluctuations, could cause a decrease in corporate spending on enterprise software in general, and in the insurance industry specifically, and negatively affect the rate of growth of our business.

In addition, the U.S. Congress could introduce legislation that would result in the increased regulation of the financial and insurance industries, which could reduce the need for our solutions and professional services. An expansion in government’s role in the U.S. P&C insurance industry may lower the future revenue for the solutions we are developing and adversely affect our future business, possibly materially. We cannot predict what insurance initiatives, if any, will be implemented at the federal or state level, or the effect any future legislation or regulation will have on us. Any of these events could seriously harm our business, results of operations and financial condition.

Factors outside of our control including but not limited to natural catastrophes and terrorism may adversely impact the P&C insurance industry, preventing us from expanding or maintaining our existing customer base and increasing our revenue.

Our customers are carriers who have experienced, and will likely experience in the future, losses from catastrophes or terrorism that may adversely impact their businesses. Catastrophes can be caused by various events, including, without limitation, hurricanes, tsunamis, floods, windstorms, earthquakes, hail, tornadoes, explosions, severe weather, epidemics, pandemics and fires. Global warming trends are contributing to an increase in erratic weather patterns globally and intensifying the impact of certain types of catastrophes. Moreover, acts of terrorism or war could cause disruptions to our business or our customers’ businesses or the economy as a whole.

The risks associated with natural catastrophes and terrorism are inherently unpredictable, and it is difficult to forecast the timing of such events or estimate the amount of losses they will generate. In recent years, for example, parts of the United States suffered extensive damage due to multiple hurricanes and fires. The combined effect of those losses on carriers was significant. Such losses and losses due to future events may adversely impact our current or potential customers, which may prevent us from maintaining or expanding our customer base and increasing our revenue as such events may cause customers to postpone purchases of new offerings and professional service engagements or to discontinue existing projects. Any of these events could materially harm our business, results of operation and financial condition.

If we are unable to continue the successful development of our direct sales team and the expansion of our relationships with our strategic partners, sales of our solutions, and consequently our professional services, will suffer and our growth would be slower than we project.

We believe that our future growth will depend on the continued recruiting, retention and training of our direct sales team and their ability to obtain new customers and to manage our existing customer base. Our ability to achieve significant growth in revenue in the future will depend, in part, on our success in recruiting, training and retaining a sufficient number of inside sales personnel and solution consultants. 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 a sufficient number of productive members of our sales team, sales of our solutions will suffer. Additionally, a decline in sales of our solutions will directly impact our professional services revenue since a reduction in sales of our SaaS solutions and software license products will reduce the need for implementation services related to such products. Any of these events could impede our growth and materially harm our business, results of operation and financial condition.

 

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We believe our future growth also will depend on the retention and expansion of our partnerships with third-party partners, including leading SIs and best-in-class technology companies, which help to increase the visibility of our products and engage with us in co-marketing efforts. The goal of our partnerships with leading SIs and other third-party partners, including our sales, solution and consulting providers and third-party solution partners is to allow us to grow our business by giving us scale to service our growing customer base. Our growth in revenue, particularly in international markets, will be influenced by the development and maintenance of partnerships which, in some cases, may require the establishment of effective relationships with regional SIs. Although we have established relationships with some of leading SIs, our solutions and professional services may compete directly against solutions and professional services that such leading SIs support or market. Additionally, we are unable to control or predict the effects of the COVID-19 pandemic on our SI partners. If we are not able to retain and expand our relationships with SIs and our other third party-partners, it will have an adverse effect on our business and our results of operations could fail to grow in line with our projections.

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

Our revenue and profitability depend on the reliability and performance of our professional services. If our professional services are unavailable, or customers are dissatisfied with our performance, we could lose customers, our revenue and profitability would decrease and our business operations or financial position could be harmed. In addition, the software and workflow processes that underlie our ability to deliver our professional services have been developed primarily by our own employees and consultants. Malfunctions in the software we use or human error could result in our inability to provide professional services or cause unforeseen technical problems. If we incur significant financial commitments to our customers in connection with our failure to meet professional service level commitment obligations, we may incur significant liability and our liability insurance and revenue reserves may not be adequate. In addition, any loss of services, equipment damage or inability to meet our professional service level commitment obligations could reduce the confidence of our customers and could consequently impair our ability to obtain and retain customers, which would adversely affect both our ability to generate revenue and our operating results.

If we or our SIs do not effectively assist our customers in implementing our solutions, succeed in helping our customers quickly resolve post-implementation issues, and provide effective ongoing support, our ability to sell additional solutions and professional services to existing customers would be adversely affected and our reputation with potential customers could be damaged. Since we believe that the implementation experience is vital to retaining customers, our SIs’ and our ability to provide predictable delivery results and product expertise is critical to our ability to renew agreements with our existing customers. We are unable to control the quantity or quality of resources that our SIs commit to implementing our solutions, or the quality or timeliness of such implementation. If our SIs do not commit sufficient or qualified resources to these activities, our customers will be less satisfied, be less supportive with references, or may require the investment of our resources at discounted rates.

Once our solutions are implemented and integrated with our customers’ existing IT investments and data, our customers may depend on our technical support services and/or the support of SIs to resolve any issues relating to our solutions. High-quality support is critical for the continued successful marketing and sale of our solutions and renewal of contracts. 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 sell additional solutions and professional services to these customers, a key group for the growth of our revenue and profitability. In addition, as we further expand our SaaS solutions, our professional services and support organization will face new challenges, including hiring, training and integrating a large number of new professional services personnel with experience in delivering high-quality support for our SaaS solutions. Alleviating any of these problems could require significant

 

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expenditures which could adversely affect our results of operations and growth prospects. Further, as we continue to rely on our SIs to provide implementation and on-going services, our ability to ensure a high level of quality in addressing customer issues will be diminished. Our failure to maintain high-quality implementation and support services, or to ensure that our SIs provide the same, could have a material adverse effect on our business, results of operations, financial condition and growth prospects.

If we fail to identify, attract and retain additional qualified personnel with experience in designing, developing and managing cloud-based software, as well as personnel who can successfully implement our solutions, we may be unable to grow our SaaS business as expected.

To execute our business strategy and continue to grow our SaaS business, we must identify, attract and retain highly qualified personnel. We compete with many other companies for a limited number of software developers with specialized experience in designing, developing and managing cloud-based software, as well as for skilled developers, engineers and information technology and operations professionals who can successfully implement and deliver our solutions. Many of the companies with which we compete for experienced personnel have greater resources than we have. As we continue to focus on growing our SaaS business, we may experience difficulty in finding, hiring and retaining highly skilled employees with appropriate qualifications which may, among other things, impede our ability to grow our SaaS business. If we are not successful in finding, attracting and retaining the professionals we need, we may be unable to execute our business strategy, including by managing employees and contractors remotely, which could have a material adverse effect on our results of operations, financial condition and growth prospects.

Any disruption of our Internet connections, including to any third-party cloud providers that host any of our websites or web-based services, could affect the success of our SaaS solutions.

Any system failure, including network, software or hardware failure, that causes an interruption in our network or a decrease in the responsiveness of our website and our SaaS solutions could result in reduced user traffic, reduced revenue and potential breaches of our SaaS arrangements. Continued growth in Internet usage could cause a decrease in the quality of Internet connection service. Websites have experienced service interruptions as a result of outages and other delays occurring throughout the worldwide Internet network infrastructure. In addition, there have been several incidents in which individuals have intentionally caused service disruptions of major e-commerce websites. If these outages, delays or service disruptions frequently occur in the future, usage of our web-based services could grow more slowly than anticipated or decline and we may lose revenue and customers.

If the third-party cloud providers that host any of our websites or web-based services were to experience a system failure, the performance of our websites and web-based services, including our SaaS solutions, would be harmed. Currently, we rely on one third-party cloud provider to host our websites and web-based services. As a result, it may take significant resources if we need to switch to another cloud provider for any reason. Any disruption of or interference with our use of this third-party cloud provider could impair our ability to deliver our solutions to our customers, resulting in customer dissatisfaction, damage to our reputation, loss of customers and harm to our operations and our business. In general, third-party cloud providers are vulnerable to damage from fire, floods, earthquakes, acts of terrorism, power loss, telecommunications failures, break-ins and similar events. The controls implemented by our current or future third-party cloud providers may not prevent or timely detect such system failures and we do not control the operation of third-party cloud providers that we use. Our current or future third-party cloud providers could decide to close their facilities without adequate notice. In addition, any financial difficulties, such as bankruptcy, faced by our current or future third-party cloud providers, or any of the service providers with whom we or they contract, may have negative effects on our business. If our current or future third-party cloud providers are unable to keep up with our growing needs for capacity or any spikes in customer demand, it could have an adverse effect on our business. Any changes in service levels by our current or future third-party cloud providers could result in loss or damage to our customers’-stored information and any service interruptions at these third-party cloud providers could hurt our reputation, cause us to lose customers,

 

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harm our ability to attract new customers or subject us to potential liability. Our property and business interruption insurance coverage may not be adequate to fully compensate us for losses that may occur. Additionally, our systems are not fully redundant, and we have not yet implemented a complete disaster recovery plan or business continuity plan. Although the redundancies we do have in place will permit us to respond, at least to some degree, to service outages, our current or future third-party cloud providers that host our SaaS solutions are vulnerable in the event of failure. We do not yet have adequate structure or systems in place to recover from a third-party cloud provider’s severe impairment or total destruction, and recovery from the total destruction or severe impairment of any of our third-party cloud providers could be difficult and may not be possible at all.

In addition, our users depend on Internet service providers, online service providers and other website operators for access to our website. These providers could experience outages, delays and other difficulties due to system failures unrelated to our systems. Any of these events could seriously harm our business, results of operations and financial condition.

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 solutions subject to those licenses.

Some of our services and technologies may incorporate software licensed under so-called “open source” licenses. 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, some open source licenses require that source code subject to the license be made available to the public and that any modifications to or derivative works of 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 solutions in such ways with certain open source software, we could be required to release the source code of our proprietary solutions.

We take steps to ensure that our proprietary solutions are not combined with, and do not incorporate, open source software in ways that would require our proprietary solutions to be subject to many of the restrictions in 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 software programmers to design our proprietary technologies, and although we take steps to prevent our programmers from including objectionable 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 such open source software into our proprietary solutions 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.

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

Our solutions are complex and are used in a wide variety of network environments. The proper use of our solutions requires training of the customer. If our solutions are not used correctly or as intended, inadequate performance may result. Our solutions may also be intentionally misused or abused by customers or their employees or third parties who are able to access or use our solutions. Because our customers rely on our solutions, services and maintenance support to manage a wide range of operations, the incorrect or improper use of our solutions, our failure to properly train customers on how to efficiently and effectively use our solutions, or

 

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our failure to properly provide 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 solutions.

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

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 those on our management team, including Michael Jackowski, our Chief Executive Officer, and our sales and marketing personnel, SaaS operations personnel, professional services personnel and software engineers. Our inability to attract and retain qualified personnel, or delays in hiring required personnel, including delays due to COVID-19, may seriously harm our business, results of operations and financial condition. If U.S. immigration policy related to skilled foreign workers were materially adjusted, such a change could hamper our efforts to hire highly skilled foreign employees, including highly specialized engineers, which would adversely impact our business.

Our executive officers and other key employees are generally employed on an at-will basis, which means that these personnel could terminate their relationship with us at any time. The loss of any member of our senior management team could significantly delay or prevent us from achieving our business and/or development objectives, and could materially harm our business.

We face competition for qualified individuals from numerous software and other technology companies. Further, significant amounts of time and resources are required to train technical, sales, services and other personnel. We may incur significant costs to attract, train and retain such personnel, and we may lose new employees to our competitors or other technology companies before we realize the benefit of our investment after recruiting and training them.

Also, to the extent that we hire personnel from competitors, we may be subject to allegations that such personnel have been improperly solicited or have divulged proprietary or other confidential information. In addition, we have a limited number of sales people and the loss of several sales people within a short period of time could have a negative impact on our sales efforts. We may be unable to attract and retain suitably qualified individuals who are capable of meeting our growing technical, operational and managerial requirements, or we may be required to pay increased compensation in order to do so.

Our ability to expand geographically depends, in large part, on our ability to attract, retain and integrate managers to lead the local business and employees with the appropriate skills. Similarly, our profitability depends on our ability to effectively utilize personnel with the right mix of skills and experience to perform services for our customers, including our ability to transition employees to new assignments on a timely basis. If we are unable to effectively deploy our employees globally on a timely basis to fulfill the needs of our customers, our reputation could suffer and our ability to attract new customers may be harmed.

Because of the technical nature of our solutions and the dynamic market in which we compete, any failure to attract, integrate and retain qualified sales, professional services and product development personnel, as well as our contract workers, could harm our ability to generate sales or successfully develop new solutions and professional services and enhancements of existing solutions.

 

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We may experience fluctuations in foreign currency exchange rates that could adversely impact our results of operations.

Our international sales are generally denominated in foreign currencies, and this revenue could be materially affected by currency fluctuations. The volatility of exchange rates depends on many factors that we cannot forecast with reliable accuracy. Although we believe our operating activities act as a natural hedge for a substantial portion of our foreign currency exposure at the cash flow or operating income level because we typically collect revenue and incur costs in the currency of the location in which we provide our solutions and services, our contracts with our customers are long-term in nature so it is difficult to predict if our operating activities will provide a natural hedge in the future. In addition, as we enter into license agreements, which have historically been characterized by large annual payments, significant fluctuations in foreign currency exchange rates that coincide with annual payments may affect our revenue or financial results in such quarter. Our results of operations may also be impacted by transaction gains or losses related to revaluing certain current asset and liability balances that are denominated in currencies other than the functional currency of the entities in which they are recorded. Moreover, significant and unforeseen changes in foreign currency exchange rates may cause us to fail to achieve our stated projections for revenue and operating income, which could have an adverse effect on our stock price. We will continue to experience fluctuations in foreign currency exchange rates, which, if material, may harm our revenue or results of operations.

Privacy concerns could result in regulatory changes and impose additional costs and liabilities on us, limit our use of information and adversely affect our business.

As we increase our focus on our SaaS solutions, the amount of customer data we or our third-party cloud providers manage, hold and/or collect will increase significantly. In addition, a limited number of our solutions may collect, process, store, and use transaction-level data aggregated across insurers using our common data model. We anticipate that over time we will expand the use and collection of personal information as greater amounts of such personal information may be transferred from our customers to us and we recognize that personal privacy has become a significant issue in the United States, Europe, and many other jurisdictions where we operate. Many federal, state, and foreign legislatures and government agencies have imposed or are considering imposing restrictions and requirements about the collection, use and disclosure of personal information.

Changes to laws or regulations affecting privacy could impose additional costs and liabilities, including fines, on us and could limit our use of such information to add value for customers. If we were required to change our business activities or revise or eliminate services, or to implement burdensome compliance measures, our business and results of operations could be harmed. Additionally, in the case of data from our websites and web-based services that is stored with third-party cloud providers that we do not control, our third-party cloud providers may not adequately implement compliance measures concerning the privacy and/or security of any stored personal information. We may be subject to fines, penalties and potential litigation if we or our third-party cloud providers fail to comply with applicable privacy and/or data security laws, regulations, standards and other requirements. The costs of compliance with and other burdens imposed by privacy-related laws, regulations and standards may limit the use and adoption of our solutions and reduce overall demand.

Furthermore, concerns regarding data privacy and/or security may cause our end-users to resist providing the data and information necessary to allow our customers to use our solutions effectively. Even the perception that the privacy and/or security of personal information is not satisfactorily managed, or does not meet applicable legal, regulatory and other requirements, could inhibit sales of our solutions, and could limit adoption of our solutions, resulting in a negative impact on our sales and results from operations.

 

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Failure to comply with the GDPR or other data privacy regimes could subject us to fines and reputational harm.

Global privacy legislation, enforcement and policy activity are rapidly expanding and creating a complex data privacy compliance environment and the potential for high profile negative publicity in the event of any data breach. We are subject to many privacy and data protection laws and regulations in the United States and around the world, some of which place restrictions on our ability to process personal data across our business. For example, the GDPR is a comprehensive update to the data protection regime in the European Economic Area that became effective on May 25, 2018. The GDPR imposes new requirements relating to, among other things, consent to process personal data of individuals, the information provided to individuals regarding the processing of their personal data, the security and confidentiality of personal data, and notifications in the event of data breaches and use of third-party processors. The GDPR imposes substantial fines for breaches of data protection requirements, which can be up to four percent of the worldwide revenue or 20 million Euros, whichever is greater. While we will continue to undertake efforts to conform to current regulatory obligations and evolving best practices, we may be unsuccessful in conforming to means of transferring personal data from the European Economic Area. We may also experience hesitancy, reluctance, or refusal by European or multi-national customers to continue to use some of our services due to the potential risk exposure of personal data transfers and the current data protection obligations imposed on them by certain data protection authorities. Such customers may also view any alternative approaches to the transfer of any personal data as being too costly, too burdensome, or otherwise objectionable, and therefore may decide not to do business with us if the transfer of personal data is a necessary requirement.

In addition, California recently adopted the California Consumer Privacy Act (“CCPA”), which went into effect on January 1, 2020, and limits how we may collect, use and process personal data of California residents. The CCPA establishes a new privacy framework for covered businesses such as ours by, among other things, creating an expanded definition of personal information, establishing new data privacy rights for California residents and creating a new and potentially severe statutory damages framework and private rights of action for violations of the CCPA and for businesses that fail to implement reasonable security procedures and practices to prevent data breaches. The uncertainty and changes in the requirements of multiple jurisdictions may increase the cost of compliance, restrict our ability to offer services in certain locations or subject us to sanctions by national, regional, state, local and international data protection regulators, all of which could harm our business, results of operations or financial condition.

Although we take reasonable efforts to comply with all applicable laws and regulations and have invested and continue to invest human and technology resources into data privacy compliance efforts, there can be no assurance that we will not be subject to regulatory action, including fines, in the event of an incident or other claim. We or our third-party service providers could be adversely affected if legislation or regulations are expanded to require changes in our or our third-party service providers’ business practices or if governing jurisdictions interpret or implement their legislation or regulations in ways that negatively affect our or our third-party service providers’ business, results of operations or financial condition.

Though our term and perpetual licensing model does not significantly collect and transfer personal information from our customers to us, our increased focus on SaaS solutions and the current data protection landscape may subject us to greater risk of potential inquiries and/or enforcement actions. For example, we may find it necessary to establish alternative systems to maintain personal data originating from the European Union in the European Economic Area, which may involve substantial expense and may cause us to divert resources from other aspects of our business, all of which may adversely affect our results from operations. Further, any inability to adequately address privacy concerns in connection with our SaaS solutions, or comply with applicable privacy or data protection laws, regulations and policies, could result in additional cost and liability to us, and adversely affect our ability to offer SaaS solutions.

Anticipated further evolution of regulations on this topic may substantially increase the penalties to which we could be subject in the event of any non-compliance. We may incur substantial expense in complying with the

 

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new obligations to be imposed by new regulations and we may be required to make significant changes to our solutions and expanding business operations, all of which may adversely affect our results of operations.

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, including impacts of the Tax Cuts and Jobs Act of Public Law No. 115-97 and the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), the consequences of which have not yet been fully determined. In addition, we are subject to the examination of our income tax returns by the Internal Revenue Service (“IRS”) 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.

Uncertainty in the marketplace regarding the use of Internet users’ personal information, or legislation limiting such use, could reduce demand for our services and result in increased expenses.

Concern among consumers and legislators regarding the use of personal information gathered from Internet users could create uncertainty in the marketplace. This could reduce demand for our services, increase the cost of doing business as a result of litigation costs or increased service delivery costs, or otherwise harm our business. Many state insurance codes limit the collection and use of personal information by insurance agencies, brokers and carriers or insurance service organizations.

Future government regulation of the Internet could place financial burdens on our businesses.

The future success of our business depends upon the continued use of the Internet as a primary medium for commerce, communication and business services. Because of the Internet’s popularity and increasing use, federal, state or foreign government bodies or agencies have adopted, and may in the future adopt, new laws or regulations affecting the use of the Internet as a commercial medium. These laws and regulations may cover issues such as the collection and use of data from website visitors and related privacy issues; pricing; taxation; telecommunications over the Internet; content; copyrights; distribution; and domain name piracy. The enactment of any additional laws or regulations of the Internet, including international laws and regulations, could impede the growth of subscription revenue and place additional financial burdens on our business.

Risks Related to Our Organizational Structure

After the completion of this offering, pursuant to the Stockholders’ Agreement, Apax and Accenture will control a majority of the voting power of the shares of our common stock eligible to vote in the election of our directors and on other matters submitted to a vote of our stockholders, and Apax’s and Accenture’s interests may conflict with ours or yours in the future.

Pursuant to the Stockholders’ Agreement to be entered into prior to the consummation of this offering in connection with the Reorganization Transactions, we will be required to take all necessary action to cause our board of directors to include individuals designated by Apax and Accenture pursuant to certain ownership thresholds. Apax and Accenture, individually, will be required to vote all of their shares, and take all other necessary actions, to cause our board of directors to include the individuals designated as directors by Apax and Accenture (as applicable). Accordingly, immediately following this offering, Apax and Accenture will control a majority of the voting power of the shares of our common stock eligible to vote in the election of our directors

 

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and on other matters submitted to a vote of our stockholders, and Apax and Accenture will be able to control the outcome of matters submitted to a stockholder vote. Even if Apax and Accenture collectively cease to own shares of our common stock representing a majority of the total voting power, for so long as Apax and Accenture continue to own a significant percentage of our common stock, Apax and Accenture, through their collective voting power and certain protective provisions, will still be able to significantly influence the composition of our board of directors and the approval of actions requiring stockholder approval. For example, each of Apax and Accenture will have certain consent rights so long as such stockholder owns at least 5% of the outstanding equity securities of the Company that are not shares of our common stock awarded under the Plan or other incentive equity plan. Accordingly, for such period of time, Apax and Accenture will have significant influence with respect to our management, business plans, and policies, including the appointment and removal of our officers. In particular, Apax and Accenture will be able to cause or prevent a change of control of us or a change in composition of our board of directors and could preclude any unsolicited acquisition of us. The concentration of voting power could deprive you of an opportunity to receive a premium for your shares of common stock as part of the sale of us and ultimately might affect the market price of our common stock. See “Certain Relationships and Related Party Transactions—Stockholders’ Agreement.”

If the ownership of our common stock continues to be highly concentrated, it may prevent you and other minority stockholders from influencing significant corporate decisions and may result in conflicts of interest.

Immediately following the completion of this offering, Apax will own approximately 33.7% of our common stock (or approximately 33.1% if the underwriters exercise their option to purchase additional shares of common stock in full) and Accenture will own approximately 22.5% of our common stock (or approximately 22.1% if the underwriters exercise their option to purchase additional shares of common stock in full). As a result, Apax will exercise significant influence over all matters requiring a stockholder vote, including: the election of directors; mergers, consolidations and acquisitions; the sale of all or substantially all of our assets and other decisions affecting our capital structure; the amendment of our amended and restated certificate of incorporation and our amended and restated bylaws; and our winding up and dissolution. This concentration of ownership may delay, deter or prevent acts that would be favored by our other stockholders. The interests of Apax may not always coincide with our interests or the interests of our other stockholders. This concentration of ownership may also have the effect of delaying, preventing or deterring a change in control of us. Also, Apax may seek to cause us to take courses of action that, in its judgment, could enhance its investment in us, but which might involve risks to our other stockholders or adversely affect us or our other stockholders, including investors in this offering. As a result, the market price of our common stock could decline or stockholders might not receive a premium over the then-current market price of our common stock upon a change in control. In addition, this concentration of share ownership may adversely affect the trading price of our common stock because investors may perceive disadvantages in owning shares in a company with significant stockholders. See “Principal Stockholders” and “Description of Capital Stock—Anti-Takeover Effects of Delaware Law and Our Organizational Documents.”

Certain provisions of Delaware Law, the Stockholders’ Agreement, our amended and restated certificate of incorporation and our amended and restated bylaws could hinder, delay or prevent a change in control of us, which could adversely affect the price of our common stock.

Certain provisions of Delaware Law, the Stockholders’ Agreement, our amended and restated certificate of incorporation and our amended and restated bylaws will contain provisions that could make it more difficult for a third-party to acquire us without the consent of our board of directors, Apax or Accenture.

As a Delaware corporation, we are subject to provisions of Delaware law, including Section 203 of the Delaware General Corporation Law, as amended (the “DGCL”), which prevents some stockholders holding more than 15% of our outstanding common stock from engaging in certain business combinations without approval of the holders of substantially all of our outstanding common stock.

Furthermore, pursuant to the Stockholders’ Agreement, immediately following this offering, Apax and Accenture will control a majority of the voting power of the shares of our common stock eligible to vote in the

 

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election of our directors and on other matters submitted to a vote of our stockholders, and Apax and Accenture will be able to control the outcome of matters submitted to a stockholder vote. Even if Apax and Accenture collectively cease to own shares of our common stock representing a majority of the total voting power, for so long as Apax and Accenture continue to own a significant percentage of our common stock, Apax and Accenture, through their collective voting power and certain protective provisions, will still be able to significantly influence the composition of our board of directors and the approval of actions requiring stockholder approval.

In addition, under our amended and restated certificate of incorporation, our board of directors will have the authority to cause the issuance of preferred stock from time to time in one or more series and to establish the terms, preferences and rights of any such series of preferred stock, all without approval of our stockholders. Nothing in our amended and restated certificate of incorporation will preclude future issuances without stockholder approval of the authorized but unissued shares of our common stock. Further, our amended and restated certificate of incorporation will provide for a staggered board of directors and does not provide for cumulative voting in the election of our directors and our amended and restated certificate of incorporation and our amended and restated bylaws do not permit our stockholders to call special meetings. These factors could have the effect of making the replacement of incumbent directors more time consuming and difficult.

These provisions may make it difficult and expensive for a third party to pursue a tender offer, change in control or takeover attempt that is opposed by Apax, Accenture, our management or our board of directors. Public stockholders who might desire to participate in these types of transactions may not have an opportunity to do so, even if the transaction is favorable to stockholders. These anti-takeover provisions could substantially impede the ability of public stockholders to benefit from a change in control or change our management and board of directors and, as a result, may adversely affect the market price of our common stock and your ability to realize any potential change of control premium. See “Description of Capital Stock—Anti-Takeover Effects of Delaware Law and Our Organizational Documents” and “Certain Relationships and Related Party Transactions.”

Certain of our stockholders have the right to engage or invest in the same or similar businesses as us.

Apax and Accenture each engage in other investments and business activities in addition to their ownership of us. Under our amended and restated certificate of incorporation, Apax and Accenture each have the right, and have no duty to abstain from exercising such right, to engage or invest in the same or similar businesses as us, do business with any of our customers or vendors, or employ or otherwise engage any of our officers, directors or employees. If Apax, Accenture or any of their respective officers, directors or employees acquire knowledge of a potential transaction that could be a corporate opportunity, they have no duty, to the fullest extent permitted by law, to offer such corporate opportunity to us, our stockholders or our affiliates.

In the event that any of our directors and officers who is also a director, officer or employee of Apax or Accenture acquires knowledge of a corporate opportunity or is offered a corporate opportunity, provided that this knowledge was not acquired solely in such person’s capacity as our director or officer and such person acts in good faith to the fullest extent permitted by law, then even if Apax or Accenture pursues or acquires the corporate opportunity or if Apax or Accenture does not present the corporate opportunity to us, such person is deemed to have fully satisfied such person’s fiduciary duties owed to us and is not liable to us. See “Certain Relationships and Related Party Transactions—Stockholders’ Agreement.”

Risks Related to this Offering and Our Common Stock

An active trading market for our common stock may never develop or be sustained.

Prior to this offering, there has been no public market for our common stock. Although we have applied to have our common stock approved for listing on NASDAQ, an active trading market for our common stock may not develop on that exchange or elsewhere or, if developed, that market may not be sustained. Accordingly, if an active trading market for our common stock does not develop or is not maintained, the liquidity of our common

 

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stock, your ability to sell your shares of common stock when desired and the prices that you may obtain for your shares of common stock will be adversely affected. Additionally, one or more entities affiliated with or advised by certain of our existing investors, including Dragoneer, Neuberger Berman Investment Advisers LLC and Insight, have previously indicated non-binding interests to purchase a significant amount of shares (which shares will not be subject to transfer restrictions), representing, together with their existing common stock after giving effect to the Reorganization Transactions, up to approximately 2.9% our common stock in the aggregate and such investors may continue to hold a large portion of our publicly traded common stock, which may inhibit the development and maintenance of an active trading market. An inactive trading market may also impair our ability to raise capital to continue to fund operations by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration.

The market price and trading volume of our common stock may be volatile, which could result in rapid and substantial losses for our stockholders.

Even if an active trading market develops, the market price of our common stock may be highly volatile and could be subject to wide fluctuations. In addition, the trading volume in our common stock may fluctuate and cause significant price variations to occur. The initial public offering price of our common stock will be determined by negotiation between us and the representatives of the underwriters based on a number of factors and may not be indicative of prices that will prevail in the open market following the completion of this offering. If the market price of our common stock declines significantly, you may be unable to resell your shares at or above your purchase price, if at all. The market price of our common stock may fluctuate or decline significantly in the future. Some of the factors that could negatively affect our share price or result in fluctuations in the price or trading volume of our common stock include:

 

   

variations in our quarterly or annual operating results;

 

   

the impact on our public float if one or more entities affiliated with or advised by certain of our existing investors, including Dragoneer, Neuberger Berman Investment Advisers LLC and Insight who have previously indicated non-binding interests to purchase a significant amount of shares (up to $100 million in the aggregate) in this offering purchase such shares (which shares will not be subject to transfer restrictions), representing, together with their existing common stock after giving effect to the Reorganization Transactions, up to approximately 2.9% of our common stock, respectively;

 

   

our ability to attract new customers, particularly larger customers, in both domestic and international markets and our ability to increase sales to and renew agreements with our existing customers, particularly larger customers, at comparable prices;

 

   

the timing of our customers’ buying decisions and reductions in our customers’ budgets for IT purchases and delays in their purchasing cycles, particularly in light of recent adverse global economic conditions;

 

   

changes in our earnings estimates (if provided) or differences between our actual financial and operating results and those expected by investors and analysts;

 

   

the contents of published research reports about us or our industry or the failure of securities analysts to cover our common stock after this offering;

 

   

additions to, or departures of, key management personnel;

 

   

any increased indebtedness we may incur in the future;

 

   

announcements and public filings by us or others and developments affecting us;

 

   

actions by institutional stockholders;

 

   

litigation and governmental investigations;

 

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operating and stock performance of other companies that investors deem comparable to us (and changes in their market valuations) and overall performance of the equity markets;

 

   

speculation or reports by the press or investment community with respect to us or our industry in general;

 

   

increases in market interest rates that may lead purchasers of our shares to demand a higher yield;

 

   

announcements by us or our competitors of significant contracts, acquisitions, dispositions, strategic relationships, joint ventures or capital commitments;

 

   

announcements or actions taken by Apax as our principal stockholder;

 

   

sales of substantial amounts of our common stock by Apax or other significant stockholders or our insiders, or the expectation that such sales might occur;

 

   

volatility or economic downturns in the markets in which we, our customers and our SI partners are located caused by pandemics, including the COVID-19 pandemic, and related policies and restrictions undertaken to contain the spread of such pandemics or potential pandemics; and

 

   

general market, political and economic conditions, in the insurance industry in particular, including any such conditions and local conditions in the markets in which any of our customers are located.

These broad market and industry factors may decrease the market price of our common stock, regardless of our actual operating performance. The stock market in general has from time to time experienced extreme price and volume fluctuations, including in recent months. In addition, in the past, following periods of volatility in the overall market and the market price of a company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.

Future offerings of debt or equity securities by us may materially adversely affect the market price of our common stock.

In the future, we may attempt to obtain financing or to further increase our capital resources by issuing additional shares of our common stock or offering debt or other equity securities, including senior or subordinated notes, debt securities convertible into equity or shares of preferred stock. In addition, we may seek to expand operations in the future to other markets which we would expect to finance through a combination of additional issuances of equity, corporate indebtedness and/or cash from operations.

Issuing additional shares of our common stock or other equity securities or securities convertible into equity may dilute the economic and voting rights of our existing stockholders or reduce the market price of our common stock or both. Upon liquidation, holders of such debt securities and preferred shares, if issued, and lenders with respect to other borrowings would receive a distribution of our available assets prior to the holders of our common stock. Debt securities convertible into equity could be subject to adjustments in the conversion ratio pursuant to which certain events may increase the number of equity securities issuable upon conversion. Preferred shares, if issued, could have a preference with respect to liquidating distributions or a preference with respect to dividend payments that could limit our ability to pay dividends to the holders of our common stock. Our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, which may adversely affect the amount, timing or nature of our future offerings. Thus, holders of our common stock bear the risk that our future offerings may reduce the market price of our common stock and dilute their stockholdings in us. See “Description of Capital Stock.”

 

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We expect to be a “controlled company” within the meaning of the corporate governance standards of NASDAQ. As a result, we will qualify for, and intend to rely on, exemptions from certain corporate governance standards. You will not have the same protections afforded to stockholders of companies that are subject to all corporate governance requirements of NASDAQ.

After the completion of this offering, pursuant to the Stockholders’ Agreement, Apax and Accenture will control a majority of the voting power of shares of common stock eligible to vote in the election of our directors. As a result, we will be a “controlled company” within the meaning of the corporate governance standards of NASDAQ. As a controlled company, we will qualify for, and intend to rely on, exemptions from certain corporate governance requirements, including the requirement that, within one year of the date of the listing of our common stock a majority of our board of directors consists of “independent directors,” as defined under the rules of NASDAQ.

These requirements will not apply to us as long as we remain a controlled company. While Apax and Accenture control a majority of the voting power of our outstanding shares of common stock, we may also elect to not have our nominating and corporate governance and compensation committees consisting entirely of independent directors and we will not be required to have written charters addressing these committees’ purposes and responsibilities or have annual performance evaluations of these committees. Accordingly, if we elect in the future not to comply with all of the corporate governance requirements, you will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of NASDAQ. See “Management—Controlled Company Exemption.”

The market price of our common stock could be negatively affected by sales of substantial amounts of our common stock in the public markets.

After this offering, there will be 128,437,830 shares of common stock outstanding (or 130,687,830 shares outstanding if the underwriters exercise their option to purchase additional shares of common stock in full). Of our issued and outstanding shares, only the 15,000,000 shares of common stock sold in this offering (or 17,250,000 shares if the underwriters exercise the option to purchase additional shares of common stock in full) will be freely transferable, except for any shares held by our “affiliates,” as that term is defined in Rule 144 under the Securities Act (“Rule 144”). Following completion of the offering, approximately 33.7% of our outstanding common stock (or 33.1% if the underwriters exercise their option to purchase additional shares of common stock in full) will be held by Apax and approximately 22.5% of our outstanding common stock (or 22.1% if the underwriters exercise their option to purchase additional shares of common stock in full) will be held by Accenture and can be resold into the public markets in the future in accordance with the requirements of Rule 144. The sale by Apax or Accenture of a substantial number of shares after this offering, or a perception that such sales could occur, could significantly reduce the market price of our common stock. See “Shares Eligible For Future Sale.”

We and our executive officers, directors, Apax, Accenture and substantially all of our Existing Holders have agreed with the underwriters that, subject to certain exceptions, for a period of 180 days after the date of this prospectus, we and they will not directly or indirectly offer, pledge, sell, contract to sell, sell any option or contract to purchase or otherwise dispose of any common stock or any securities convertible into or exercisable or exchangeable for common stock, or in any manner transfer all or a portion of the economic consequences associated with the ownership of common stock, or cause a registration statement covering any common stock to be filed, without the prior written consent of Goldman Sachs & Co. LLC and J.P. Morgan Securities LLC. Any shares acquired by Existing Holders (other than officers, directors, Apax and Accenture) in this offering of our shares of common stock will not be subject to these transfer restrictions. See “Underwriting.”

In addition, pursuant to the Registration Rights Agreement (as defined below), Apax, Accenture and certain of our other Existing Holders and their respective affiliates and permitted third-party transferees have the right, in certain circumstances, to require us to register their 108,052,793 shares of our common stock under the Securities

 

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Act for sale into the public markets. Upon the effectiveness of such a registration statement, all shares covered by the registration statement will be freely transferable. See “Certain Relationships and Related Party Transactions—Registration Rights Agreement.”

The market price of our common stock may decline significantly when the restrictions on resale by our existing stockholders lapse. A decline in the price of our common stock might impede our ability to raise capital through the issuance of additional common stock or other equity securities.

The future issuance of additional common stock in connection with our incentive plans or otherwise will dilute all other stockholdings.

After this offering, assuming the underwriters exercise their option to purchase additional shares of common stock in full, we will have an aggregate of 159,345,123 shares of common stock authorized but unissued and not reserved for issuance under our incentive plans. We may issue all of these shares of common stock without any action or approval by our stockholders, subject to certain exceptions. Any common stock issued in connection with our incentive plans, the exercise of outstanding stock options or otherwise would dilute the percentage ownership held by the investors who purchase common stock in this offering.

Investors in this offering will suffer immediate and substantial dilution.

The initial public offering price of our common stock is substantially higher than the as adjusted net tangible book value per share issued and outstanding immediately after this offering. Therefore, if you purchase shares of our common stock in this offering, you will experience immediate and substantial dilution of $24.57 in the net tangible book value per share.

We will have broad discretion in the use of a significant part of the net proceeds from this offering and may not use them effectively.

Our management currently intends to use the net proceeds from this offering in the manner described in “Use of Proceeds” and will have broad discretion in the application of a significant part of the net proceeds from this offering. The failure by our management to apply these funds effectively could affect our ability to operate and grow our business.

If securities or industry analysts do not publish research or reports about our business or publish negative reports, our stock price could decline.

The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. If one of more of these analysts ceases coverage of our company or fails to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. Moreover, if one or more of the analysts who cover our company downgrades our common stock or if our reporting results do not meet their expectations, our stock price could decline.

We are an “emerging growth company,” and the reduced disclosure requirements applicable to emerging growth companies may make our common stock less attractive to investors.

We are an “emerging growth company,” as defined in the JOBS Act and may remain an emerging growth company for up to five years. For so long as we remain an emerging growth company, we are permitted and plan to rely on exemptions from certain disclosure requirements that are applicable to other public companies that are not emerging growth companies. These exemptions include not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, not being required to comply with any requirement that

 

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may be adopted by the Public Company Accounting Oversight Board (“PCAOB”) regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements, reduced disclosure obligations regarding executive compensation, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. As a result, the information we provide stockholders will be different than the information that is available with respect to other public companies. In this prospectus, we have not included all of the executive compensation related information that would be required if we were not an emerging growth company. We cannot predict whether investors will find our common stock less attractive if we rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock, and our stock price may be more volatile.

In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this exemption from new or revised accounting standards, and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

We have not paid dividends in the past and do not anticipate paying any dividends on our common stock in the foreseeable future.

We have never paid cash dividends on our common stock and have no plans to pay regular dividends on our common stock in the foreseeable future. Any declaration and payment of future dividends to holders of our common stock will be at the sole discretion of our board of directors and will depend on many factors, including our financial condition, earnings, capital requirements, level of indebtedness, statutory and contractual restrictions applying to the payment of dividends and other considerations that our board of directors deems relevant. Because we are a holding company and have no direct operations, we will only be able to pay dividends from our available cash on hand and any funds we receive from our subsidiaries. Certain of our debt agreements limit the ability of certain of our subsidiaries to pay dividends. In addition, Delaware law may impose requirements that may restrict our ability to pay dividends. Until such time that we pay a dividend, our investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment.

Our amended and restated certificate of incorporation will provide that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for certain stockholder litigation matters, which could discourage stockholder lawsuits or limit our stockholders’ ability to bring a claim in any judicial forum that they find favorable for disputes with us or our officers and directors.

Pursuant to our amended and restated certificate of incorporation, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a duty (including any fiduciary duty) owed by any current or former director, officer, stockholder, employee or agent of the Company or our stockholders, (iii) any action asserting a claim arising pursuant to any provision of the DGCL, our amended and restated certificate of incorporation or our amended and restated bylaws or (iv) any action asserting a claim governed by the internal affairs doctrine, in each case, subject to the Court of Chancery having personal jurisdiction over the indispensable party named as a defendant therein. If the Court of Chancery of the State of Delaware does not have jurisdiction, the sole and exclusive forum for such action or proceeding shall be another state or federal court located in the State of Delaware.

Our amended and restated certificate of incorporation and bylaws further provide that any person or entity purchasing, otherwise acquiring or holding any interest in shares of our capital stock will be deemed to have notice

 

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of and consented to the forum selection clause. The forum selection clause in our amended and restated certificate of incorporation may have the effect of discouraging stockholder lawsuits or limiting our stockholders’ ability to bring a claim in any judicial forum that they find favorable for disputes with us or our officers and directors.

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 and corporate governance practices. We may fail to comply with the rules that apply to public companies, including Section 404 of the Sarbanes-Oxley Act, which could result in sanctions or other penalties that would harm our business.

As a public company, and particularly after we are no longer an “emerging growth company,” we will incur significant legal, accounting, and other expenses that we did not incur as a private company, including costs resulting from public company reporting obligations under the Securities Act, or the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and regulations regarding corporate governance practices. The Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, the rules of the SEC, the listing requirements of NASDAQ, and other applicable securities rules and regulations impose various requirements on public companies, including establishment and maintenance of effective disclosure and financial controls and corporate governance practices. We expect that we will need to hire additional accounting, finance, and other personnel in connection with our becoming, and our efforts to comply with the requirements of being, a public company, and our management and other personnel will need to devote a substantial amount of time towards maintaining compliance with these requirements. These requirements will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect that the rules and regulations applicable to us as a public company may make it more difficult and more expensive for us to obtain director and officer liability insurance, which could make it more difficult for us to attract and retain qualified members of our board of directors. We are currently evaluating these rules and regulations and cannot predict or estimate the amount of additional costs we may incur or the timing of such costs. These rules and regulations are often subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We cannot predict or estimate the amount of additional costs we may incur as a result of becoming a public company or the timing of such costs. Any changes we make to comply with these obligations may not be sufficient to allow us to satisfy our obligations as a public company on a timely basis, or at all. These reporting requirements, rules and regulations, coupled with the increase in potential litigation exposure associated with being a public company, could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors or board committees or to serve as executive officers, or to obtain certain types of insurance, including directors’ and officers’ insurance, on acceptable terms.

Pursuant to Sarbanes-Oxley Act Section 404, we will be required to furnish a report by our management on our internal control over financial reporting beginning with our second filing of an Annual Report on Form 10-K with the SEC after we become a public company. In order to maintain effective internal controls, we will need additional financial personnel, systems and resources. However, while we remain an emerging growth company, we will not be required to include an attestation report on internal control over financial reporting issued by our independent registered public accounting firm. To achieve compliance with Sarbanes-Oxley Act Section 404 within the prescribed period, we will be engaged in a process to document and evaluate our internal control over financial reporting, which is both costly and challenging. In this regard, we will need to continue to dedicate internal resources, potentially engage outside consultants, adopt a detailed work plan to assess and document the adequacy of internal control over financial reporting, continue steps to improve control processes as appropriate, validate through testing that controls are functioning as documented, and implement a continuous reporting and improvement process for internal control over financial reporting. Despite our efforts, there is a risk that we will not be able to conclude, within the prescribed timeframe or at all, that our internal control over financial reporting is effective as required by Sarbanes-Oxley Act Section 404. If we identify one or more material

 

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weaknesses, it could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements.

To date, we have not conducted a review of our internal controls for the purpose of providing the reports required by these rules. During the course of our review and testing, we have in the past and may in the future, identify deficiencies and be unable to remediate them before we must provide the required reports. Furthermore, if we have a material weakness in our internal control over financial reporting, we may not detect errors on a timely basis and our financial statements may be materially misstated. We or our independent registered public accounting firm may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting, which could harm our operating results, cause investors to lose confidence in our reported financial information and cause the trading price of our stock to fall. In addition, as a public company we will be required to file accurate and timely quarterly and annual reports with the SEC under the Exchange Act. Any failure to report our financial results on an accurate and timely basis could result in sanctions, lawsuits, delisting of our shares from NASDAQ or other adverse consequences that would materially harm our business and reputation.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the information contained in the sections entitled “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and elsewhere in this prospectus contain forward-looking statements that reflect our current views with respect to, among other things, future events and financial performance. You can identify these forward-looking statements by the use of forward-looking words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “could,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates,” “target,” “projects,” “contemplates” or the negative version of those words or other comparable words. Any forward-looking statements contained in this prospectus are based upon our historical performance and on our current plans, estimates and expectations in light of information currently available to us. The inclusion of this forward-looking information should not be regarded as a representation by us, Apax, the underwriters or any other person that the future plans, estimates or expectations contemplated by us will be achieved. Such forward-looking statements are subject to various risks and uncertainties and assumptions relating to our operations, financial results, financial condition, business, prospects, growth strategy and liquidity. Accordingly, there are, or will be, important factors that could cause our actual results to differ materially from those indicated in these statements. We believe that these factors include, but are not limited to:

 

   

our history of losses;

 

   

changes in our product revenue mix as we continue to focus on sales of our SaaS solutions, which will cause fluctuations in our results of operations and cash flows between periods;

 

   

our reliance on orders and renewals from a relatively small number of customers for a substantial portion of our revenue, and the substantial negotiating leverage customers have in renewing and expanding their contracts for our solutions;

 

   

the success of our growth strategy focused on SaaS solutions and our ability to develop or sell our solutions into new markets or further penetrate existing markets;

 

   

our ability to manage our expanding operations;

 

   

intense competition in our market;

 

   

third parties may assert we are infringing or violating their intellectual property rights;

 

   

U.S. and global market and economic conditions, particularly adverse in the insurance industry;

 

   

additional complexity, burdens and volatility in connection with our international sales and operations;

 

   

the length and variability of our sales and implementation cycles;

 

   

data breaches, unauthorized access to customer data or other disruptions of our solutions;

 

   

control of our Company by Apax and Accenture and perceived conflicts of interests;

 

   

our status as a “controlled company” within the meaning of the corporate governance standards of NASDAQ;

 

   

impact of pandemics, including the COVID-19 pandemic, on U.S. and global economies, our business, our employees, results of operations, financial condition, demand for our products, sales and implementation cycles, and the health of our customers’ and partners’ businesses; and

 

   

the other risks and uncertainties described under “Risk Factors.”

These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this prospectus. The forward-looking statements made in this prospectus relate only to events as of the date on which the statements are made. We do not undertake any obligation to publicly update or review any forward-looking statement except as required by law, whether as a result of new information, future developments or otherwise.

 

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If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, our actual results may vary materially from what we may have expressed or implied by these forward-looking statements. We caution that you should not place undue reliance on any of our forward-looking statements. You should specifically consider the factors identified in this prospectus that could cause actual results to differ before making an investment decision to purchase our common stock. Furthermore, new risks and uncertainties arise from time to time, and it is impossible for us to predict those events or how they may affect us.

 

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ORGANIZATIONAL STRUCTURE

Existing Organizational Structure

 

 

LOGO

Organizational Structure Following This Offering

The simplified diagram below depicts our organizational structure immediately following the reorganization transactions that will occur concurrently with or immediately following the completion of this offering (the “Reorganization Transactions”) and this offering, assuming no exercise by the underwriters of their option to purchase additional shares of common stock, and the use of proceeds therefrom.

 

LOGO

Our post-offering organizational structure will allow the Existing Holders to retain all or a portion of their equity ownership in the Company through their ownership of our common stock as described below. Under our

 

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amended and restated certificate of incorporation, each share of common stock shall entitle its holder to one vote on all matters to be voted on by stockholders generally. The chart above with respect to Public Stockholders includes shares that are expected to be purchased by certain of our Existing Holders that are expected to participate in this offering.

Reorganization Transactions

The following steps will occur concurrently with or immediately following the completion of this offering in the order indicated:

 

   

The Company’s amended and restated certificate of incorporation will authorize, immediately prior to this offering, one class of common stock and one class of preferred stock, each having the terms described in “Description of Capital Stock.”

 

   

Apax will contribute the entity that holds all of Apax’s equity interests in the Operating Partnership and all of Apax’s interest in the General Partner to a newly-formed Cayman company (the “Reorg Subsidiary”) in exchange for shares of the Reorg Subsidiary.

 

   

Accenture will contribute to the Company, directly or indirectly, (i) a portion of its equity interests in the Operating Partnership and (ii) all of its interest in the general partner of the Operating Partnership (the “General Partner”) in exchange for newly-issued common stock in the Company.

 

   

Certain members of management will contribute to the Company, directly or indirectly, all of their respective equity interests in the Operating Partnership in exchange for (i) newly-issued common stock in the Company or (ii) restricted common stock in the Company and options to acquire common stock in the Company with an exercise price equal to the fair market value on the date of grant.

 

   

Each of the Existing Holders (other than Apax, Accenture and RBW Investment GmbH & Co., a minority limited partner of the Operating Partnership, which we refer to as RBW) will contribute to the Company, directly or indirectly, all of their equity interests in the Operating Partnership in exchange for newly-issued common stock in the Company.

 

   

The Company will contribute a portion of the net proceeds received from the offering to the Operating Partnership, and the Operating Partnership will redeem the outstanding LP Units of the Operating Partnership owned by Accenture and RBW that are not contributed to the Company.

 

   

Immediately following the completion of this offering, (i) Apax will exchange all of its shares in the Reorg Subsidiary for newly-issued common stock in the Company and (ii) the Reorg Subsidiary will merge with and into the Company (and the Reorg Subsidiary will cease to exist) (collectively, the “Reorg Merger”).

 

   

Following these transactions and the subsequent redemption of the outstanding LP Units owned by Accenture and RBW that are not contributed to the Company, the Company will indirectly own all of the LP Units and interests in the General Partner that were owned by the Existing Holders prior to this offering.

The final exchange ratio with respect to certain of our Existing Holders who will contribute their equity interests in the Operating Partnership in exchange for newly-issued restricted stock and options to acquire common stock in the Company and the number of restricted stock to be issued under our 2020 Omnibus Incentive Plan in connection with the completion of this offering was determined by the initial public offering price of $27.00 per share.

This Offering

Upon the completion of this offering, we intend to use (i) $43.1 million of the net proceeds that we receive from this offering to redeem all of the outstanding LP Units of the Operating Partnership held by Accenture and RBW immediately prior to the consummation of this offering, which includes $43.1 million paid to Accenture, after giving effect to the contributions that are part of the Reorganization Transactions, at a redemption price per

 

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LP Unit equal to the initial public offering price of this offering after deducting underwriting discounts and commissions payable by us, (ii) $64.7 million of the net proceeds that we receive from this offering to repurchase from Apax a portion of the shares in the Company received by Apax in the Reorg Merger at a repurchase price per share equal to the initial public offering price of this offering after deducting underwriting discounts and commissions payable by us and (iii) $6.3 million of net proceeds that we receive from this offering to cash settle outstanding equity awards of certain international employees. One of our directors, Larry Wilson, is a limited partner in Disco (Guernsey) Holdings L.P. Inc. (“Disco (Guernsey) Holdings L.P.”), the shareholder of the Apax entity that holds Apax’s LP Units. Pursuant to the partnership agreement for Disco (Guernsey) Holdings L.P., Mr. Wilson is entitled to receive approximately 0.3% of any proceeds received by Disco (Guernsey) Holdings L.P. from the repurchase of shares of common stock in the Company described in clause (ii), following certain priority returns to Apax and Mr. Wilson. Of the $64.7 million to be paid by the Company to repurchase shares of common stock in the Company owned by Disco (Guernsey) Holdings L.P, it is expected that Mr. Wilson will receive approximately $922 thousand due to his limited partnership interest. We intend to use the remaining net proceeds from this offering for general corporate purposes, including acquisitions and other strategic transactions and to repay any amounts outstanding under our revolving credit facility (but not a permanent reduction of any commitments thereunder).

Immediately following this offering and the use of proceeds therefrom:

 

   

our common stock will be held as follows: 15,000,000 shares (or 17,250,000 shares if the underwriters exercise their option to purchase additional shares of common stock in full) by investors in this offering, 43,282,953 shares by Apax, and 28,855,302 shares by Accenture; and

 

   

the combined voting power in the Company will be as follows: (i) 11.7% by investors in this offering (or 13.2% if the underwriters exercise their option to purchase additional shares of common stock in full); (ii) 33.7% by Apax (or 33.1% if the underwriters exercise their option to purchase additional shares of common stock in full); and (iii) 22.5% by Accenture (or 22.1% if the underwriters exercise their option to purchase additional shares of common stock in full).

 

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USE OF PROCEEDS

We will receive net proceeds from this offering of approximately $373.2 million (or approximately $430.1 million if the underwriters exercise their option to purchase additional shares of common stock in full), after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

We intend to use (i) $43.1 million of the net proceeds that we receive from this offering to redeem all of the outstanding LP Units of the Operating Partnership retained by Accenture and RBW, after giving effect to the contributions that are part of the Reorganization Transactions, which includes $43.1 million paid to Accenture, at a redemption price per LP Unit equal to the initial public offering price of this offering less underwriting discounts and commissions payable by us, (ii) $64.7 million of the net proceeds that we receive from this offering to repurchase from Apax a portion of the shares in the Company received by Apax in the Reorg Merger at a repurchase price per share equal to the initial public offering price of this offering less underwriting discounts and commissions payable by us and (iii) $6.3 million of net proceeds that we receive from this offering to cash settle outstanding equity awards of certain international employees. For additional information, see “Organizational Structure—Reorganization Transactions” and “Certain Relationships and Related Party Transactions—The Reorganization Transactions.” We intend to use the remaining net proceeds from this offering for general corporate purposes, including acquisitions and other strategic transactions and to repay any amounts outstanding under our revolving credit facility (but not a permanent reduction of any commitments thereunder). As of August 11, 2020, we had no principal amount of outstanding indebtedness under our revolving credit facility. To the extent we generate any additional net proceeds from this offering, we expect to use such additional net proceeds in a manner consistent with the uses described above.

Our revolving credit facility with Bank of America, N.A. that was originally scheduled to mature on October 4, 2019. On October 2, 2019, we amended certain of the financial covenants and extended our credit agreement for two years to a maturity date of October 2, 2021. The revolving credit facility is expandable at our option in increments of $5.0 million up to a limit of $30.0 million under certain conditions. Availability under our revolving credit facility is collateralized by a first priority interest in substantially all of our assets. The revolving credit facility incurs interest at the Eurodollar rate plus applicable margin, or at the Bank of America base rate, defined as the higher of the prime rate, Federal Funds Rate or the Eurodollar rate plus applicable margin, which ranges from 2.00% to 3.00% depending on the interest rate basis and type of borrowing elected. For the nine months ended May 31, 2020, the effective interest rate under our revolving credit agreement was 6.9%. We have historically used borrowings under our revolving credit facility primarily for general corporate purposes, including acquisitions.

 

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DIVIDEND POLICY

We do not currently anticipate paying dividends on our common stock. Any declaration and payment of future dividends to holders of our common stock will be at the discretion of our board of directors and will depend on many factors, including our financial condition, earnings, cash flows, capital requirements, level of indebtedness, statutory and contractual restrictions applicable to the payment of dividends and other considerations that our board of directors deems relevant, including any contractual prohibitions with respect to payment of distributions. See “Risk Factors—Risks Related to our Organizational Structure—We do not anticipate paying any dividends on our common stock in the foreseeable future.”

Because we are a holding company and have no direct operations, we will only be able to pay dividends from our available cash on hand and any funds we receive from our subsidiaries. Certain of our debt agreements limit the ability of certain of our subsidiaries to pay dividends. For example, the agreements governing our existing indebtedness contain negative covenants that limit, among other things, certain of our subsidiaries from paying dividends and other distributions to our Company. In addition, Delaware law may impose requirements that may restrict our ability to pay dividends. See “Management Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Indebtedness” and “Risk Factors—Risks Related to the Offering and Our Common Stock— We have not paid dividends in the past and do not anticipate paying any dividends on our common stock in the foreseeable future.”

Under Delaware law, dividends may be payable only out of surplus, which is calculated as our net assets less our liabilities and our capital, or, if we have no surplus, out of our net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year.

 

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CAPITALIZATION

The following table sets forth the cash and cash equivalents and capitalization as of May 31, 2020:

 

   

of the Operating Partnership on an actual basis;

 

   

of Duck Creek Technologies, Inc. on an as adjusted basis to give effect to the (i) the contribution to the Company of certain equity interests in the Operating Partnership by the Existing Holders (other than Apax, Accenture and RBW) in exchange for newly-issued common stock in the Company, (ii) the contribution to the Company by Accenture of its interest in the General Partner and a portion of its equity interests in the Operating Partnership and (iii) the Reorg Merger, in each case, as described under “Organizational Structure—Reorganization Transactions,” prior to the sale of 15 million shares of common stock in this offering and the application of the net proceeds as described under “Use of Proceeds”; and

 

   

of Duck Creek Technologies, Inc. on a pro forma basis to give further effect to (i) the other Reorganization Transactions described under “Organizational Structure,” and (ii) the sale by us of 15 million shares of common stock in this offering, after deducting estimated underwriting discounts and commissions and estimated offering expenses), after the use of proceeds therefrom, as if they had occurred on May 31, 2020).

The following table is derived from and should be read together with the sections of this prospectus entitled “Use of Proceeds,” “Unaudited Pro Forma Consolidated Financial Information,” “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and accompanying notes included elsewhere in this prospectus.

 

    As of May 31, 2020  
(in $ thousands, except share numbers)   Operating
Partnership
Actual
     Duck Creek
Technologies, Inc.
As Adjusted
Before this
Offering
    Duck Creek
Technologies, Inc.
Pro Forma
 

Cash and cash equivalents(1)

  $ 19,195      $ 19,195     $ 278,310  
 

 

 

    

 

 

   

 

 

 

Borrowings under credit facility(2)

  $ —        $ —       $ —    

Redeemable partners’ interest and partners’ capital/stockholders’ equity:

      

Common stock, par value $0.01 per share; 300,000,000 common stock authorized, as adjusted and pro forma; 110,119,521 common stock issued and outstanding, as adjusted; 122,563,966 common stock issued and outstanding, pro forma

    —          1,101       1,226  

Preferred stock, par value $0.01 per share; 50,000,000 preferred stock authorized, as adjusted and pro forma; no preferred stock issued and outstanding, as adjusted and pro forma

 

 

—  

 

     —         —    

Additional paid-in capital

    —          341,292       713,432  

Accumulated deficit

    —          (58,699     (58,699

Noncontrolling interest(3)

    —          (922     —    

Limited partners’ interest

    396,844        —         —    
 

 

 

    

 

 

   

 

 

 

Total redeemable partners’ interest and partners’ capital/stockholders’ equity

    396,844        282,772       655,959  
 

 

 

    

 

 

   

 

 

 

Total capitalization

  $ 396,844      $ 282,772     $ 655,959  
 

 

 

    

 

 

   

 

 

 

 

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(1)

As of August 11, 2020, we had $69.0 million of cash and cash equivalents.

 

(2)

As of August 11, 2020, we had no principal amount outstanding under our revolving credit facility and $29.0 million of remaining availability.

 

(3)

The LP Units of Disco Topco Holdings (Cayman), L.P. owned by Accenture and RBW after giving effect to the contribution of equity interests in Disco Topco Holdings (Cayman), L.P. and the Reorg Merger, but prior to the completion of this offering, will be considered noncontrolling interests of Duck Creek Technologies, Inc.

 

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DILUTION

If you invest in our common stock in this offering, you will experience immediate and substantial dilution in the net tangible book value per share of our common stock upon the completion of this offering.

Our as adjusted net tangible book deficit as of May 31, 2020, was approximately $(75.6) million, or approximately $(0.69) per share. As used in this “Dilution” section, (i) our as adjusted net tangible book value per share is determined by dividing our as adjusted net tangible book value (tangible assets less total liabilities) by the total number of our outstanding common stock that will be outstanding after giving effect to the Reorganization Transactions but immediately prior to the closing of this offering, and (ii) our pro forma net tangible book value per share of common stock represents pro forma net tangible book value divided by the number of shares of common stock outstanding after giving effect to the Reorganization Transactions and the closing of this offering.

After giving effect to the sale of common stock in this offering and after deducting estimated underwriting discounts and commissions and offering expenses, our pro forma net tangible book value as of May 31, 2020 would have been approximately $297.6 million, or approximately $2.43 per share. This represents an immediate increase in the net tangible book value of $3.12 per share to our Existing Holders and an immediate dilution (i.e., the difference between the offering price and the pro forma net tangible book value after this offering) to new investors participating in this offering of $24.57 per share.

The following table illustrates the per share dilution to new investors participating in this offering:

 

Initial public offering price per share

     $ 27.00  

As adjusted net tangible book deficit per share as of May 31, 2020

   $ (0.69  

Increase per share attributable to new investors in this offering

     3.12    
  

 

 

   

Pro forma net tangible book value per share

       2.43  
    

 

 

 

Dilution per share to new investors in this offering(1)

     $ 24.57  
    

 

 

 

 

(1)

Dilution is determined by subtracting pro forma net tangible book value per share from the initial public offering price paid by a new investor

The following table summarizes on an adjusted pro forma basis as of May 31, 2020, the total number of shares of common stock owned by Existing Holders and to be owned by the new investors in this offering, the total consideration paid, and the average price per share paid by our Existing Holders and to be paid by the new investors in this offering, calculated before deducting estimated discounts and commissions and offering expenses:

 

     Shares Purchased     Total Consideration     Average Price
Per Share
 
     Number      Percentage     Amount      Percentage  

Existing Holders

     107,563,966        87.8   $ 449,578,000        52.6   $ 4.18  

New investors in this offering

     15,000,000        12.2   $ 405,000,000        47.4   $ 27.00  

Total

     122,563,966        100.0   $ 854,578,000        100.0   $ 6.97  

 

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UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

The unaudited pro forma consolidated statement of operations for the year ended August 31, 2019 and the nine months ended May 31, 2020 gives effect to (i) the Reorganization Transactions described under “Organizational Structure” and (ii) the sale of 15,000,000 shares of common stock in this offering and the application of the net proceeds as described under “Use of Proceeds,” as if each had occurred on September 1, 2018. The unaudited pro forma consolidated balance sheet as of May 31, 2020 gives effect to (i) the Reorganization Transactions described under “Organizational Structure” and (ii) the sale of 15,000,000 shares of common stock in this offering and the application of the net proceeds as described under “Use of Proceeds,” as if each had occurred on May 31, 2020.

The unaudited pro forma consolidated financial information has been prepared by our management and is based on Disco Topco Holdings (Cayman), L.P.’s historical consolidated financial statements. The presentation of the unaudited pro forma consolidated financial information is prepared in conformity with Article 11 of Regulation S-X.

We based the pro forma adjustments on available information and on assumptions that we believe are reasonable under the circumstances in order to reflect, on a pro forma basis, the impact of the relevant transactions on the historical consolidated financial information of Disco Topco Holdings (Cayman), L.P. See the notes to unaudited pro forma consolidated financial information below for a discussion of assumptions made. The unaudited pro forma consolidated financial information does not purport to be indicative of our results of operations or financial position had the relevant transactions occurred on the dates assumed and does not project our results of operations or financial position for any future period or date.

The unaudited pro forma consolidated financial information should be read together with “Capitalization,” “Selected Historical Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our and Disco Topco Holdings (Cayman), L.P.’s financial statements and related notes thereto included elsewhere in this prospectus.

The pro forma adjustments related to the pre-offering Reorganization Transactions give effect to the following:

 

   

the Reorg Merger and issuance of newly-issued common stock in the Company to Apax;

 

   

the contribution by Accenture to the Company of a portion of its equity interests in Disco Topco Holdings (Cayman), L.P. and all of its interests in the General Partner in exchange for newly-issued common stock in the Company;

 

   

the contribution by certain members of management to the Company of all of their respective equity interests in the Operating Partnership in exchange for (i) newly-issued common stock in the Company or (ii) restricted common stock in the Company and options to purchase common stock in the Company at an exercise price equal to the fair market value on the date of grant; and

 

   

the contribution by each of the Existing Holders (other than Apax and Accenture, which will take the actions described above, and RBW) to the Company of all of their equity interests in the Operating Partnership in exchange for newly-issued common stock in the Company.

The pro forma adjustments related to this offering give effect to the following:

 

   

the issuance of shares of our common stock to the purchasers in this offering and the receipt of net proceeds of approximately $373.2 million from offering the shares at $27.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses;

 

   

the use of $43.1 million of the net proceeds from this offering to redeem all of the outstanding LP Units of Disco Topco Holdings (Cayman), L.P. held by Accenture and RBW immediately following to the Reorganization Transactions, as described under “Organizational Structure.”

 

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the payment of $64.7 million of the net proceeds from this offering to Apax to repurchase up to 2,555,555 outstanding shares of common stock received by Apax in the Reorg Merger, as described under “Organizational Structure—Reorganization Transactions;” and

 

   

the use of $6.3 million of the net proceeds from this offering to cash settle outstanding equity awards of certain international employees.

Duck Creek Technologies, Inc. was incorporated as a Delaware corporation on November 15, 2019 and will have no material assets or results of operations until the completion of this offering and therefore its historical financial position is not shown in a separate column in this unaudited pro forma consolidated financial information. The Reorganization Transactions will be accounted for as a combination of entities under common control and Disco Topco Holdings (Cayman), L.P. will be considered our predecessor for accounting purposes. This will result in the presentation of Disco Topco Holdings (Cayman), L.P.’s historical consolidated financial statements as the historical consolidated financial statements of Duck Creek Technologies, Inc. and Duck Creek Technologies, Inc. will account for Disco Topco Holdings (Cayman), L.P.’s assets and liabilities at their historical carrying amounts.

As a public company, we will be implementing additional procedures and processes for the purpose of addressing the standards and requirements applicable to public companies. We expect to incur additional annual expenses related to these steps and, among other things, additional directors’ and officers’ liability insurance, director fees, reporting requirements of the SEC, transfer agent fees, hiring additional accounting, legal and administrative personnel, increased auditing and legal fees and similar expenses. We have not included any pro forma adjustments relating to these costs.

 

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Unaudited Pro Forma Consolidated Statement of Operations

Year Ended August 31, 2019

 

(in thousands, except share and per share information)   Historical
Disco
Topco
Holdings
(Cayman),
L.P.
    Adjustments
for the
Reorganization
Transactions
    As
Adjusted
Before

this Offering
    Adjustments
for this
Offering
    Pro forma
Duck Creek
Technologies,
Inc.
 

Revenue:

         

Subscription

  $ 55,909     $ —       $ 55,909     $ —       $ 55,909  

License

    13,776       —         13,776       —         13,776  

Maintenance and support

    23,896       —         23,896       —         23,896  

Professional services

    77,692       —         77,692       —         77,692  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    171,273       —         171,273       —         171,273  

Cost of revenue:

         

Subscription

    24,199       —         24,199       —         24,199  

License

    1,970       —         1,970       —         1,970  

Maintenance and support

    2,781       —         2,781       —         2,781  

Professional services

    43,228       —         43,228       —         43,228  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

    72,178       —         72,178       —         72,178  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

    99,095       —         99,095       —         99,095  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

         

Research and development

    35,936       —         35,936       —         35,936  

Sales and marketing

    40,189       —         40,189       —         40,189  

General and administrative

    36,493       —         36,493       —         36,493  

Change in fair value of contingent consideration

    628       —         628       —         628  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expense

    113,246       —         113,246       —         113,246  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (14,151     —         (14,151     —         (14,151

Other income (expense), net

    (565     —         (565     —         (565

Interest expense, net

    (1,030     —         (1,030     —         (1,030
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

    (15,746     —         (15,746     —         (15,746

Provision for income taxes

    1,150       —         1,150       —         1,150  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (16,896     —         (16,896     —         (16,896
 

 

 

         

Less net loss attributable to noncontrolling interests

      (268 )(1)      (268     268 (1)      —    
   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to Duck Creek Technologies, Inc.

    $ 268     $ (16,628   $ (268   $ (16,896
   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share information:

         

Pro forma net loss per share of common stock, basic and diluted

      $ (0.15     $ (0.14

Pro forma weighted average shares of common stock outstanding, basic and diluted

        111,052,080 (2)        119,056,362 (3) 

 

(1)

The LP Units of Disco Topco Holdings (Cayman), L.P. owned by Accenture and RBW after giving effect to the contribution of equity interests in Disco Topco Holdings (Cayman), L.P. to the Company and the Reorg Merger, but prior to the completion of this offering, will be considered noncontrolling interests of Duck Creek Technologies, Inc. The pro forma adjustment reflects the allocation of the net loss of Disco Topco Holdings (Cayman), L.P. to the noncontrolling interests. The net loss is allocated based on Accenture and RBW’s aggregate economic interest in Disco Topco Holdings (Cayman), L.P. Upon consummation of this offering, all LP Units of Disco Topco Holdings (Cayman), L.P. held by the noncontrolling interests at the time of consummation of this offering will be redeemed or otherwise acquired. Accordingly, the noncontrolling interests’ ownership of Disco Topco Holdings (Cayman), L.P. will be diluted from 1.6% to 0%. Therefore, there will be no noncontrolling interests of Duck Creek Technologies, Inc.

(2)

The unaudited pro forma weighted average shares of common stock outstanding in the column titled “As Adjusted Before this Offering” includes the common stock of Duck Creek Technologies, Inc. that will be

 

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  outstanding after the contribution of equity interests in Disco Topco Holdings (Cayman), L.P to the Company by the Existing Holders (other than Apax and RBW) and giving effect to the Reorg Merger, but prior to the completion of the offering, as if such Reorganization Transactions (including the Reorg Merger) occurred on September 1, 2018. The unaudited pro forma weighted average shares of common stock outstanding in the column titled “As Adjusted Before this Offering” also gives effect to the number of shares issued in the offering the proceeds of which would be necessary to fund: (i) the redemption of the outstanding LP Units of the Operating Partnership held by Accenture and RBW that are not contributed to the Company, (ii) the repurchase from Apax of a portion of the shares of common stock received by Apax in the Reorg Merger and (iii) the cash settlement of outstanding equity awards of certain international employees, as if such redemptions, repurchase and cash settlements occurred on September 1, 2018. The redemption and repurchase prices, as applicable, payable to Accenture, RBW and Apax in such redemptions and repurchase are based on the initial public offering price of $27.00 per share, after deducting underwriting discounts and commissions. Under certain interpretations of the SEC, distributions preceding an initial public offering are deemed to be in contemplation of the offering with the intention of repayment out of offering proceeds to the extent that the distributions exceeded earnings during such period.
(3)

The unaudited pro forma weighted average shares of common stock outstanding in the column titled “Pro forma Duck Creek Technologies, Inc.” gives effect to the Reorganization Transactions as if they occurred on September 1, 2018. It also gives effect to the issuance and sale of shares of common stock in this offering at the initial public offering price of $27.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses, as if the offering occurred on September 1, 2018.

 

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Unaudited Pro Forma Consolidated Statement of Operations

Nine Months Ended May 31, 2020

 

(in thousands, except share and per share information)   Historical
Disco
Topco
Holdings
(Cayman),
L.P.
    Adjustments
for the
Reorganization
Transactions
    As Adjusted
Before this
Offering
    Adjustments
for this
Offering
    Pro forma
Duck Creek
Technologies,
Inc.
 

Revenue:

         

Subscription

  $ 59,368     $ —       $ 59,368     $ —       $ 59,368  

License

    5,431       —         5,431       —         5,431  

Maintenance and support

    17,791       —         17,791       —         17,791  

Professional services

    70,760       —         70,760       —         70,760  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    153,350       —         153,350       —         153,350  

Cost of revenue:

         

Subscription

    24,871       —         24,871       —         24,871  

License

    1,347       —         1,347       —         1,347  

Maintenance and support

    2,475       —         2,475       —         2,475  

Professional services

    38,839       —         38,839       —         38,839  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

    67,532       —         67,532       —         67,532  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margin

    85,818       —         85,818       —         85,818  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

         

Research and development

    29,424       —         29,424       —         29,424  

Sales and marketing

    33,539       —         33,539       —         33,539  

General and administrative

    29,916       —         29,916       —         29,916  

Change in fair value of contingent consideration

    21       —         21       —         21  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expense

    92,900       —         92,900       —         92,900  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (7,082     —         (7,082     —         (7,082

Other income (expense), net

    (96     —         (96     —         (96

Interest expense, net

    (386     —         (386     —         (386
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

    (7,564     —         (7,564     —         (7,564

Provision for income taxes

    889       —         889       —         889  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (8,453     —         (8,453     —         (8,453
 

 

 

         

Less net loss attributable to noncontrolling interests

      (131 )(1)      (131     131 (1)      —    
   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to Duck Creek Technologies, Inc.

    $ 131     $ (8,322   $ (131   $ (8,453
   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net loss per share information:

         

Pro forma net loss per share of common stock, basic and diluted

      $ (0.07     $ (0.07

Pro forma weighted average shares of common stock outstanding, basic and diluted

        114,093,671 (2)        122,036,008 (3) 

 

(1)

The LP Units of Disco Topco Holdings (Cayman), L.P. owned by Accenture and RBW after giving effect to the contribution of equity interests in Disco Topco Holdings (Cayman), L.P. to the Company and the Reorg Merger, but prior to the completion of this offering, will be considered noncontrolling interests of Duck Creek Technologies, Inc. The pro forma adjustment reflects the allocation of the net loss of Disco Topco

 

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  Holdings (Cayman), L.P. to the noncontrolling interests. The net loss is allocated based on Accenture and RBW’s aggregate economic interest in Disco Topco Holdings (Cayman), L.P. Upon consummation of this offering, all LP Units of Disco Topco Holdings (Cayman), L.P. held by the noncontrolling interests at the time of consummation of this offering will be redeemed or otherwise acquired. Accordingly, the noncontrolling interests’ ownership of Disco Topco Holdings (Cayman), L.P. will be diluted from 1.6% to 0%. Therefore, there will be no noncontrolling interests of Duck Creek Technologies, Inc.
(2)

The unaudited pro forma weighted average shares of common stock outstanding in the column titled “As Adjusted Before this Offering” includes the common stock of Duck Creek Technologies, Inc. that will be outstanding after the contribution of equity interests in Disco Topco Holdings (Cayman), L.P to the Company by the Existing Holders (other than Apax and RBW) and giving effect to the Reorg Merger, but prior to the completion of the offering, as if such Reorganization Transactions (including the Reorg Merger) occurred on September 1, 2018. The unaudited pro forma weighted average shares of common stock outstanding in the column titled “As Adjusted Before this Offering” also gives effect to the number of shares issued in the offering the proceeds of which would be necessary to fund: (i) the redemption of the outstanding LP Units of the Operating Partnership held by Accenture and RBW that are not contributed to the Company, (ii) the repurchase from Apax of a portion of the shares of common stock received by Apax in the Reorg Merger and (iii) the cash settlement of outstanding equity awards of certain international employees, as if such redemptions, repurchase and cash settlements occurred on September 1, 2018. The redemption and repurchase prices, as applicable, payable to Accenture, RBW and Apax in such redemptions and repurchase are based on the initial public offering price of $27.00 per share, after deducting underwriting discounts and commissions. Under certain interpretations of the SEC, distributions preceding an initial public offering are deemed to be in contemplation of the offering with the intention of repayment out of offering proceeds to the extent that the distributions exceeded earnings during such period.

(3)

The unaudited pro forma weighted average shares of common stock outstanding in the column titled “Pro forma Duck Creek Technologies, Inc.” gives effect to the Reorganization Transactions as if they occurred on September 1, 2018. It also gives effect to the issuance and sale of shares of common stock in this offering at the initial public offering price of $27.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses, as if the offering occurred on September 1, 2018.

 

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Unaudited Pro Forma Consolidated Balance Sheet

As of May 31, 2020

(in thousands)

 

    Historical Disco
Topco Holdings
(Cayman), L.P.
    Adjustments
for the
Reorganization
Transactions
    As
Adjusted
Before this
Offering
    Adjustments
for this
Offering
    Pro forma
Duck Creek
Technologies,
Inc.
 

Assets

         

Current assets:

         

Cash and cash equivalents

  $ 19,195     $ —       $ 19,195     $ 259,115 (2)(3)    $ 278,310  

Accounts receivable, net

    29,686       —         29,686       —         29,686  

Unbilled revenue

    18,112       —         18,112       —         18,112  

Prepaid expenses and other current assets

    5,818       —         5,818       —         5,818  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    72,811       —         72,811       259,115       331,926  

Property and equipment, net

    19,516         19,516       —         19,516  

Operating lease assets

    20,491       —         20,491       —         20,491  

Goodwill

    272,455       —         272,455       —         272,455  

Intangible assets, net

    85,954       —         85,954       —         85,954  

Deferred tax assets

    1,016       —         1,016       —         1,016  

Unbilled revenue, net of current portion

    6,408       —         6,408       —         6,408  

Other assets

    18,222       —         18,222       —         18,222  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 496,873     $ —       $ 496,873     $ 259,115     $ 755,988  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities, Redeemable Partners’ Interest and Partners’ Capital/Stockholders’ Deficit

         

Current liabilities:

         

Accounts payable

    911       —         911       —         911  

Accrued liabilities

    39,946       114,072 (1)      154,018       (114,072 )(3)      39,946  

Contingent earnout liability

    3,881       —         3,881       —         3,881  

Lease liability

    3,751       —         3,751       —         3,751  

Deferred revenue

    24,174       —         24,174       —         24,174  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    72,663       114,072       186,735       (114,072     72,663  

Contingent earnout liability, net of current portion

    3,100       —         3,100       —         3,100  

Borrowings under credit facility

    —         —         —         —         —    

Lease liability, net of current portion

    22,327       —         22,327       —         22,327  

Deferred revenue, net of current portion

    200       —         200       —         200  

Other long-term liabilities

    1,739       —         1,739       —         1,739  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    100,029       114,072       214,101       (114,072     100,029  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commitments and contingencies

Redeemable partners’ interest:

         

General partner interest

    —         —         —         —         —    

Limited partners’ interest

    396,844       (396,844 )(1)      —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total partners’ capital

    396,844       (396,844     —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Common stock

 

 

 

 

—  

 

 

    1,101 (1)      1,101       125 (2)(3)      1,226  

Additional paid-in-capital

    —         341,292 (1)      341,292       372,140 (2)(3)      713,432  

Accumulated deficit

    —         (58,699 )(1)      (58,699     —         (58,699

Noncontrolling interest

    —         (922 )(1)      (922     922 (3)      —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities, redeemable partners’ interest and partners’ capital/stockholders’ deficit

  $ 496,873     $ —       $ 496,873     $ 259,115     $ 755,988  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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(1)

As a C-corporation, we will no longer record redeemable partners’ interest and partners’ capital in the consolidated balance sheet. To reflect the C-corporation structure of our equity, we will separately present the value of our common stock, additional paid-in capital and accumulated deficit. Common stock, additional paid-in capital and accumulated deficit initially represents our share of Disco Topic Holdings (Cayman), L.P.’s redeemable partners’ interest and partners’ capital after allocation to the noncontrolling interest. Following the contribution of equity interests in Disco Topco Holdings (Cayman), L.P. to the Company by the Existing Holders (other than Apax and RBW) and giving effect to the Reorg Merger, but prior to this offering, Accenture and RBW (combined) and Duck Creek Technologies, Inc. will own 1.6% and 98.4%, respectively, of the outstanding LP Units of Disco Topco Holdings (Cayman), L.P. In addition, we have reflected: (i) the redemption price payable to Accenture and RBW to redeem the outstanding LP Units of the Operating Partnership that are not contributed to the Company, (ii) the repurchase price payable to Apax to repurchase a portion of the shares of common stock received by Apax in the Reorg Merger, and (iii) the cash amount needed to settle outstanding equity awards of certain international employees as a distribution accrual, which increased accrued liabilities, in the column titled “As Adjusted Before this Offering.” The redemption price payable to Accenture, RBW and Apax in such redemption is based on the initial public offering price of $27.00 per share, after deducting underwriting discounts and commissions.

(2)

Represents the issuance of shares of our common stock to the purchasers in this offering and the receipt of net proceeds of approximately $373.2 million from offering the shares at $27.00 per share, after deducting underwriting discounts and commissions and estimated offering expenses.

(3)

We will use the net proceeds from this offering to (i) redeem certain outstanding LP Units of Disco Topco Holdings (Cayman), L.P. held by Accenture and RBW immediately prior to the consummation of this offering, totaling $43.1 million, (ii) repurchase from Apax a portion of the shares of common stock received by Apax in the Reorg Merger, as described under “Organizational Structure” totaling $64.7 million and (iii) cash settle outstanding equity awards of certain international employees totaling $6.3 million. Upon consummation of this offering and the use of proceeds therefrom, 100% of the outstanding LP Units of Disco Topco Holdings (Cayman), L.P. will be owned by Duck Creek Technologies, Inc.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The following table presents the selected consolidated financial data of the Operating Partnership for the periods and as of the dates indicated. The Operating Partnership is considered our predecessor for accounting purposes, and its consolidated financial statements will be our consolidated financial statements following this offering. The selected consolidated financial data of Duck Creek Technologies, Inc. has not been presented because Duck Creek Technologies, Inc. is a newly incorporated entity and has not engaged in any business or other activities except in connection with its formation and initial capitalization.

The selected consolidated statement of operations for the years ended August 31, 2017, 2018 and 2019 and the selected consolidated balance sheet data as of August 31, 2018 and 2019 have been derived from our audited financial statements included elsewhere in this prospectus. The selected consolidated statements of operations for the nine months ended May 31, 2019 and 2020 and the consolidated balance sheet data as of May 31, 2020 have been derived from the unaudited financial statements of the Operating Partnership included elsewhere in this prospectus. The unaudited financial statements have been prepared on the same basis as the audited financial statements and reflect, in the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the financial information in those statements. Our historical results for any prior period are not necessarily indicative of results to be expected in any future period, and our results for any interim period are not necessarily indicative of results that may be expected for any full fiscal year. You should read the selected financial data presented below in conjunction with the information included under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and the related notes included elsewhere in this prospectus.

 

     Year Ended August 31,     Nine Months Ended
May 31,
 
($ in thousands)    2017     2018     2019     2019     2020  

Consolidated Statements of Operations Data

          

Total revenue

   $ 156,721     $ 159,669     $ 171,273     $ 123,354     $ 153,350  

Total cost of revenue

     63,400       64,332       72,178       51,930       67,532  

Total operating expenses

     116,850       101,685       113,246       83,163       92,900  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

     (23,529     (6,348     (14,151     (11,739     (7,082

Other income (expense), net

     77       (533     (565     (312     (96

Interest expense, net

     (330     (567     (1,030     (1,015     (386
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (23,782     (7,448     (15,746     (13,066     (7,564

Provision for income taxes

     1,008       354       1,150       1,007       889  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (24,790   $ (7,802   $ (16,896   $ (14,073   $ (8,453
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Consolidated Balance Sheets Data (at period end)

          

Cash and cash equivalents

     $ 13,879     $ 11,999       $ 19,195  

Total current assets

       49,100       58,514         72,811  

Total assets

       449,237       467,277         496,873  

Total current liabilities

       41,382       59,890         72,663  

Total liabilities

       47,370       78,211         100,029  

Total redeemable partners’ interest

       401,867       389,066         396,844  

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read together with our “Unaudited Pro Forma Consolidated Financial Information,” “Selected Consolidated Financial Data” and the other financial information and related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from the forward-looking statements included herein. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section entitled “Risk Factors” and elsewhere in this prospectus.

Our fiscal year ends on August 31. Unless otherwise noted, any reference to a year preceded by the word “fiscal” refers to the fiscal year ended August 31 of that year. For example, references to “fiscal 2019” refer to the fiscal year ended August 31, 2019. Any reference to a year not preceded by “fiscal” refers to a calendar year.

Overview

We are the leading SaaS provider of core systems for the P&C insurance industry. We have achieved our leadership position by combining over twenty years of deep domain expertise with the differentiated SaaS capabilities and low-code configurability of our technology platform. We believe we are the first company to provide carriers with an end-to-end suite of enterprise-scale core system software that is purpose-built as a SaaS solution. Our product portfolio is built on our modern technology foundation, the Duck Creek Platform, and works cohesively to improve the operational efficiency of carriers’ core processes (policy administration, claims management and billing) as well as other critical functions. The Duck Creek Platform enables our customers to be agile and rapidly capitalize on market opportunities, while reducing their total cost of technology ownership.

Our deep understanding of the P&C insurance industry has enabled us to develop a single, unified suite of insurance software products that is tailored to address the key challenges faced by carriers. Our solutions promote carriers’ nimbleness by enabling rapid integration and streamlining the ability to capture, access and utilize data more effectively. The Duck Creek Suite includes several products that support the P&C insurance process lifecycle, such as:

 

   

Duck Creek Policy: enables carriers to develop and launch new insurance products and manage all aspects of policy administration, from product definition to quoting, binding and servicing

 

   

Duck Creek Billing: supports fundamental payment and invoicing capabilities (such as billing and collections, commission processing, disbursement management and general ledger capabilities) for all insurance lines and bill types

 

   

Duck Creek Claims: supports the entire claims lifecycle from first notice of loss through investigation, payments, negotiations, reporting and closure

In addition, we offer other innovative solutions, such as Duck Creek Rating, Duck Creek Insights, Duck Creek Digital Engagement, Duck Creek Distribution Management, Duck Creek Reinsurance Management, Duck Creek Anywhere Managed Integrations and Duck Creek Industry Content, which provide additional features and functionalities that further help our customers meet the increasing and evolving demands of the P&C industry. Our customers purchase and deploy Duck Creek OnDemand, our SaaS solution, either individually or as a suite.

We sell our SaaS solutions through recurring fee arrangements where revenue is recognized on a monthly basis following deployment to the customer, which we refer to as subscription revenue. Substantially all of our new bookings come from the sale of SaaS subscriptions of Duck Creek OnDemand. For the twelve months ended August 31, 2017, 2018 and 2019, SaaS ACV bookings represented 48%, 71% and 86% of our total ACV

 

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bookings, respectively, and for the nine months ended May 31, 2019 and 2020, SaaS ACV bookings represented 82% and 95% of our total ACV bookings, respectively. Historically, we have also sold our products through perpetual and term license arrangements, most commonly installed on-premise, where license revenue is typically recognized in full upon delivery of the software to the customer. We generally price our SaaS and license arrangements at individually negotiated rates based on the amount of a customer’s DWP that will be managed by our solutions with pre-determined fee adjustments as the customer’s DWP increases over the term of the contract, which typically ranges from three to seven years for our SaaS arrangements. We typically invoice our customers monthly, in advance, for SaaS fees whereas our term licenses are typically invoiced annually, in advance. The total cost of a perpetual license is billed in full upon contract signing.

We also derive revenue from maintenance and support services on our perpetual and term license products (primarily software updates, rights to unspecified software upgrades on a when-and-if-available basis and remote support services). We recognize revenue on a monthly basis as maintenance and support services are provided to customers. We generate revenue by providing professional services for both our SaaS solutions and perpetual and term license products (primarily related to implementation services) to the extent requested by our customers. The vast majority of our professional services revenue is recognized on a time and materials basis as the work is delivered to our customers. Our customers may also choose to obtain implementation services through our network of third-party SI partners who provide implementation and other related services to our customers. Our partnerships with leading SIs allow us to grow our business more efficiently by giving us scale to service our growing customer base. We continue to grow our services organization, including increasing the number of qualified consultants we employ and investing time and resources to develop relationships with new SI partners in existing and new markets.

We sell our products and services to a wide variety of carriers, including many of the largest and most recognizable brands in the P&C insurance industry, as well as smaller national and regional carriers. Our direct sales team focuses on obtaining new customers, which includes carriers that currently operate internally developed or competing systems, as well as selling into our existing customer base, which includes marketing our SaaS solutions to our term and perpetual license customers to drive adoption of our SaaS solutions and cross-selling additional applications. We are committed to continued training and development in order to increase the productivity of our sales team, with regional sales centers in North America, Europe and Australia. Our sales team is complemented by our partnerships with third-party partners, including leading SIs and solution partners. These partners provide additional market validation to our offerings, enhance our sales force through co-marketing efforts and offer greater speed and efficiency of implementation capabilities and related services to our customers. We also engage in a variety of traditional and online marketing activities designed to provide sales support and build brand recognition and enhance our reputation as an industry leader.

We believe our strong customer relationships are a result of our ability to develop innovative technology and incorporate our deep domain expertise into products that serve mission critical functions in our customers’ day-to-day operations. We have over 150 insurance customers, of which over 50 have purchased one or more of our SaaS solutions. We had one customer, State Farm, that accounted for approximately 10% of our total revenue in fiscal 2019. No single customer accounted for more than 10% of our total revenue for the nine months ended May 31, 2020. We also assess customer concentration by combining customers that are under common control and considering them as one entity. On this basis we had two consolidated entities that each represented in excess of 10% of our total revenue in fiscal 2019, a large multinational corporation that does business with us through multiple subsidiaries at approximately 13% and State Farm at approximately 10%, respectively. The same multinational corporation represented approximately 11% of our total revenue for the nine months ended May 31, 2020.

Key Factors and Trends Affecting Our Results of Operations

Increased focus on the sale of our SaaS solutions and resulting changing revenue mix. A central part of our strategy is to continue to grow our subscription revenue by signing new SaaS customers and increasing sales

 

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to our existing SaaS customers. Additionally, over time we also expect to migrate existing term and perpetual license customers to our SaaS solutions. As a result, our software revenue mix will continue to change over time as the portion of license revenue (primarily recognized up-front) decreases and the portion of subscription revenue (recognized monthly) increases, which may make our results in any one period difficult to compare to any other period. For the fiscal years ended August 31, 2017, 2018 and 2019, subscription revenue was 41%, 47% and 60% of software revenue, respectively, and for the nine months ended May 31, 2019 and 2020, subscription revenue was 59% and 72% of software revenue, respectively.

Continued and increased adoption of our solutions by customers. Strong customer relationships are a key driver of our success given the importance of customer references for new sales. Our long-term relationships with existing customers provide us with significant opportunities to reach customer decision-makers and sell our product offerings that address the specific customer’s needs, allowing us to recognize incremental sales with lower sales and marketing spend than for a new customer. With the continued launch of new functionality for the Duck Creek Suite, we have the opportunity to realize incremental value by selling additional functionality to customers that do not currently utilize our full product portfolio and by encouraging existing term and perpetual license customers to adopt our SaaS solutions. As we demonstrate our value to customers, we believe we will have the opportunity to sell them additional solutions. Moreover, because our products are priced on the basis of the amount of DWP generated by our customers, we expect our revenue will grow as our customers grow their businesses.

Timing of license revenue recognition and changing contract terms. Because our offerings are typically priced based on a customer’s DWP, and our business relies on a relatively small number of high-value contracts, the license revenues recognized in any fiscal period in which we sign a term license with a large global carrier may be disproportionally higher than revenues recognized in a period in which we only sign term licenses with smaller carriers. We generally experience lengthy sales cycles because potential customers typically undertake a rigorous pre-purchase decision-making and evaluation process. Additionally, our license revenue may significantly increase in any given period in which a new license contract is signed. In fiscal 2018, we revised our contracting practices and began to sell our term licenses with an initial two-year committed term and optional annual renewals instead of our historical three to six year committed terms. This contracting change has impacted historical period-over-period revenue comparisons. However, because of our revenue mix shift to subscription and since our contracts going forward are expected to have initial two-year committed terms, this change is not expected to have a material impact on the comparability of our results in future periods. Our term license revenue accounted for 23%, 17% and 13% of software revenue during fiscal 2017, 2018 and 2019, respectively, and accounted for 14% and 7% of software revenue during the nine months ended May 31, 2019 and 2020, respectively.

Investment in sales and marketing organization. We plan to continue to invest in our sales and marketing efforts to grow our customer base, increase sales of additional functionality to existing customers and encourage carriers who currently operate legacy systems or use one or more of our competitor’s applications to adopt our SaaS solutions. We expect to add sales personnel and expand our marketing activities. We also intend to continue to expand our international sales and marketing organization, which we believe will be an important factor in our continued growth. Our sales and marketing expenses totaled $30.7 million, $34.2 million and $40.2 million in fiscal 2017, 2018 and 2019, respectively, and totaled $30.0 million and $33.5 million in the nine months ended May 31, 2019 and 2020, respectively. We expect sales and marketing expenses to continue to increase in absolute dollars for the foreseeable future.

Investment in SaaS operations. We will continue to invest in Duck Creek OnDemand, including through our new SaaS operations center and continued growth in the number of our cloud and SaaS operations experts, to further our goal of delivering the best experience for our SaaS customers. Personnel related costs of our SaaS operations team is the fastest growing component of our cost of subscription revenue. Our cost of subscription revenue totaled $17.0 million, $22.3 million and $24.2 million in fiscal 2017, 2018 and 2019, respectively, and totaled $17.0 million and $24.9 million in the nine months ended May 31, 2019 and 2020, respectively.

 

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Investment in technology and research and development efforts. We are committed to continuing to deliver market-leading software to carriers and believe that maintaining our product leadership is critical to driving further revenue growth. As a result, we intend to continue to make significant investments in our research and development efforts to extend the functionality and breadth of our current solutions as well as develop and launch new products and tools to address the evolving needs of the P&C insurance industry. Our research and development expenses totaled $42.8 million, $36.1 million and $35.9 million in fiscal 2017, 2018 and 2019, respectively, and $26.3 million and $29.4 million in the nine months ended May 31, 2019 and 2020, respectively. Although research and development expenses decreased in the last two fiscal years, we expect research and development expenses to increase in absolute dollars for the foreseeable future.

Pursuing acquisitions. We have acquired and successfully integrated several businesses complementary to our own to enhance our software and technology capabilities. We intend to continue to pursue targeted acquisitions that further complement our product portfolio or provide us access to new markets. For example, in August 2016, we acquired Agencyport Software, a provider of intuitive, digital experiences between carriers and their agents, brokers, consumers and policyholders; in January 2017, we acquired Yodil, LLC, a pioneer in insurance data management solutions; in October 2018, we acquired Outline Systems LLC, a provider of P&C distribution channel management software and longstanding member of our partner ecosystem; and in June 2019, we acquired the CedeRight Products business, a provider of reinsurance management software, from DataCede LLC. As a result of the contributions of these businesses and any future businesses we may acquire, our results of operations may not be comparable between periods. For fiscal 2017, 2018 and 2019, cash consideration for acquisitions was $2.5 million, $0.0 million and $11.6 million, respectively. For the nine months ended May 31, 2019, cash consideration for acquisitions was $9.8 million and we did not expend funds on acquisitions for the nine months ended May 31, 2020.

Mix of Professional Services Revenue. Our professional services teams ensure the successful configuration and integration of our solutions, and provide continuous support to our customers. We recognize most of our professional services revenue during initial deployment, and recognize additional revenue for services provided over the lifetime of a customer’s use of our software. Over time, a customer’s spend on professional services decreases as a percentage of their overall spend with us. In addition, although we plan on increasing our professional services headcount in the long-term, we expect to shift an increasing percentage of implementation work to our network of third-party SIs to better enable us to meet growing market demand. As a result, we expect our overall professional services revenue to increase in absolute dollars due to the growth in the number of our SaaS customers, but to decrease as a percentage of total revenue. For the fiscal 2017, 2018 and 2019, our professional services revenue was $75.2 million, $70.2 million and $77.7 million, respectively. For the nine months ended May 31, 2019 and 2020, our professional services revenue was $55.8 million and $70.8 million, respectively.

COVID-19 Expenses. In March 2020, we implemented various measures in response to the ongoing COVID-19 pandemic to ensure the safety of our employees. Over a two day period, we shifted 100% of our employee base to work from home and suspended international and domestic travel. As a result, we experienced a decrease in our sales and marketing expenses for the quarter ended May 31, 2020 primarily related to a decrease in travel costs. We expect this trend to continue at least in the near term, however such savings may be offset by increased costs when employees return to work and we implement measures to ensure their safety.

Recent Developments

On November 13, 2019, the Operating Partnership issued and sold 31,059,222 Class E Preferred Units to certain accredited investors in a private offering for $90.0 million. On November 27, 2019, the Operating Partnership used $72.0 million of such proceeds from the sale to redeem 14,908,429 Class A Units and 9,938,949 Class B Units held by Apax, and Accenture, respectively. On November 27, 2019, the Operating Partnership issued and sold 10,353,074 Class E Preferred Units to an accredited investor in a private offering for $30.0 million. On November 29, 2019, the Operating Partnership used $26.0 million of such proceeds from the

 

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sale to redeem 5,383,600 Class A Units and 3,589,064 Class B Units from Apax and Accenture, respectively. On February 18, 2020, the Operating Partnership issued and sold 27,199,913 Class E Preferred Units to Drake DF Holdings, LP, an entity affiliated with Dragoneer, Insight and certain accounts and funds advised by Neuberger Berman Investment Advisers LLC in a private offering for $90.0 million. On February 26, 2020, the Operating Partnership issued and sold 3,022,213 Class E Preferred Units to an accredited investor in a private offering for $10.0 million. On February 27, 2020, the Operating Partnership used $100.0 million of the proceeds from the February 18, 2020 and February 26, 2020 sales to redeem 18,133,278 Class A Units and 12,088,848 Class B Units from Apax and Accenture, respectively. On June 5, 2020, the Operating Partnership issued and sold 50,603,459 Class E Preferred Units to certain accredited investors in a private offering for $200.0 million. On June 8, 2020, the Operating Partnership issued and sold 7,590,517 Class E Preferred Units to a certain accredited investor in a private offering for $30.0 million. On June 8, 2020, the Operating Partnership used $200.0 million of such proceeds from the sale to redeem 30,362,073 Class A Units and 20,241,374 Class B Units held by Apax, and Accenture, respectively. For additional information, see “Certain Relationships and Related Party Transactions—Sale of Class E Preferred Units.”

On October 2, 2019, we amended certain of the financial covenants and extended our credit agreement for two years to a maturity date of October 2, 2021.

Components of Results of Operations

Revenue

We generate our revenue from selling subscriptions to our SaaS solutions, licensing our term and perpetual software applications, providing maintenance and support services (primarily software updates, rights to unspecified software upgrades on a when-and-if-available basis and remote support services) to our term and perpetual license customers and providing professional services (primarily related to implementation services) to the extent requested by either our SaaS or term and perpetual license customers. We generally price our SaaS and licenses arrangements based on the amount of a customer’s DWP that will be managed by our software solutions and may include volume-based pricing for customers managing a higher amount of DWP with our solutions. Our SaaS and license contracts generally include provisions for additional fees when the amount of the customer’s DWP managed by our software solutions exceed agreed-upon caps within defined reporting periods, which are recognized on an as incurred basis. Software revenue is comprised of subscription revenue and revenue from licenses and maintenance and support services. Total revenue is comprised of software revenue plus revenue from our professional services.

Subscription

Our subscription revenue is comprised of fees from customers accessing our Duck Creek OnDemand platform and other SaaS solutions. Revenue for a reporting period is generally recognized ratably in proportion to the total contractual DWP, beginning when the service has been made available to the customer. Our subscription revenue accounted for 41%, 47% and 60% of software revenue during fiscal 2017, 2018 and 2019, respectively, and 59% and 72% of software revenue during the nine months ended May 31, 2019 and 2020, respectively.

Licenses

On an increasingly limited basis, we sell licenses for our solutions on either a renewable term basis or a perpetual basis. The total contractual consideration allocated to the license is recognized as revenue upon delivery of the software to a customer, assuming all other revenue recognition criteria are satisfied. Historically, our term license contracts had terms of three to six years. We began revising our contracting practices in fiscal 2018 by selling our term licenses with an initial two-year committed term and optional annual renewals, with the revenue allocated to the initial two-year license period recognized in full upon delivery of the license. As a result of our revenue mix shift to subscription, this change is not expected to have a material impact on our results

 

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going forward. We expect volatility across quarters for our license revenue due to the timing of license sales and renewals. Our license revenue accounted for 31%, 23% and 15% of software revenue during fiscal 2017, 2018 and 2019, respectively, and 14% and 7% of software revenue during the nine months ended May 31, 2019 and 2020, respectively.

Maintenance and Support

In connection with our term and perpetual license arrangements, we offer maintenance and support 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. Our maintenance and support fees are typically priced as a fixed percentage of the associated license fees. We recognize maintenance and support revenue from customers ratably over the committed term of the contract. Substantially all term and perpetual license customers purchase an agreement for maintenance and support. We expect to continue to generate a relatively consistent stream of revenue from the maintenance and support services we provide to our existing license customers. However, we expect revenue from maintenance and support services to decrease as a percentage of software revenue as we continue to deemphasize license sales in favor of our SaaS solutions. Our maintenance and support revenue accounted for 28%, 29% and 26% of software revenue during fiscal 2017, 2018 and 2019, respectively, and 27% and 21% of software revenue during the nine months ended May 31, 2019 and 2020, respectively.

Professional Services

We offer professional services, primarily related to implementation of our products, in connection with both our SaaS solutions and software license products. The vast majority of professional services engagements are billed to customers on a time and materials basis and revenue is generally recognized upon delivery of our services. We expect our professional services revenue to grow over time in absolute dollars due to customer growth and an increasing need for implementation services, but decrease as a percentage of total revenue. We believe the rate at which we sell our software will drive a greater need for implementation services that will support both an increase in our professional services revenue and an increase in demand for the services provided by our third-party SIs. Our professional services revenue generates lower gross margins than our software revenue and accounted for 48%, 44% and 45% of our total revenue during fiscal 2017, 2018 and 2019, respectively, and 45% and 46% for the nine months ended May 31, 2019 and 2020, respectively.

Cost of Revenue

Our cost of revenue has fixed and variable components and depends on the type of revenue earned in each period. Cost of revenue includes amortization expense associated with acquired technology and other operating expenses directly related to the cost of products and services, including depreciation expense. We expect our cost of revenue to increase in absolute dollars as we continue to hire personnel, to provide hosting services, technical support and consulting services to our growing customer base.

Cost of Subscriptions

Our cost of subscription revenue is primarily comprised of cloud infrastructure costs, royalty fees paid to third parties, amortization of acquired technology intangible assets and personnel-related expenses for our SaaS operations teams, including salaries and other direct personnel-related costs.

Cost of Licenses

Our cost of license revenue is primarily comprised of royalty fees paid to third parties and amortization of acquired technology intangible assets.

 

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Cost of Maintenance and Support

Our cost of maintenance and support revenue is comprised of personnel-related expenses for our technical support team, including salaries and other direct personnel-related costs. While we expect the cost of maintenance and support revenue will increase in the near term, it may decrease in the future if we successfully transition our term and perpetual license customers to our SaaS solutions.

Cost of Professional Services

Our cost of professional services revenue is primarily comprised of personnel-related expenses for our professional service employees and contractors, including salaries and other direct personnel-related costs.

Gross Margins

Gross margins have been and will continue to be affected by a variety of factors, including the average sales price of our products and services, DWP volume growth, the mix of revenue between SaaS solutions, software licenses, maintenance and support and professional services and changes in cloud infrastructure and personnel costs. As we transition our product mix to include more SaaS customers, we expect our overall gross margin percentages to decrease in the near term due to our SaaS gross margin percentages being lower than our license gross margin percentages. Over time, we expect gross margins to increase as we onboard additional customers, achieve growth within existing customers and realize greater economies of scale.

Operating Expenses

Research and Development

Our research and development expenses consist primarily of costs incurred for personnel-related expenses for our technical staff, including salaries and other direct personnel-related costs. Additional expenses include consulting and professional fees for third-party development resources. We expect our research and development expenses to increase in absolute dollars for the foreseeable future as we continue to dedicate substantial resources to develop, improve and expand the functionality of our solutions. Costs incurred in the preliminary design and development stages of our SaaS projects are generally expensed as incurred in accordance with FASB ASC 350-40, Internal-Use Software. Once a SaaS project has reached the application development stage, certain internal, external, direct and indirect costs may be subject to capitalization. Generally, costs are capitalized until the technology is available for its intended use. Subsequent costs incurred for the development of future upgrades and enhancements, which are expected to result in additional functionality, follow the same protocol for capitalization.

Sales and Marketing Expenses

Our sales and marketing expenses consist primarily of personnel related costs for our sales and marketing functions, including salaries and other direct personnel-related costs. Additional expenses include marketing program costs, including costs related to our annual Formation conference and amortization of acquired customer relationships intangible assets. While we expect our sales and marketing expenses to increase on an absolute dollar basis in the near term as we continue to increase investments to support our growth, we also anticipate that sales and marketing expenses will remain relatively consistent as a percentage of total revenue.

General and Administrative Expenses

Our general and administrative expenses consist primarily of personnel-related costs for our executive, finance, human resources, information technology and legal functions, including salaries and other direct personnel-related costs. Additional expenses include professional fees, amortization of acquired trademarks, tradenames and domain name intangible assets, insurance and acquisition-related costs. While we expect other

 

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general and administrative expense to increase on an absolute dollar basis in the near term as we continue to increase investments to support our growth and as a result of our becoming a public company, we also anticipate that general and administrative expenses will decrease as a percentage of total revenue.

Change in Fair Value of Contingent Consideration

Certain of our acquisitions have included a component of contingent consideration to be paid to the sellers if certain performance levels are achieved by the acquired entity over a specific period of time. Contingent consideration is initially recorded at fair value on the acquisition date based, in part, on a range of estimated probabilities for achievement of these performance levels. The fair value is periodically adjusted as actual performance levels become known and updates are made to the estimated probabilities for future performance. A gain or loss is recognized in the income statement for fair value adjustments. As a result of additional acquisitions, it is possible that we will incur gains or losses in the future due to the change in the fair value of contingent consideration.

Other Income (Expense), Net

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

Interest Expense, Net

Interest expense, net comprise interest expense accrued or paid on our indebtedness, net of interest income earned on our cash balances. We expect interest expense to vary each reporting period depending on the amount of outstanding indebtedness and prevailing interest rates.

We expect interest income will vary in each reporting period depending on our average cash balances during the period and applicable interest rates.

Provision for Income Taxes

We are subject to taxes in the U.S. 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. Due to cumulative losses, we maintain a valuation allowance against our deferred tax assets, except in certain foreign subsidiaries that generate income. We consider all available evidence, both positive and negative, in assessing the extent to which a valuation allowance should be applied against our deferred tax assets. Realization of our U.S. deferred tax assets depends upon future earnings, the timing and amount of which are uncertain.

 

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Results of Operations

Comparison of the Nine Months Ended May 31, 2019 and 2020

The following table sets forth our consolidated results of operations for the periods indicated, expressed in total dollar terms and as a percentage of total revenue:

 

     Nine Months Ended May 31,  
(dollars in thousands)    2019     2020  

Revenue

          

Subscription

   $ 39,932        32   $ 59,368        39

License

     9,539        8       5,431        3  

Maintenance and support

     18,098        15       17,791        12  

Professional services

     55,785        45       70,760        46  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total revenue

     123,354        100       153,350        100  
  

 

 

    

 

 

   

 

 

    

 

 

 

Cost of revenue

          

Subscription

     16,988        14       24,871        16  

License

     1,467        1       1,347        1  

Maintenance and support

     2,171        2       2,475        2  

Professional services

     31,304        25       38,839        25  

Total cost of revenue

     51,930        42       67,532        44  
  

 

 

    

 

 

   

 

 

    

 

 

 

Gross margins

     71,424        58       85,818        56  
  

 

 

    

 

 

   

 

 

    

 

 

 

Operating expenses

          

Research and development

     26,339        21       29,424        19  

Sales and marketing

     29,962        24       33,539        22  

General and administrative

     27,074        22       29,916        20  

Change in fair value of contingent consideration

     (212      0       21        0  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total operating expense

     83,163        67       92,900        61  
  

 

 

    

 

 

   

 

 

    

 

 

 

Loss from operations

     (11,739      (10     (7,082      (5

Other expense, net

     (312      0       (96      0  

Interest expense, net

     (1,015      (1     (386      0  
  

 

 

    

 

 

   

 

 

    

 

 

 

Loss before income taxes

     (13,066      (11     (7,564      (5

Provision for income taxes

     1,007        1       889        1  
  

 

 

    

 

 

   

 

 

    

 

 

 

Net loss

   $ (14,073      (11 )%    $ (8,453      (6 )% 
  

 

 

    

 

 

   

 

 

    

 

 

 

Revenue

Subscription

Subscription revenue increased $19.4 million, or 49%, in the nine months ended May 31, 2020 versus the nine months ended May 31, 2019 due to a combination of sales to new customers and increased revenue generated from existing customers, which includes the full period impact of prior year sales, sales of new services to existing customers and contractual growth.

License

License revenue decreased $4.1 million, or (43)%, in the nine months ended May 31, 2020 versus the nine months ended May 31, 2019 primarily due to our focus on selling our SaaS solutions to new customers.

 

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Maintenance and Support

Maintenance and support revenue decreased $0.3 million, or (2)%, in the nine months ended May 31, 2020 versus the nine months ended May 31, 2019 primarily due to the conversion of license contract customers to subscription customers in the previous fiscal year.

Professional services

Professional services revenue increased $15.0 million, or 27%, in the nine months ended May 31, 2020 versus the nine months ended May 31, 2019 primarily due to growth of our existing software customer base and new customer implementations.

Cost of Revenue

Cost of revenue increased $15.6 million, or 30%, in the nine months ended May 31, 2020 versus the nine months ended May 31, 2019.

Cost of Subscriptions

Cost of subscription revenue increased $7.9 million, or 46%, in the nine months ended May 31, 2020 versus the nine months ended May 31, 2019 primarily due to an increase in SaaS customers, and is primarily comprised of a $4.8 million increase in data hosting costs, a $2.5 million increase in payroll and related costs as we added employees to build out our SaaS operations team, and a $0.8 million increase in computer hardware and software costs.

Cost of License

Cost of license revenue decreased $0.1 million, or (8)%, in the nine months ended May 31, 2020 versus the nine months ended May 31, 2019 primarily due to a decrease in royalties paid to third parties resulting from the decrease in license revenue.

Cost of Maintenance and Support

Cost of maintenance and support revenue increased $0.3 million, or 14%, in the nine months ended May 31, 2020 versus the nine months ended May 31, 2019 primarily due to a shift in the mix of on-shore versus off-shore personnel-related costs required to support our term and perpetual license customers.

Cost of Professional Services

Cost of professional services revenue increased $7.5 million, or 24%, in the nine months ended May 31, 2020 versus the nine months ended May 31, 2019 primarily due to a $5.8 million increase in salaries and other payroll-related costs from increased professional services headcount in addition to a $1.8 million increase in personnel-related costs due to the internal transfer of professional services headcount back to professional services from a research and development project completed in late 2019.

Gross Margins

Gross margins increased $14.4 million, or 20%, in the nine months ended May 31, 2020 versus the nine months ended May 31, 2019, primarily due to a $11.6 million increase in subscription gross margin and a $7.4 million increase in professional services gross margin, partially offset by a $0.6 million decrease in maintenance and support gross margin and a $4.0 million decrease in license gross margin. Our gross margin percentage decreased slightly to 56% for the nine months ended May 31, 2020, as compared to 58% for the nine months ended May 31, 2019. This is primarily due to decreases in license gross margin percentage and maintenance and support gross margin percentage, partially offset by an increase in professional services gross margin percentage.

 

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Operating Expenses

Research and Development Expense

Research and development expense increased $3.0 million, or 12%, in the nine months ended May 31, 2020 versus the nine months ended May 31, 2019 primarily due to a $4.3 million increase in salaries and payroll-related costs from increased headcount, offset by a $1.2 million reduction in costs due to the completion of a research and development project in late 2019.

Sales and Marketing Expense

Sales and marketing expense increased $3.6 million, or 12%, in the nine months ended May 31, 2020 versus the nine months ended May 31, 2019 primarily due to an increase in salaries and payroll-related costs from increased headcount.

General and Administrative Expense

General and administrative expense increased $2.8 million, or 10%, in the nine months ended May 31, 2020 versus the nine months ended May 31, 2019 primarily due to a $3.1 million increase in salaries, bonus and payroll-related costs, a $0.4 million increase in computer software costs and a $0.3 million increase in facilities costs. These increases were offset by a $1.0 million decrease in accounting and legal costs.

Change in Fair Value of Contingent Consideration

In the nine months ended May 31, 2020, a loss of less than $0.1 million was recognized.

Other (Expense) Income, Net

Other (expense) income, net decreased $0.2 million, to $(0.1) million in the nine months ended May 31, 2020 versus $(0.3) million in the nine months ended May 31, 2019 primarily due to fluctuations in foreign exchange rates on receivables and payables denominated in currencies other than the U.S. dollar.

Interest Expense, Net

Interest expense, net decreased $0.6 million in the nine months ended May 31, 2020 versus the nine months ended May 31, 2019 primarily due to lower net revolver borrowing costs.

Provision for Income Taxes

Provision for income taxes decreased by $0.1 million in the nine months ended May 31, 2020 versus the nine months ended May 31, 2019 primarily due to an increase in the deferred tax benefit in foreign entities.

 

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Comparison of Fiscal Years Ended August 31, 2017, 2018 and 2019

The following table sets forth our consolidated results of operations for the periods indicated, expressed in total dollar terms and as a percentage of total revenue:

 

    Year Ended August 31,  
    2017     2018     2019  
(dollars in thousands)                                    

Revenue

           

Subscription

  $ 33,453       21   $ 42,451       27   $ 55,909       33

License

    25,457       16       20,969       13       13,776       8  

Maintenance and support

    22,650       15       26,034       16       23,896       14  

Professional services

    75,161       48       70,215       44       77,692       45  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

    156,721       100       159,669       100       171,273       100  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenue

           

Subscription

    17,028       11       22,272       14       24,199       14  

License

    2,402       2       2,121       1       1,970       1  

Maintenance and support

    1,913       1       2,456       2       2,781       2  

Professional services

    42,057       27       37,483       23       43,228       25  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenue

    63,400       40       64,332       40       72,178       42  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross margins

    93,321       60       95,337       60       99,095       58  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

           

Research and development

    42,815       27       36,056       23       35,936       21  

Sales and marketing

    30,725       20       34,158       21       40,189       23  

General and administrative

    39,262       25       30,670       19       36,493       21  

Change in fair value of contingent consideration

    3,828       2       801       1       628       0  

Transaction expenses of acquirer

    220       0       0       0       0       0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expense

    116,850       75       101,685       64       113,246       66  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss from operations

    (23,529     (15     (6,348     (4     (14,151     (8

Other income (expense), net

    77       0       (533     0       (565     0  

Interest expense, net

    (330     0       (567     0       (1,030     (1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

    (23,782     (15     (7,448     (5     (15,746     (9

Provision for income taxes

    1,008       0       354       0       1,150       1  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (24,790     (16 )%    $ (7,802     (5 )%    $ (16,896     (9 )% 
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revenue

Subscription

Fiscal 2019 Compared to Fiscal 2018. Subscription revenue increased $13.5 million, or 32%, in fiscal 2019 versus fiscal 2018 due to a combination of sales to new customers and increased revenue generated from existing customers, which includes full year impact of prior year sales, sales of new services to existing customers and contractual growth.

Fiscal 2018 Compared to Fiscal 2017. Subscription revenue increased $9.0 million, or 27%, in fiscal 2018 versus fiscal 2017 primarily due to sales to new customers in fiscal 2018 and fiscal 2017.

License

Fiscal 2019 Compared to Fiscal 2018. License revenue decreased $7.2 million, or (34)%, in fiscal 2019 versus fiscal 2018 primarily due to our focus on selling our SaaS solutions to new customers and the revisions to

 

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contracting practices in fiscal 2018 to sell our term licenses with an initial two-year committed term and optional annual renewals instead of our historical three to six year committed terms. These decreases were partially offset by the conversion of a large perpetual license contract to an enterprise-wide term license contract, which shifted the revenue mix away from maintenance revenue and into license revenue.

Fiscal 2018 Compared to Fiscal 2017. License revenue decreased $4.5 million, or (18)%, in fiscal 2018 versus fiscal 2017 primarily due to our focus on selling our SaaS solutions to new customers and the revisions to contracting practices in fiscal 2018 to sell our term licenses with an initial two-year committed term and optional annual renewals instead of our historical three to six year committed terms.

Maintenance and Support

Fiscal 2019 Compared to Fiscal 2018. Maintenance and support revenue decreased $2.1 million, or (8)%, in fiscal 2019 versus fiscal 2018 primarily due to the conversion of a large perpetual license contract to an enterprise-wide term license contract, which shifted the revenue mix away from maintenance revenue and into license revenue, and the conversion of two license contract customers to SaaS customers.

Fiscal 2018 Compared to Fiscal 2017. Maintenance and support revenue increased $3.4 million, or 15%, in fiscal 2018 versus fiscal 2017 primarily due to an increase in our license customer base in fiscal 2018.

Professional services

Fiscal 2019 Compared to Fiscal 2018. Professional services revenue increased $7.5 million, or 11%, in fiscal 2019 versus fiscal 2018 primarily due to growth of our existing software customer base and new customer implementations.

Fiscal 2018 Compared to Fiscal 2017. Professional services revenue decreased $4.9 million, or (7)%, in fiscal 2018 versus fiscal 2017 primarily due to an increasing percentage of implementation work being completed by our network of third-party SIs and a decrease in our professional services headcount.

Cost of Revenue

Fiscal 2019 Compared to Fiscal 2018. Cost of revenue increased $7.8 million, or 12%, in fiscal 2019 versus fiscal 2018.

Fiscal 2018 Compared to Fiscal 2017. Cost of revenue increased $0.9 million, or 1%, in fiscal 2018 versus fiscal 2017.

Cost of Subscriptions

Fiscal 2019 Compared to Fiscal 2018. Cost of subscription revenue increased $1.9 million, or 9%, in fiscal 2019 versus fiscal 2018 primarily due to an increase in SaaS customers, and is comprised of a $0.8 million increase in payroll and related costs as we added employees to build out the SaaS operations team, a $0.6 million increase in third-party software costs, a $0.5 million increase in consulting costs and a $0.1 million increase in royalties paid related to subscription arrangements. The increases were offset by a $0.4 million decrease due to eliminating redundancies in our external data hosting costs.

Fiscal 2018 Compared to Fiscal 2017. Cost of subscription revenue increased $5.2 million, or 31%, in fiscal 2018 versus fiscal 2017 primarily due to an increase in SaaS customers, and is comprised of an increase of data hosting fees of $2.7 million, a $1.5 million increase in payroll and related costs and a $0.8 million increase in third-party software cost.

Cost of License

Fiscal 2019 Compared to Fiscal 2018. Cost of license revenue decreased $0.2 million, or (7)%, in fiscal 2019 versus fiscal 2018 primarily due to a decrease in royalties paid to third-parties resulting from the decrease in license revenue.

 

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Fiscal 2018 Compared to Fiscal 2017. Cost of license revenue decreased $0.3 million, or (12)%, in fiscal 2018 versus fiscal 2017 primarily due to a decrease in royalties paid to third-parties resulting from the decrease in license revenue.

Cost of Maintenance and Support

Fiscal 2019 Compared to Fiscal 2018. Cost of maintenance and support revenue increased $0.3 million, or 13%, in fiscal 2019 versus fiscal 2018 primarily due to an increase in personnel-related costs required to support our term and perpetual license customers.

Fiscal 2018 Compared to Fiscal 2017. Cost of maintenance and support revenue increased $0.5 million, or 28%, in fiscal 2018 versus fiscal 2017 primarily due to an increase in personnel-related costs required to support our term and perpetual license customers.

Cost of Professional Services

Fiscal 2019 Compared to Fiscal 2018. Cost of professional services revenue increased $5.7 million, or 15%, in fiscal 2019 versus fiscal 2018 primarily due to an increase in salaries and other payroll related costs resulting from increased professional services headcount in fiscal 2019.

Fiscal 2018 Compared to Fiscal 2017. Cost of professional services revenue decreased $4.6 million, or (11)%, in fiscal 2018 versus fiscal 2017 primarily due to a decrease in salaries and other payroll related costs resulting from our decreased professional services headcount in fiscal 2018.

Gross Margins

Fiscal 2019 Compared to Fiscal 2018. Gross margins increased $3.8 million, or 4%, in fiscal 2019 versus fiscal 2018, primarily due to the continued transition from on premise licensing to providing SaaS in fiscal 2018 and fiscal 2019, resulting in an increase in subscription gross margins offset by a decrease in license gross margins. Our gross margin percentage decreased from 60% in fiscal 2018 to 58% in fiscal 2019. This decrease is primarily due to a decrease in license gross margin percentage partially offset by an increase in subscription gross margin percentage.

Fiscal 2018 Compared to Fiscal 2017. Gross margins increased $2.0 million, or 2%, in fiscal 2018 versus fiscal 2017, primarily due to the continued transition from on premise licensing to providing SaaS in fiscal 2017 and fiscal 2018, resulting in an increase in subscription gross margins offset by a decrease in license gross margins. Our gross margin percentage remained consistent at 60% for fiscal 2018 as compared to fiscal 2017. This is primarily due to a decrease in subscription gross margin percentage offset by an increase in professional services gross margin percentage.

Operating Expenses

Research and Development Expense

Fiscal 2019 Compared to Fiscal 2018. Research and development expense remained consistent in fiscal 2019 versus fiscal 2018 primarily due to a $0.5 million decrease in salary and salary-related costs due to lower headcount and a $1.5 million reduction in payroll-related expenses related to capitalized internal-use software costs. These decreases were offset by a $1.3 million increase in engineering software costs and a $0.6 million increase in consulting fees.

Fiscal 2018 Compared to Fiscal 2017. Research and development expense decreased $6.8 million, or (16)%, in fiscal 2018 versus fiscal 2017 primarily due to a $3.7 million decrease in salary and salary-related costs

 

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attributable to decreased headcount in connection with cost reduction initiatives, a $1.5 million reduction in payroll-related expenses related to capitalized internal-use software costs, and a $1.4 million decrease in transition services costs related to our carve-out that did not recur in fiscal 2018.

Sales and Marketing Expense

Fiscal 2019 Compared to Fiscal 2018. Sales and marketing expense increased $6.0 million, or 18%, in fiscal 2019 versus fiscal 2018 primarily due to a $5.7 million increase in salaries and payroll-related costs from increased headcount and a $0.2 million increase in costs related to marketing programs.

Fiscal 2018 Compared to Fiscal 2017. Sales and marketing expense increased $3.4 million, or 11%, in fiscal 2018 versus fiscal 2017 primarily due to a $2.9 million increase in salaries and payroll-related costs from increased headcount and a $0.5 million increase in third-party software costs.

General and Administrative Expense

Fiscal 2019 Compared to Fiscal 2018. General and administrative expense increased $5.8 million, or 19%, in fiscal 2019 versus fiscal 2018 primarily due to a $3.6 million increase in salaries and payroll-related costs from increased headcount, a $0.6 million increase in legal costs related to merger and acquisition activity, a $0.6 million increase in facilities cost due to opening additional offices in fiscal 2019, a $0.5 million increase in depreciation expense, a $0.5 million increase in third-party software costs and a $0.3 million increase in consulting costs.

Fiscal 2018 Compared to Fiscal 2017. General and administrative expense decreased $8.6 million, or (22)%, in fiscal 2018 versus fiscal 2017 primarily due to a $11.3 million decrease in contingent labor costs, which were incurred in 2017 to account for the carve-out from Accenture that we were able to reduce as we transitioned to a labor force, a $2.4 million decrease in professional services fees mainly due to carve-out related transition services costs incurred in fiscal 2017 that did not recur in fiscal 2018, partially offset by a $2.8 million increase in salaries and payroll-related costs due to increased headcount, a $1.5 million increase in facilities cost due to opening additional, larger offices in fiscal 2018 to accommodate a growth in headcount and a $0.5 million increase in depreciation expense.

Change in Fair Value of Contingent Consideration

Fiscal 2019 Compared to Fiscal 2018. In fiscal 2019, a $0.6 million loss was recognized primarily due to the change in fair value of contingent consideration related to the acquisition of Outline Systems (now Duck Creek Distribution Management).

Fiscal 2018 Compared to Fiscal 2017. In fiscal 2018 and fiscal 2017, a loss of $0.8 million and $3.8 million, respectively, was recognized due to the change in fair value of contingent consideration related to the acquisition of Yodil (now Duck Creek Insights). The increase in losses recognized were due to higher than projected sales for acquired businesses.

Other Income (Expense), Net

Fiscal 2019 Compared to Fiscal 2018. Other income (expense) was relatively consistent in fiscal 2019 versus fiscal 2018, as net losses incurred related to fluctuations in foreign exchange rates on receivables and payables denominated in currencies other than the U.S. dollar remained stable.

Fiscal 2018 Compared to Fiscal 2017. Other income (expense) decreased $0.6 million in fiscal 2018 versus fiscal 2017 primarily due to net losses incurred related to fluctuations in foreign exchange rates on receivables and payables denominated in currencies other than the U.S. dollar.

 

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Interest Expense, Net

Fiscal 2019 Compared to Fiscal 2018. Interest expense, net increased $0.5 million in fiscal 2019 versus fiscal 2018 primarily due to higher net revolver borrowing costs.

Fiscal 2018 Compared to Fiscal 2017. Interest expense, net increased $0.2 million in fiscal 2018 versus fiscal 2017 primarily due to higher net revolver borrowing costs.

Provision for Income Taxes

Fiscal 2019 Compared to Fiscal 2018. Provision for income taxes increased by $0.8 million in fiscal 2019 versus fiscal 2018 primarily due to a decrease in the deferred tax benefit in foreign entities.

Fiscal 2018 Compared to Fiscal 2017. Provision for income taxes decreased by $0.7 million in fiscal 2018 versus fiscal 2017 primarily due to an increase in the deferred tax benefit in foreign entities.

Liquidity and Capital Resources

To date, we have financed our operations primarily through cash provided by operating activities and our revolving credit facility. As of May 31, 2020, we had $19.2 million in cash (this includes the impact of net proceeds received from the issuance of equity securities in November 2019), no outstanding borrowings under our revolving credit facility and $1.0 million of outstanding letters of credit. We also had $29.0 million principal amount of additional availability under our revolving credit facility. While we believe our existing cash, together with cash provided by operating activities and amounts available under our revolving credit facility, will be sufficient to meet our operating working capital and capital expenditure requirements over at least the next twelve months, the extent to which COVID-19 could impact our business, financial condition, results of operations and cash flows in the short- and medium-term cannot be predicted with certainty, but such impact could be material. Although we did not experience significant disruptions to our business during the three months ended May 31, 2020 from COVID-19, we and our industry as a whole may experience a greater impact going forward. To the extent COVID-19 has resulted in any increase to our cash and cash equivalents, including as a result of any decreases in sales and market expenses described above, such increase could be temporary. Additionally, on a longer term basis, we may not be able to accurately predict the effect of COVID-19 on our future financing requirements, which will depend on our primary cash needs that could be affected by many factors, including the number of new customers that we obtain, the renewal activity of our existing customers and our ability to both cross-sell additional functionality to our existing customers and to encourage our existing customers to adopt our SaaS solutions, the timing and extent of our research and development spending and the expansion of our sales and marketing activities. We may also face unexpected costs in connection with our business operations, including in connection with the ongoing implementation of our COVID-19 related policies and procedures. Any of the above could have a material adverse effect on our business, financial condition, results of operations and cash flows and require us to seek additional sources of liquidity and capital resources. For additional information regarding the impact of COVID-19 on the Company, see “Risk Factors—Public health outbreaks, epidemics or pandemics, including the global COVID-19 outbreak, could harm our business, results of operations, and financial condition”. In addition, any given time, we may be evaluating one or more potential investments in, or acquisitions of, businesses or technologies, which could also require us to seek additional equity or debt financing. Additional sources of liquidity and capital resources, including equity or debt financing, may not be available on terms favorable to us or at all.

As of May 31, 2020, $3.7 million of cash was held by our foreign subsidiaries. We currently do not anticipate a need to repatriate these funds to finance our U.S. operations and it is our intention to indefinitely reinvest these funds outside the United States.

 

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Summary of Cash Flows for the Nine Months Ended May 31, 2019 and 2020

The following summarizes our cash flows from operating, investing and financing activities for the periods

indicated:

 

     Nine Months Ended May 31,   
($ in thousands)            2019                     2020          

Net cash (used in) provided by operating activities

   $ (2,259   $ 8,247  

Net cash used in investing activities

     (13,786     (5,604

Net cash provided by financing activities

     12,000       4,553  

Net (decrease) increase in cash, cash equivalents and restricted cash

     (4,045     7,196  

Cash, cash equivalents and restricted cash, beginning of period

     13,879       11,999  

Cash, cash equivalents and restricted cash, end of period

   $ 9,834     $ 19,195  

Operating Activities

We generated $8.2 million of cash from operating activities during the nine months ended May 31, 2020, primarily resulting from our net income, after excluding the impact of non-cash charges of $16.8 million and $0.1 million of cash used in working capital activities. Cash used in working capital activities during the nine months ended May 31, 2020 was primarily due to increases in accounts receivable, unbilled revenue and deferred contract costs of $8.8 million, collectively, consistent with our revenue growth, offset by a $9.3 million increase in accrued liabilities mostly related to increased hosting expenses.

We used $2.3 million of cash in operating activities during the nine months ended May 31, 2019, primarily resulting from our net loss, after excluding the impact of non-cash charges of $14.1 million and $2.3 million of cash used in working capital activities. Cash used in working capital activities during the nine months ended May 31, 2019 was primarily due to an increase in other assets of $2.5 million mostly related to deferred contract costs.

Non-cash charges in all periods include depreciation and amortization, share-based compensation expense, deferred taxes, and change in fair value of contingent earn-out liability.

Investing Activities

Net cash used in investing activities consists of business acquisitions, purchases of property and equipment and capitalization of internal use software costs.

We used $5.6 million of cash in investing activities during the nine months ended May 31, 2020. Cash used in investing activities during this period primarily related to purchases of property and equipment of $3.2 million and capitalized internal-use software costs of $2.4 million.

We used $13.8 million of cash in investing activities during the nine months ended May 31, 2019 primarily related to our acquisition of Outline Systems LLC for cash consideration of $9.8 million, purchases of property and equipment of $1.8 million and capitalized internal use-software costs of $2.2 million.

Financing Activities

We generated $4.6 million of cash from financing activities during the nine months ended May 31, 2020, primarily related to $212.9 million of net proceeds from the issuance of Class E Preferred Units and borrowings under our revolving credit facility of $5.0 million partially offset by a $118.8 million payment for the redemption of Class A Units and a $79.2 million payment for the redemption of Class B Units, payments of principal on our revolving credit facility of $9.0 million, payments of contingent consideration of $3.5 million and costs of $2.6 million relating to proceeding with our initial public offering.

 

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We generated $12.0 million of cash from financing activities during the nine months ended May 31, 2019 due to borrowings under our revolving credit facility of $12.0 million.

Summary of Cash Flows for the Fiscal Years Ended August 31, 2017, 2018 and 2019

The following summarizes our cash flows from operating, investing and financing activities for the periods indicated:

 

     Year Ended August 31,  
($ in thousands)    2017     2018     2019  

Net cash (used in) provided by operating activities

   $ (11,869   $ 11,833     $ 14,833  

Net cash used in investing activities

     (4,042     (8,594     (19,911

Net cash provided by (used in) financing activities

     759       (901     3,198  
  

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash, cash equivalents and restricted cash

     (15,152     2,338       (1,880

Cash, cash equivalents and restricted cash, beginning of period

     26,693       11,541       13,879  
  

 

 

   

 

 

   

 

 

 

Cash, cash equivalents and restricted cash, end of period

   $ 11,541     $ 13,879     $ 11,999  
  

 

 

   

 

 

   

 

 

 

Operating Activities

We generated $14.8 million of cash from operating activities during fiscal 2019, primarily resulting from our net income, after excluding the impact of non-cash charges, of $3.9 million, and $10.9 million of cash generated by working capital activities. Cash generated by working capital activities during fiscal 2019 was primarily due to an increase in accrued liabilities related to an increase in our liabilities with third-party software vendors.

We generated $11.8 million of cash from operating activities during fiscal 2018, primarily resulting from our net income, after excluding the impact of non-cash charges, of $14.1 million, partially offset by a $2.3 million of cash used in working capital activities. Cash used by working capital activities during fiscal 2018 was primarily due to a decrease in accounts payable due to the timing of invoice payments.

We used $11.9 million of cash from operating activities during fiscal 2017, primarily resulting from our net loss, after excluding the impact of non-cash charges, of $1.1 million, and $10.7 million of cash used in working capital activities. Cash used in working capital activities during fiscal 2017 was primarily due to approximately $8.0 million of non-recurring costs related to our carve-out from Accenture.

Non-cash charges in all periods include depreciation and amortization, share-based compensation expense, deferred taxes, and change in fair value of contingent earn-out liability.

Investing Activities

Net cash used in investing activities consists of business acquisitions, purchases of property and equipment and capitalization of internal use software costs.

We used $19.9 million of cash in investing activities during fiscal 2019 primarily related to our acquisition of Outline Systems LLC for cash consideration of $9.8 million, our acquisition of the CedeRight Products business for cash consideration of $1.8 million, purchases of property and equipment of $5.3 million and capitalized internal use-software costs of $3.0 million.

We used $8.6 million of cash in investing activities during fiscal 2018. Cash used in investing activities during this period primarily related to purchases of property and equipment of $7.1 million and capitalized internal-use software costs of $1.5 million.

 

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We used $4.0 million of cash in investing activities during fiscal 2017, primarily related to our acquisition of Yodil for cash consideration of $2.5 million and purchases of property and equipment of $1.5 million.

Financing Activities

We generated $3.2 million of cash in financing activities during fiscal 2019, primarily related to borrowings under our revolving credit facility of $12.0 million offset by payments of principal on our revolving credit facility of $8.0 million and costs of $0.8 million relating to proceeding with our initial public offering.

We used $0.9 million of cash in financing activities during fiscal 2018, primarily related to payments of principal on our revolving credit facility of $5.0 million, payments of contingent consideration of $0.9 million partially offset by borrowings under our revolving credit facility of $5.0 million.

We generated $0.8 million of cash in financing activities during fiscal 2017, primarily related to borrowings under our revolving credit facility of $2.0 million and proceeds from the issuance of Class C Units of $1.1 million, partially offset by payments on our revolving credit facility of $2.0 million and payment of deferred financing costs of $0.3 million.

Other Financial Data and Key Metrics

In connection with the management of our business, we use certain non-GAAP financial measures and identify, measure and assess a variety of key metrics. The non-GAAP financial measures and principal metrics we use in managing our business are set forth below:

Adjusted EBITDA. We define Adjusted EBITDA as net loss before interest expense, net; other (expense) income, net; provision for income taxes; depreciation expense; amortization of intangible assets; amortization of capitalized internal-use software; share-based compensation expense; and the change in fair value of contingent consideration. We believe Adjusted EBITDA provides investors and other users of our financial information consistency and comparability with our past financial performance and facilitates period-to-period comparisons of operations. Adjusted EBITDA was $(1.1) million, $13.7 million and $6.8 million for fiscal 2017, 2018 and 2019, respectively, and $3.2 million and $8.9 million for the nine months ended May 31, 2019 and 2020, respectively. For a further discussion of Adjusted EBITDA, including the reconciliation to net loss, the most directly comparable GAAP financial measure, and the inherent limitations of using non-GAAP measures, see “Summary Consolidated Financial Information—Other Financial Data and Key Metrics.”

Free Cash Flow. We define Free Cash Flow as net cash provided by (used in) operating activities, less purchases of property and equipment, including capitalized internal use software. We consider Free Cash Flow to be an important measure in facilitating period-to-period comparisons of liquidity. We use Free Cash Flow in conjunction with traditional GAAP measures as part of our overall assessment of liquidity. Free cash flow was $(13.4) million, $3.2 million and $6.6 million for fiscal 2017, 2018 and 2019, respectively, and $(6.2) million and $2.6 million for the nine months ended May 31, 2019 and 2020, respectively. For more information about Free Cash Flow, including the reconciliation to net cash provided by (used in) operating activities, the most directly comparable GAAP measure, and the inherent limitations of using non-GAAP measures, see “Summary Consolidated Financial Information—Other Financial Data and Key Metrics.”

Non-GAAP Gross Margin. We define Non-GAAP Gross Margin as GAAP gross margin before the portion of amortization of intangible assets, amortization of capitalized internal-use software and share-based compensation expense that is included in cost of revenue. We believe Non-GAAP Gross Margin provides investors and other users of our financial information consistency and comparability with our past financial performance and facilitates period-to-period comparisons of gross margin. Non-GAAP Gross Margin was $98.0 million, $100.1 million and $103.9 million for fiscal 2017, 2018 and 2019, respectively, and $75.0 million and $89.7 million for the nine months ended May 31, 2019 and 2020, respectively. For a further discussion of Non-GAAP Gross Margin, including the reconciliation to gross margin, the most directly comparable GAAP financial measure, and the inherent limitations of using non-GAAP measures, see “Summary Consolidated Financial Information—Other Financial Data and Key Metrics.”

 

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Non-GAAP (Loss) Income from Operations. We define Non-GAAP (Loss) Income from Operations as GAAP loss from operations before amortization of intangible assets; amortization of capitalized internal-use software; share-based compensation expense; and the change in fair value of contingent consideration. We believe Non-GAAP (Loss) Income from Operations provides investors and other users of our financial information consistency and comparability with our past financial performance and facilitates period-to-period comparisons of operations. Non-GAAP (Loss) Income from Operations was $(2.5) million, $11.7 million and $4.4 million for fiscal 2017, 2018 and 2019, respectively, and $1.5 million and $6.5 million for the nine months ended May 31, 2019 and 2020, respectively. For a further discussion of Non-GAAP (Loss) Income from Operations, including the reconciliation to loss from operations, the most directly comparable GAAP financial measure, and the inherent limitations of using non-GAAP measures, see “Summary Consolidated Financial Information—Other Financial Data and Key Metrics.”

Non-GAAP Net (Loss) Income. We define Non-GAAP Net (Loss) Income as GAAP net loss before amortization of intangible assets; amortization of capitalized internal-use software; share-based compensation expense; change in fair value of contingent consideration; and the tax effect of amortization of intangible assets, share-based compensation expense, and the change in fair value of contingent consideration. We believe Non-GAAP Net (Loss) Income provides investors and other users of our financial information consistency and comparability with our past financial performance and facilitates period-to-period comparisons of operations. Non-GAAP Net (Loss) Income was $(9.5) million, $5.4 million and $(3.3) million for fiscal 2017, 2018 and 2019, respectively, and $(4.4) million and $1.5 million for the nine months ended May 31, 2019 and 2020, respectively. For a further discussion of Non-GAAP Net (Loss) Income, including the reconciliation to net loss, the most directly comparable GAAP financial measure, and the inherent limitations of using non-GAAP measures, see “Summary Consolidated Financial Information—Other Financial Data and Key Metrics.”

SaaS Net Dollar Retention Rate. We calculate SaaS Net Dollar Retention Rate by annualizing SaaS revenue recorded in the last month of the measurement period for those revenue-generating customers in place throughout the entire measurement period (the latest twelve-month period). We divide the result by annualized SaaS revenue from the month that is immediately prior to the beginning of the measurement period, for all revenue-generating customers in place at the beginning of the measurement period. Our SaaS Net Dollar Retention Rate was 107% and 114% for fiscal 2018 and 2019, respectively, and 118% and 113% for the nine months ended May 31, 2019 and 2020, respectively. The Company is not able to calculate a SaaS Net Dollar Retention Rate for periods prior to fiscal 2018 due to data limitations associated with the carve-out from Accenture. Our calculation excludes one existing contract for a service no longer offered on a standalone basis by the Company. We believe SaaS Net Dollar Retention Rate is an important metric for the Company because, in addition to providing a measure of retention, it indicates our ability to grow revenue within existing customer accounts. For more information about SaaS Net Dollar Retention Rate and the inherent limitations of using non-GAAP measures, see “Summary Consolidated Financial Information—Non-GAAP Financial Measures.”

SaaS Annual Recurring Revenue (“SaaS ARR”). We calculate SaaS ARR by annualizing the recurring subscription revenue recognized in the last month of the measurement period (the latest twelve-month period). Our SaaS ARR as of August 31, 2017, 2018 and 2019 was $21.3 million, $30.1 million and $51.7 million, respectively, and our SaaS ARR as of May 31, 2019 and 2020 was $43.2 million and $75.8 million, respectively. Our calculation excludes one existing contract for a service no longer offered on a standalone basis by the Company. We believe SaaS ARR provides important information about our ability to acquire new subscription customers and to maintain and expand our relationship with existing subscription customers. For more information about SaaS ARR and the inherent limitations of using non-GAAP measures, see “Summary Consolidated Financial Information—Non-GAAP Financial Measures.”

Non-GAAP Subscription Gross Margin. We define Non-GAAP Subscription Gross Margin as GAAP subscription gross margin before the portion of amortization of intangible assets, amortization of capitalized internal-use software and share-based compensation expense that is included in subscription gross margin. We believe Non-GAAP Subscription Gross Margin provides investors and other users of our financial information

 

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consistency and comparability with our past financial performance and facilitates period-to-period comparisons of subscription gross margin. Non-GAAP Subscription Gross Margin was $19.7 million, $23.5 million and $35.2 million for fiscal 2017, 2018 and 2019, respectively, and $25.5 million and $37.4 million for the nine months ended May 31, 2019 and 2020, respectively. A reconciliation of Non-GAAP Subscription Gross Margin to subscription gross margin, the most directly comparable GAAP financial measure, is presented below for the periods indicated.

 

     Year Ended August 31,      Nine Months Ended May 31,  
($ in thousands)    2017      2018      2019                2019                          2020            

Subscription gross margin

   $ 16,425      $ 20,180      $ 31,710      $ 22,944      $ 34,497  

Amortization of intangible assets

     3,184        3,275        3,433        2,582        2,655  

Amortization of capitalized internal-use software

     —          —          —          —          205  

Share-based compensation expense

     52        59        21        13        10  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Non-GAAP Subscription Gross Margin

   $ 19,661      $ 23,514      $ 35,164      $ 25,539      $ 37,367  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Non-GAAP Professional Services Gross Margin. We define Non-GAAP Professional Services Gross Margin as GAAP professional services gross margin before the portion of share-based compensation expense that is included in professional services gross margin. We believe Non-GAAP Professional Services Gross Margin provides investors and other users of our financial information consistency and comparability with our past financial performance and facilitates period-to-period comparisons of professional services gross margin. Non-GAAP Professional Services Gross Margin was $33.3 million, $32.9 million and $34.6 million for fiscal 2017, 2018 and 2019, respectively, and $24.6 million and $32.0 million for the nine months ended May 31, 2019 and 2020, respectively. A reconciliation of Non-GAAP Professional Services Gross Margin to professional services gross margin, the most directly comparable GAAP financial measure, is presented below for the periods indicated.

 

     Year Ended August 31,      Nine Months Ended May 31,  
($ in thousands)    2017      2018      2019                2019                          2020            

Professional services gross margin

   $ 33,104      $ 32,732      $ 34,464      $ 24,480      $ 31,920  

Share-based compensation expense

     172        170        122        82        103  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Non-GAAP Professional Services Gross Margin

   $ 33,276      $ 32,902      $ 34,586      $ 24,562      $ 32,023  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Non-GAAP Sales and Marketing Expense. We define Non-GAAP Sales and Marketing Expense as GAAP sales and marketing expense before the portion of amortization of intangible assets and share-based compensation expense that is included in sales and marketing expense. We believe Non-GAAP Sales and Marketing Expense provides investors and other users of our financial information consistency and comparability with our past financial performance and facilitates period-to-period comparisons of sales and marketing expense. Non-GAAP Sales and Marketing Expense was $20.4 million, $23.7 million and $29.5 million for fiscal 2017, 2018 and 2019, respectively, and $21.9 million and $25.6 million for the nine months ended May 31, 2019 and 2020, respectively. A reconciliation of Non-GAAP Sales and Marketing Expense to sales and marketing expense, the most directly comparable GAAP financial measure, is presented below for the periods indicated.

 

     Year Ended August 31,     Nine Months Ended May 31,  
($ in thousands)    2017     2018     2019               2019                         2020            

Sales and marketing expense

   $ 30,725     $ 34,158     $ 40,189     $ 29,962     $ 33,539  

Amortization of intangible assets

     (10,080     (10,080     (10,254     (7,735     (7,710

Share-based compensation expense

     (234     (338     (417     (317     (257
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP Sales and Marketing Expense

   $ 20,411     $ 23,740     $ 29,518     $ 21,910     $ 25,572  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Non-GAAP Research and Development Expense. We define Non-GAAP Research and Development Expense as GAAP research and development expense before the portion of share-based compensation expense that is included in research and development expense. We believe Non-GAAP Research and Development Expense provides investors and other users of our financial information consistency and comparability with our past financial performance and facilitates period-to-period comparisons of research and development expense. Non-GAAP Research and Development Expense was $42.4 million, $35.7 million and $35.5 million for fiscal 2017, 2018 and 2019, respectively, and $26.1 million and $29.1 million for the nine months ended May 31, 2019 and 2020, respectively. A reconciliation of Non-GAAP Research and Development Expense to research and development expense, the most directly comparable GAAP financial measure, is presented below for the periods indicated.

 

     Year Ended August 31,     Nine Months Ended May 31,  
($ in thousands)    2017     2018     2019             2019                     2020          

Research and development expense

   $ 42,815     $ 36,056     $ 35,936     $ 26,339     $ 29,424  

Share-based compensation expense

     (440     (395     (398     (266     (285
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP Research and Development Expense

   $ 42,375     $ 35,661     $ 35,538     $ 26,073     $ 29,139  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-GAAP General and Administrative Expense. We define Non-GAAP General and Administrative Expense as GAAP general and administrative expense before the portion of amortization of intangible assets and share-based compensation expense that is included in general and administrative expense. We believe Non-GAAP General and Administrative Expense provides investors and other users of our financial information consistency and comparability with our past financial performance and facilitates period-to-period comparisons of general and administrative expense. Non-GAAP General and Administrative Expense was $37.5 million, $28.9 million and $34.4 million for fiscal 2017, 2018 and 2019, respectively, and $25.6 million and $28.5 million for the nine months ended May 31, 2019 and 2020, respectively. A reconciliation of Non-GAAP General and Administrative Expense to general and administrative expense, the most directly comparable GAAP financial measure, is presented below for the periods indicated.

 

     Year Ended August 31,     Nine Months Ended May 31,  
($ in thousands)    2017     2018     2019             2019                     2020          

General and administrative expense

   $ 39,262