S-1 1 ds1.htm REGISTRATION STATEMENT ON FORM S-1 Registration Statement on Form S-1
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As filed with the Securities and Exchange Commission on September 2, 2011

Registration No. 333-            

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

Under

The Securities Act of 1933

 

 

Guidewire Software, Inc.

(Exact name of Registrant as specified in its charter)

 

 

 

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

2211 Bridgepointe Parkway

San Mateo, CA 94404

Tel: (650) 357-9100

(Address, including zip code, and telephone number,

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

 

 

Marcus S. Ryu

President and Chief Executive Officer

2211 Bridgepointe Parkway

San Mateo, CA 94404

Tel: (650) 357-9100

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

 

 

Copies to:

 

Craig M. Schmitz

Richard A. Kline

Goodwin Procter LLP

135 Commonwealth Drive

Menlo Park, CA 94025

 

Robert F. Donohue

Vice President and General Counsel

Guidewire Software, Inc.

2211 Bridgepointe Parkway

San Mateo, CA 94404

 

Jeffrey D. Saper

Robert G. Day

Wilson Sonsini Goodrich & Rosati, P.C.

650 Page Mill Road

Palo Alto, CA 94304

 

 

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

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

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

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

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

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

 

Large accelerated filer  ¨

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

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of Securities to be Registered   Proposed Maximum
Aggregate Offering Price(1)
  Amount of
Registration Fee(2)

Common Stock, par value $0.0001 per share

  $100,000,000   $11,610

 

 

(1) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended. Includes offering price of shares that the underwriters have the option to purchase to cover over allotments, if any.

 

(2) Calculated pursuant to Rule 457(o) under the Securities Act based on an estimate of the proposed maximum offering price.

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

 

 

 


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

 

PRELIMINARY PROSPECTUS, SUBJECT TO COMPLETION, DATED                             , 2011

Prospectus

             Shares

LOGO

Common Stock

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

We expect to apply for listing of our common stock on the              under the symbol “GWRE”.

 

     Per Share      Total  

Initial public offering price

   $                    $                

Underwriting discounts and commissions

   $                    $                

Proceeds to Guidewire Software, Inc., before expenses

   $                    $                

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

Investing in our common stock involves risks. See “Risk Factors” beginning on page 9.

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

The underwriters expect to deliver the shares on or about                    , 2011.

 

J.P. Morgan   Deutsche Bank Securities   Citigroup

 

Stifel Nicolaus Weisel    Pacific Crest Securities

                    , 2011


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LOGO

 

 


Table of Contents

TABLE OF CONTENTS

 

     Page  

Prospectus Summary

     1   

Risk Factors

     9   

Special Note Regarding Forward-Looking Statements

     32   

Industry and Market Data

     33   

Use of Proceeds

     34   

Dividend Policy

     34   

Capitalization

     35   

Dilution

     37   

Selected Consolidated Financial Data

     39   

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

     42   

Business

     78   

Management

     94   

Compensation

     100   

Certain Relationships and Related Party Transactions

     125   

Principal Stockholders

     127   

Description of Capital Stock

     129   

Shares Eligible for Future Sale

     134   

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

     137   

Underwriting

     141   

Legal Matters

     146   

Experts

     146   

Where You Can Find More Information

     146   

Index to Consolidated Financial Statements

     F-1   

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

Through and including                    , 2011 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

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

 

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PROSPECTUS SUMMARY

This summary highlights selected information appearing elsewhere in this prospectus and does not contain all the information you should consider before investing in our common stock. You should carefully read this prospectus in its entirety before investing in our common stock, including “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this prospectus. Unless the context otherwise requires, we use the terms “Guidewire,” “we,” “us,” “the Company” and “our” in this prospectus to refer to Guidewire Software, Inc. and its subsidiaries. Our fiscal years ended July 31, 2008, 2009 and 2010 are referred to herein as fiscal year 2008, fiscal year 2009 and fiscal year 2010, respectively.

Overview

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

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

Strong customer relationships are a key component of our success given the long-term nature of our contracts and the importance of customer references for new sales. Our customers range from some of the largest global insurance carriers or their subsidiaries such as Tokio Marine & Nichido Fire Insurance Co., Ltd. and Zurich Financial Services Group Ltd. to national carriers such as Nationwide Mutual Insurance Company to regional carriers such as AAA affiliates. As of July 31, 2011, we had 101 customers.

We primarily generate software license revenues through annual license fees that recur during the multi-year term of a customer’s contract. The average initial length of our contracts is approximately five years, and these contracts are renewable on an annual or multi-year basis. We typically bill our customers annually in advance. We generated revenues of $144.7 million in fiscal year 2010 and $121.5 million for the nine months ended April 30, 2011. We generated net income of $15.5 million in fiscal year 2010 and $33.5 million for the nine months ended April 30, 2011, including a benefit of $24.4 million related to a release of a significant portion of our tax valuation allowance during the three months ended April 30, 2011.

Overview of the P&C Insurance Industry

The P&C insurance industry is large, fragmented, highly regulated and complex. In order to effectively manage their operations, P&C insurance carriers require IT systems that integrate with other internal systems, control workflow, enable extensive configurability and provide visibility to every user.

 

 

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According to Gartner, in 2010, P&C insurance carriers spent $4.0 billion on software and $10.5 billion on IT services, which encompasses outsourced custom development and maintenance.

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

 

  Ÿ  

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

 

  Ÿ  

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

 

  Ÿ  

Financial loss due to fraud and error in the claims process.    P&C insurance carriers experience substantial financial losses each year due to claims leakage, where the amount paid on a claim exceeds the amount to which a claimant is entitled. Claims leakage, which includes fraud as well as system and human error, is often the result of ineffective business process controls in legacy systems. We believe, based upon our analysis and industry reports, that claims leakage costs the P&C insurance industry over $50 billion annually.

 

  Ÿ  

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

 

  Ÿ  

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

Our Solutions

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

 

  Ÿ  

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

 

 

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  Ÿ  

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

 

  Ÿ  

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

 

  Ÿ  

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

 

  Ÿ  

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

Our Growth Strategy

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

 

  Ÿ  

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

 

  Ÿ  

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

 

  Ÿ  

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

 

  Ÿ  

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

 

 

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  Ÿ  

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

Risks Affecting Us

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

 

  Ÿ  

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

 

  Ÿ  

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

 

  Ÿ  

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

 

  Ÿ  

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

 

  Ÿ  

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

 

  Ÿ  

we face intense competition in our market;

 

  Ÿ  

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

 

  Ÿ  

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

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

Corporate History and Information

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

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

 

 

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THE OFFERING

 

Common stock offered by us

                     shares

 

Common stock to be outstanding after this offering

                     shares

 

Over-allotment option offered by us

                     shares

 

Use of proceeds

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

 

Proposed              symbol

“GWRE”

The number of shares of our common stock to be outstanding following this offering is based on 39,516,598 shares of our common stock outstanding as of April 30, 2011, assuming conversion of all outstanding shares of our convertible preferred stock on a one-for-one basis into 25,357,721 shares of common stock, and excludes:

 

  Ÿ  

8,065,964 shares of common stock issuable upon the exercise of options outstanding as of April 30, 2011, with a weighted average exercise price of $2.64 per share;

 

  Ÿ  

3,491,773 shares of common stock issuable upon the vesting of RSUs outstanding as of April 30, 2011;

 

  Ÿ  

69,529 shares of common stock issuable upon the exercise of warrants to purchase convertible preferred stock outstanding as of April 30, 2011, assuming conversion of all outstanding shares of our convertible preferred stock, which we expect to occur immediately prior to the closing of this offering, with an exercise price of $5.03 per share; and

 

  Ÿ  

        shares of our common stock reserved for future issuance under our stock-based compensation plans as of April 30, 2011, and any future increase in shares reserved for issuance under such plans.

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

 

  Ÿ  

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

 

  Ÿ  

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

 

  Ÿ  

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

 

 

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SUMMARY CONSOLIDATED FINANCIAL DATA

The following table summarizes our consolidated financial data. We have derived the summary consolidated statements of operations data for the fiscal years ended July 31, 2008, 2009 and 2010 from our audited consolidated financial statements included elsewhere in this prospectus. We have derived the summary consolidated statements of operations data for the nine months ended April 30, 2010 and 2011 and our consolidated balance sheet data as of April 30, 2011 from our unaudited interim consolidated financial statements included elsewhere in this prospectus. The unaudited interim consolidated financial statements have been prepared on a basis consistent with the audited consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, that management considers necessary to present fairly the financial information set forth in those statements. Our historical results are not necessarily indicative of the results that may be expected in the future and the results for the nine months ended April 30, 2011 are not necessarily indicative of the results to be expected for the fiscal year ended July 31, 2011 or any other future annual or interim period. The following summary consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

     Years Ended July 31,     Nine Months
Ended April 30,
 
     2008     2009     2010     2010     2011  
                       (unaudited)  
     (in thousands, except share and per share data)  

Revenues:

          

License

   $ 16,202      $ 26,996      $ 60,315      $ 39,138      $ 47,890   

Maintenance

     5,531        9,572        18,702        13,934        15,420   

Services

     48,923        48,177        65,674        45,837        58,155   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     70,656        84,745        144,691        98,909        121,465   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenues(1):

          

License

     555        349        267        231        441   

Maintenance

     2,018        2,628        3,685        2,791        2,850   

Services

     39,875        38,679        51,519        36,772        46,196   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues

     42,448        41,656        55,471        39,794        49,487   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit:

          

License

     15,647        26,647        60,048        38,907        47,449   

Maintenance

     3,513        6,944        15,017        11,143        12,570   

Services

     9,048        9,498        14,155        9,065        11,959   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gross profit

     28,208        43,089        89,220        59,115        71,978   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

          

Research and development(1)

     21,162        22,356        28,273        20,601        24,704   

Sales and marketing(1)

     15,718        21,559        26,741        19,112        19,315   

General and administrative(1)

     8,506        9,646        16,192        12,905        16,069   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     45,386        53,561        71,206        52,618        60,088   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     (17,178     (10,472     18,014        6,497        11,890   

Interest income (expense), net

     443        27        95        (17     100   

Other income (expense), net

     —          (123     (391     (400     1,221   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before provision for income taxes

     (16,735     (10,568     17,718        6,080        13,211   

Provision for (benefit from) income taxes

     148        398        2,199        694        (20,277
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (16,883   $ (10,966   $ 15,519      $ 5,386      $ 33,488   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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     Years Ended July 31,      Nine Months
Ended April 30,
 
     2008     2009     2010      2010     2011  
                        (unaudited)  
     (in thousands, except share and per share data)  

Net income (loss) per share attributable to common stockholders(2):

           

Basic

   $ (1.28   $ (0.83   $ 0.32       $ 0.08      $ 0.79   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Diluted

   $ (1.28   $ (0.83   $ 0.30       $ 0.07      $ 0.74   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Shares used in computing net income (loss) per share attributable to common stockholders(2):

           

Basic

     13,195,733        13,284,938        13,535,736         13,509,038        14,012,799   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Diluted

     13,195,733        13,284,938        15,933,374         15,847,015        16,879,578   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Pro forma net income per share attributable to common stockholders (unaudited)(2):

           

Basic

       $ 0.40         $ 0.85   
      

 

 

      

 

 

 

Diluted

       $ 0.38         $ 0.79   
      

 

 

      

 

 

 

Shares used in computing pro forma net income per share attributable to common stockholders (unaudited)(2):

           

Basic

         38,893,457           39,370,520   
      

 

 

      

 

 

 

Diluted

         41,291,095           42,237,299   
      

 

 

      

 

 

 

Other financial data:

           

Adjusted EBITDA(3) (unaudited)

   $ (12,869   $ (6,377   $ 22,744       $ 9,956      $ 17,236   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Operating cash flows

   $ (3,459   $ 11,379      $ 9,534       $ (2,191   $ 7,945   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) Includes stock-based compensation as follows:

 

     Years Ended July 31,      Nine Months
Ended April 30,
 
     2008      2009      2010      2010      2011  
                          (unaudited)  
     (in thousands)  

Cost of revenues

   $ 737       $ 780       $ 925       $ 695       $ 999   

Research and development

     872         688         769         565         943   

Sales and marketing

     825         857         755         559         630   

General and administrative

     690         464         905         635         1,739   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation

   $ 3,124       $ 2,789       $ 3,354       $ 2,454       $ 4,311   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(2) See Note 9 to our audited consolidated financial statements for an explanation of the calculations of our actual basic and diluted and pro forma basic and diluted net income (loss) per share attributable to common stockholders. All shares to be issued in this offering were excluded from the unaudited pro forma basic and diluted net income per share calculation.
(3) We define Adjusted EBITDA as net income (loss), plus provision for (benefit from) income taxes, other (income) expense, net, interest (income) expense, net, depreciation and stock-based compensation. For a discussion of Adjusted EBITDA and a reconciliation of net income (loss) to Adjusted EBITDA see “Selected Consolidated Financial Data—Adjusted EBITDA.”

 

 

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The following table presents our summary consolidated balance sheet data as of April 30, 2011:

 

  Ÿ  

on an actual basis;

 

  Ÿ  

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

 

  Ÿ  

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

 

     As of April 30, 2011
   Actual      Pro Forma    Pro Forma as
Adjusted
         

(unaudited)

    
            (in thousands)     

Consolidated Balance Sheet Data:

        

Cash and cash equivalents

   $ 40,121         

Working capital

     14,292         

Total assets

     106,884         

Total liabilities

     93,530         

Total stockholders’ equity

     13,354         

 

 

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RISK FACTORS

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

Risks Relating to Our Business and Industry

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

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

Factors that may affect our results of operations include:

 

  Ÿ  

structure of our licensing contracts;

 

  Ÿ  

the timing of revenue recognition for our sales;

 

  Ÿ  

seasonal buying patterns of our customers;

 

  Ÿ  

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

 

  Ÿ  

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

 

  Ÿ  

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

 

  Ÿ  

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

 

  Ÿ  

commissions expense related to large transactions;

 

  Ÿ  

the lengthy and variable nature of our product implementation cycles;

 

  Ÿ  

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

 

  Ÿ  

our ability to control costs, including our operating expenses;

 

  Ÿ  

any significant change in our facilities-related costs;

 

  Ÿ  

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

 

  Ÿ  

timing and amount of litigation expenses;

 

  Ÿ  

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

 

  Ÿ  

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

 

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  Ÿ  

fluctuations in foreign currency exchange rates;

 

  Ÿ  

purchase of patents to protect our intellectual property;

 

  Ÿ  

future accounting pronouncements or changes in our accounting policies; and

 

  Ÿ  

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

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

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

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

We generally charge annual software license fees for our multi-year term licenses and price our licenses based on the amount of direct written premiums, or DWP, that will be managed by our solutions. However, in certain circumstances we offer our customers the ability to purchase our products on a perpetual license basis, resulting in an acceleration of revenue recognition. In addition, certain of our multi-year term licenses provide the customer with the option to purchase a perpetual license at the end of the initial contract term, which we refer to as a perpetual buyout right. The mix of our contract terms for our licenses and the exercise of perpetual buyout rights at the end of the initial contract term by our customers may lead to variability in our results of operations. Increases in perpetual license sales and exercises of perpetual buyout rights by our customers may affect our ability to show consistent license revenues growth in subsequent periods. In addition, because we price our products based on the amount of DWP that will be managed by our solutions, license revenues from each customer may fluctuate up or down based upon insurance policies sold by the customer in the preceding year. Seasonal and other variations related to our revenue recognition may cause significant fluctuations in our results of operations and cash flows and may prevent us from achieving our quarterly or annual forecasts or meeting or exceeding the expectations of research analysts or investors, which may cause our stock price to decline.

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

Our revenues are dependent on orders from customers in the P&C insurance industry, which may be adversely affected by economic, environmental and world political conditions. A relatively small number of customers have historically accounted for a majority of our revenues. In fiscal year 2010 and the nine months ended April 30, 2011, our top 10 customers accounted for 48% and 38% of our revenues, respectively. We expect that we will continue to depend upon a relatively small number of

 

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customers for a significant portion of our revenues for the foreseeable future. As a result, if we fail to successfully sell our products and services to one or more anticipated customers in any particular period or fail to identify additional potential customers or an anticipated customer purchases fewer of our products or services, defers or cancels orders, or terminates its relationship with us, our business, results of operations and financial condition would be harmed. Some of our orders are realized at the end of the quarter or are subject to delayed payment terms. As a result of this concentration and timing, if we are unable to complete one or more substantial sales or achieve any required performance or acceptance criteria in any given quarter, our quarterly results of operations may fluctuate significantly.

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

Our services revenues were 45% and 48% of total revenues for fiscal year 2010 and for the nine months ended April 30, 2011, respectively. Our services revenues produce lower gross margins than our license revenues. The gross margin of our services revenues was 22% and 21% for fiscal year 2010 and for the nine months ended April 30, 2011, respectively, while the gross margin for license revenues was 100% and 99% for the respective periods. An increase in the percentage of total revenues represented by services revenues could reduce our overall gross margins.

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

 

  Ÿ  

price charged to our customers;

 

  Ÿ  

the utilization rate of our services personnel;

 

  Ÿ  

the complexity of our customers’ information technology environments;

 

  Ÿ  

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

 

  Ÿ  

the resources directed by our customers to their implementation projects;

 

  Ÿ  

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

 

  Ÿ  

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

 

  Ÿ  

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

 

  Ÿ  

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

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

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

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

 

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Although we believe that our products and services do not infringe upon the intellectual property rights of third parties, we cannot assure you that third parties will not assert infringement or misappropriation claims against us with respect to current or future products or services, or that any such assertions will not require us to enter into royalty arrangements or result in costly litigation, or result in us being unable to use certain intellectual property. In this regard, we have previously been sued by Accenture, a competitor, in the U.S. District Court for the District of Delaware, or the Delaware Court, over our alleged infringement of certain of their intellectual property rights. The patents that were the subject of these actions have been found invalid by the Delaware Court, but Accenture has appealed the judgment of the Delaware Court with respect to one of these patents. In addition, we have sued Accenture over its alleged infringement of certain of our intellectual property rights and Accenture has counterclaimed that we infringe certain of their intellectual property rights. Our patent litigation with Accenture is on-going and is further described in “Business—Legal Proceedings.” In the event that Accenture prevails and is successful in obtaining some or all of the relief it seeks, we may be subject to damages and injunctions against selling our products. We cannot assure you that we are not infringing or otherwise violating any third party intellectual property rights. Infringement assertions from third parties may involve patent holding companies or other patent owners who have no relevant product revenues, and therefore our own issued and pending patents may provide little or no deterrence to these patent owners in bringing intellectual property rights claims against us.

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

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

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

 

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or functions and from vendors of software products that may be customized to address the needs of P&C insurance carriers.

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

Our current and potential competitors may also establish cooperative relationships among themselves or with third parties that may further enhance their resources. Current or potential competitors may be acquired by third parties with greater available resources, such as Accenture’s recent acquisition of Duck Creek Technologies, Inc. As a result of such acquisitions, our current or potential competitors might be able to adapt more quickly to new technologies and customer needs, devote greater resources to the promotion or sale of their products and services, initiate or withstand substantial price competition, take advantage of other opportunities more readily or develop and expand their product and service offerings more quickly than we do. Additionally, they may hold larger portfolios of patents and other intellectual property rights as a result of such acquisitions. If we are unable to compete effectively for a share of our market, our business, results of operations and financial condition could be materially and adversely affected.

Weakened global economic conditions may adversely affect the P&C insurance industry, including the rate of information technology spending.

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

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

The typical sales cycle for our products and services is lengthy and unpredictable, requires pre-purchase evaluation by a significant number of employees in our customers’ organizations, and often involves a significant operational decision by our customers. Our sales efforts involve educating our customers about the use and benefits of our products, including the technical capabilities of our products and the potential cost savings achievable by organizations deploying our products.

 

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

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

Some of our customers are large P&C insurance carriers with significant bargaining power in negotiations with us. In fiscal year 2010 and the nine months ended April 30, 2011, our top 10 customers accounted for 48% and 38% of our revenues, respectively. These customers have and may continue to seek advantageous pricing and other commercial terms and may require us to develop additional features in the products we sell to them. We have and may continue to be required to reduce the average selling price, or increase the average cost, of our products in response to these pressures. If we are unable to offset any reductions in our average selling prices or increases in our average costs with increased sales volumes and reduced costs, our results of operations could be harmed.

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

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

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

Although we had a profit of $15.5 million in fiscal year 2010 and $33.5 million in the nine months ended April 30, 2011, which included a benefit of $24.4 million related to a release of a significant portion of our tax valuation allowance during the three months ended April 30, 2011, we have incurred significant losses in prior years, including a net loss of $11.0 million in fiscal year 2009, a net loss of $16.9 million in fiscal year 2008 and a net loss of $28.5 million in fiscal year 2007. We expect that our expenses will increase in future periods as we implement initiatives designed to grow our business, including, among other things, improvement of our current products, development and marketing of new services and products, international expansion, investment in our infrastructure and increased general and administrative functions. If our revenues do not sufficiently increase to offset these expected increases in operating expenses, we will incur significant losses and will not be profitable. Our revenues growth in recent periods should not be considered indicative of our future performance. Any failure to continue profitability may materially and adversely affect our business, results of operations and financial condition.

 

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

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

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

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

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

The implementation and testing of our products by our customers lasts 6 to 24 months or longer, and unexpected implementation delays and difficulties can occur. Implementing our products typically involves integration with our customers’ systems, as well as adding their data to our system. This can be complex, time-consuming and expensive for our customers and can result in delays in the implementation and deployment of our products. Depending upon the nature and complexity of our customers’ systems and the time and resources that our customers are willing to devote to implementation of our products, the implementation and testing of our products may take significantly longer than 24 months. Historically, under the zero gross margin method, until the implementation project was completed, we recognized revenues in connection with implementing our products up to

 

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the corresponding costs of revenues and operating expenses. The lengthy and variable implementation cycle may also have a negative impact on the timing of our revenues, causing our revenues and results of operations to vary significantly from period to period.

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

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

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

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

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

In the course of our selling efforts, we typically enter into sales arrangements pursuant to which we license our software applications and provide maintenance support and professional services. We refer to each individual product or service as an “element” of the overall sales arrangement. These arrangements typically require us to deliver particular elements in a future period. We apply software revenue recognition rules and allocate the total revenues among elements based on the objective and reliable evidence of fair value, or vendor-specific objective evidence, VSOE, of fair value of each element. As we discuss further in “Management’s Discussion and Analysis of Financial Condition and

 

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Results of Operations—Critical Accounting Policies and Estimates—Revenue Recognition,” if we are unable to determine the VSOE of fair value of any undelivered elements, offer certain contractual provisions to our customers, such as delivery of specified functionality, or combine multiple arrangements signed in different periods, then we are required under U.S. generally accepted accounting principles, or GAAP, to defer additional revenues to future periods. If we are required to defer additional revenues to future periods for a significant portion of our sales, our revenues for that quarter could fall below our expectations or those of securities analysts and investors, resulting in a decline in our stock price.

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

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

We have filed, and may in the future file, patent applications related to certain of our innovations. We do not know whether any of our patent applications will result in the issuance of a patent or whether the examination process will require us to narrow our claims. In addition, we may not receive competitive advantages from the rights granted under our patents and other intellectual property. Our existing patents, and any patents granted to us or that we otherwise acquire in the future, may be contested, circumvented or invalidated, and we may not be able to prevent third parties from infringing these patents. Therefore, the exact effect of the protection of these patents cannot be predicted with certainty. In addition, given the costs, effort, risks and downside of obtaining patent protection, including the requirement to ultimately disclose the invention to the public, we may choose not to seek patent protection for certain innovations; however, such patent protection could later prove to be important to our business.

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

In addition, we attempt to protect our intellectual property, technology, and confidential information by generally requiring our employees and consultants to enter into confidentiality and assignment of inventions agreements and third parties to enter into nondisclosure agreements, all of which offer only limited protection. These agreements may not effectively prevent unauthorized use or disclosure of our confidential information, intellectual property or technology and may not provide an adequate remedy in the event of unauthorized use or disclosure of our confidential information, intellectual property or technology. Despite our efforts to protect our confidential information, intellectual property, and technology, unauthorized third parties may gain access to our confidential proprietary information, develop and market products or services similar to ours, or use trademarks similar to ours, any of which could materially harm our business and results of operations. In addition,

 

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others may independently discover our trade secrets and confidential information, and in such cases, we could not assert any trade secret rights against such parties. Existing U.S. federal, state and international intellectual property laws offer only limited protection. The laws of some foreign countries do not protect our intellectual property rights to as great an extent as the laws of the United States, and many foreign countries do not enforce these laws as diligently as governmental agencies and private parties in the United States. Moreover, policing our intellectual property rights is difficult, costly and may not always be effective.

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

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

We use technology and intellectual property licensed from unaffiliated third parties in certain of our products, including insurance-industry proprietary information that we license from Insurance Services Office, Inc., or ISO, for distribution in our PolicyCenter product, 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. For example, ISO reserves the right to terminate our right to license and distribute its tools and proprietary information to our customers in its discretion. Our loss of the right to license and distribute ISO’s insurance industry-specific information and tools to our customers would limit the functionality of our products, might require us to redesign our products, and would materially disrupt our business. Also, should ISO refuse to license its proprietary information to us on the same terms that it offers to our competitors, we could be placed at a significant competitive disadvantage.

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

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

Our customers are P&C insurance carriers which have experienced, and will likely experience in the future, catastrophe losses that adversely impact their businesses. Catastrophes can be caused by

 

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

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

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

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

Some of our services and technologies may incorporate software licensed under so-called “open source” licenses, including, but not limited to, the GNU General Public License and the GNU Lesser General Public License. In addition to risks related to license requirements, usage of open source software can lead to greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or controls on origin of the software. Additionally, open source licenses typically require that source code subject to the license be made available to the public and that any modifications or derivative works to open source software continue to be licensed under open source licenses. These open source licenses typically mandate that proprietary software, when combined in specific ways with open source software, become subject to the open source license. If we combine our proprietary software with open source software, we could be required to release the source code of our proprietary software.

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

 

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Real or perceived errors or failures in our products, or unsatisfactory performance of our products or services could adversely affect our business, results of operations and financial condition.

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

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

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

We may be obligated to disclose our proprietary source code to our customers.

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

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

Our products could experience data security breaches.

Our products are used by our customers to manage and store proprietary information and sensitive or confidential data relating to their businesses. Although we maintain security features in our products, our security measures may not detect or prevent hacker interceptions, break-ins, security

 

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breaches, the introduction of viruses or malicious code, and other disruptions that may jeopardize the security of information stored in and transmitted by our products. A party that is able to circumvent our security measures in our products could misappropriate our or our customers’ proprietary or confidential information, cause interruption in their operations, damage or misuse their computer systems, and misuse any information that they misappropriate.

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

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

Our products are complex and are deployed in a wide variety of network environments. The proper use of our products requires training of the customer. If our products are not used correctly or as intended, inadequate performance may result. Additionally, our customers or third-party partners may incorrectly implement or use our products. Our products may also be intentionally misused or abused by customers or their employees or third parties who are able to access or use our products. Similarly, our products are sometimes installed or maintained by customers or third parties with smaller or less qualified IT departments, potentially resulting in sub-optimal installation and, consequently, performance that is less than the level anticipated by the customer. Because our customers rely on our products, services and maintenance support to manage a wide range of operations, the incorrect or improper use of our products, our failure to properly train customers on how to efficiently and effectively use our products, or our failure to properly provide implementation or maintenance services to our customers may result in negative publicity or legal claims against us. Also, as we continue to expand our customer base, any failure by us to properly provide these services will likely result in lost opportunities for follow-on sales of our products and services.

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

Our ability to sell our products is highly dependent on the quality of our professional services and technical support services and the support of our partners, and the failure of us or our partners to offer high-quality professional services or technical support services would have a material adverse effect on our business, results of operations, financial condition and growth prospects.

If we or our partners do not effectively assist our customers in deploying our products, succeed in helping our customers quickly resolve post-deployment issues, and provide effective ongoing support, our ability to sell additional products and services to existing customers would be adversely affected and our reputation with potential customers could be damaged. Once our products are deployed and integrated with our customers’ existing information technology investments and data, our customers may depend on our technical support services, and in some cases the support of our partners, to resolve any issues relating to our products. High-quality support is critical for the continued successful marketing and sale of our products. In addition, as we continue to expand our operations

 

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internationally, our support organization will face additional challenges, including those associated with delivering support, training and documentation in languages other than English. Many enterprise customers require higher levels of support than smaller customers. If we fail to meet the requirements of our larger customers, it may be more difficult to increase our penetration with larger customers, which is key to the growth of our revenues and profitability. As a result, our failure to maintain high quality support services would have a material adverse effect on our business, results of operations, financial condition and growth prospects.

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

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

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

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

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

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

 

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the shares underlying the equity awards have significantly appreciated in value. Our inability to attract and retain qualified personnel, or delays in hiring required personnel, may seriously harm our business, results of operations and financial condition.

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

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

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

Our growth is dependent upon the continued development of our direct sales force and the expansion of our relationships with our strategic partners.

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

We believe our future growth also will depend on the expansion of successful relationships with system integrators. We rely on system integrators as channel partners to reach additional customers. Our growth in revenues, particularly in international markets, will depend on the development and

 

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maintenance of this indirect sales channel. Although we have established relationships with some of the leading system integrators, our products and services compete directly against the products and services of other leading system integrators, including Accenture. We are unable to control the resources that our system integrator partners commit to implementing our products or the quality of such implementation. If they do not commit sufficient resources to these activities, our business and results of operations could suffer.

Failure to manage our rapid growth effectively could harm our business.

We have recently experienced, and expect to continue to experience, rapid growth in our number of employees and in our international operations that has placed, and will continue to place, a significant strain on our operational and financial resources and our personnel. To manage our anticipated future growth effectively, we must continue to maintain and may need to enhance our information technology infrastructure, financial and accounting systems and controls and manage expanded operations and employees in geographically distributed locations. We also must attract, train and retain a significant number of additional qualified sales and marketing personnel, professional services personnel, software engineers, technical personnel and management personnel. Our failure to manage our rapid growth effectively could have a material adverse effect on our business, results of operations and financial condition. Our growth could require significant capital expenditures and may divert financial resources from other projects, such as the development of new services or product enhancements. For example, since it may take as long as six months to hire and train a new member of our professional services staff, we make decisions regarding the size of our professional services staff based upon our expectations with respect to customer demand for our products and services. If these expectations are incorrect, and we increase the size of our professional services organization without experiencing an increase in sales of our products and services, we will experience reductions in our gross and operating margins and net income. If we are unable to effectively manage our growth, our expenses may increase more than expected, our revenues could decline or grow more slowly than expected and we may be unable to implement our business strategy. We also intend to continue to expand into additional international markets which, if not technologically or commercially successful, could harm our financial condition and prospects.

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

We sell our products and services to customers located outside the United States and Canada, and we are continuing to expand our international operations as part of our growth strategy. In the year ended July 31, 2010, 30% of our revenues were derived from outside of the United States and Canada. Our current international operations and our plans to expand our international operations subject us to a variety of risks, including:

 

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

 

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

 

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

 

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

 

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increased exposure to fluctuations in currency exchange rates;

 

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

 

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

 

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

 

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increased financial accounting and reporting burdens and complexities;

 

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weaker protection of intellectual property rights in some countries;

 

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multiple and possibly overlapping tax regimes; and

 

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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.

Certain of our software products may be deployed through cloud-based implementations, which could be compromised by data security incidents and other disruptions.

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

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

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

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

 

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

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

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, as provided in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the results of which form the basis for making judgments about the carrying values of assets, liabilities, equity, revenues and expenses that are not readily apparent from other sources. Our results of operations may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause our results of operations to fall below the expectations of securities analysts and investors, resulting in a decline in our stock price.

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

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

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

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

 

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hire additional personnel;

 

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develop new or enhance existing products and services;

 

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enhance our operating infrastructure;

 

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acquire businesses or technologies; or

 

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otherwise respond to competitive pressures.

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

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

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

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

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

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

 

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

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

Risks Related to this Offering and Our Common Stock

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

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

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

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

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

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

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

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

 

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

Following the completion of this offering, our executive officers and directors, and entities that are affiliated with them, will beneficially own an aggregate of approximately         % of our outstanding common stock, on an as-converted basis. This significant concentration of share ownership may adversely affect the trading price for our common stock because investors often perceive disadvantages in owning stock in companies with controlling stockholders. Also, as a result, these stockholders, acting together, may be able to control our management and affairs and other matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions, such as mergers, consolidations or the sale of substantially all of our assets. Consequently, this concentration of ownership may have the effect of delaying or preventing a change in control, including a merger, consolidation or other business combination involving us, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control, even if such a change in control would benefit our other stockholders.

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

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

Assuming completion of this offering, as of April 30, 2011, we would have had an aggregate of          shares of common stock outstanding, assuming no exercise of the underwriters’ over-allotment option and no exercise of outstanding options or warrants. The          shares sold pursuant to this offering will be immediately tradable without restriction. Of the remaining shares:

 

  Ÿ  

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

 

  Ÿ  

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

 

  Ÿ  

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

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

The lock-up agreements expire 180 days after the date of this prospectus, subject to potential extension in the event we release earnings results or material news or a material event relating to us occurs near the end of the lock-up period. J.P. Morgan Securities LLC and Deutsche Bank Securities Inc., as representatives of the underwriters, may, in their discretion and at any time, release all or any portion of the securities subject to lock-up agreements. After the completion of this offering, we intend to register approximately          shares of our common stock that have been issued or reserved for future issuance under our stock incentive plans. Once we register the offer and sale of shares for the holders of registration rights and option holders, they can be freely sold in the public market upon issuance, subject to the lock-up agreements or unless they are held by “affiliates,” as that term is defined in Rule 144 of the Securities Act.

 

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

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

The initial public offering price is substantially higher than the pro forma as adjusted net tangible book value per share of our common stock based on the expected total value of our total assets, less our goodwill and other intangible assets, less our total liabilities immediately following this offering. Therefore, if you purchase shares of our common stock in this offering, you will experience immediate and substantial dilution of $         per share in the price you pay for our common stock as compared to the pro forma as adjusted net tangible book value as of April 30, 2011. To the extent outstanding options or warrants to purchase common stock are exercised, there will be further dilution. For a further description of the dilution that you will experience immediately after this offering, see “Dilution.”

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

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

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

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

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

Our amended and restated certificate of incorporation and our amended and restated bylaws, which will be effective upon completion of this offering, contain provisions that could delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which stockholders might otherwise receive a premium for their shares. These provisions may also prevent or delay attempts by stockholders to replace or remove our current management or members of our board of directors. These provisions include:

 

  Ÿ  

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

 

  Ÿ  

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

 

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  Ÿ  

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

 

  Ÿ  

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

 

  Ÿ  

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

 

  Ÿ  

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

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

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

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

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

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

 

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INDUSTRY AND MARKET DATA

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

Some of the industry and market data contained in this prospectus are based on independent industry publications, including those generated by Gartner, Inc., IBISWorld Inc. or other publicly available information. This information involves a number of assumptions and limitations. Although we believe that each source is reliable as of its respective date, neither we nor the underwriters have independently verified the accuracy or completeness of this information. The industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of factors, including those described in “Risk Factors.” These and other factors could cause results to differ materially from those expressed in these publications.

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

 

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USE OF PROCEEDS

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

We intend to use the net proceeds of this offering primarily for general corporate purposes, including working capital. We also intend to use certain of the net proceeds to satisfy tax withholding obligations related to the vesting of RSUs held by current or former employees, which will begin to vest 180 days after the completion of this offering. We do not currently know the amount of net proceeds that will be used to satisfy these tax withholding obligations because it will be dependent on our stock price on the date of vesting. Assuming a stock price of $         per share, the midpoint of the price range set forth on the front cover of this prospectus, we would use $         million to satisfy these tax withholding obligations.

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

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

DIVIDEND POLICY

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

 

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CAPITALIZATION

The following table sets forth our consolidated cash and cash equivalents and capitalization as of April 30, 2011 on:

 

  Ÿ  

an actual basis;

 

  Ÿ  

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

 

  Ÿ  

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

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

 

      As of April 30, 2011  
      Actual     Pro Forma      Pro Forma As
Adjusted
 
    

(unaudited)

 
    

(in thousands)

 

Cash and cash equivalents

   $ 40,121      $                $            
  

 

 

   

 

 

    

 

 

 

Short-term and long-term debt

   $ —        $         $     

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

     36,500        

Common stock, $0.0001 par value; 55,000,000 shares authorized, 14,158,877 shares issued and outstanding, actual; 500,000,000 shares authorized, 39,516,598 shares issued and outstanding, pro forma; and 500,000,000 shares authorized,          shares issued and outstanding, pro forma as adjusted

     1        

Additional paid-in capital

     17,573        

Accumulated other comprehensive loss

     (278     

Accumulated deficit

     (40,442     
  

 

 

   

 

 

    

 

 

 

Total stockholders’ equity

     13,354        
  

 

 

   

 

 

    

 

 

 

Total capitalization

   $ 13,354      $                $            
  

 

 

   

 

 

    

 

 

 

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

 

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

The number of shares of our common stock to be outstanding following this offering is based on 39,516,598 shares of our common stock outstanding as of April 30, 2011, assuming conversion of all outstanding shares of our convertible preferred stock on a one-for-one basis into 25,357,721 shares of common stock, and excludes:

 

  Ÿ  

8,065,964 shares of common stock issuable upon the exercise of options outstanding as of April 30, 2011, with a weighted average exercise price of $2.64 per share;

 

  Ÿ  

3,491,773 shares of common stock issuable upon the upon the vesting of RSUs outstanding as of April 30, 2011;

 

  Ÿ  

69,529 shares of common stock issuable upon the exercise of warrants to purchase convertible preferred stock outstanding as of April 30, 2011, assuming conversion of all outstanding shares of our convertible preferred stock, which we expect to occur immediately prior to the closing of this offering, with an exercise price of $5.03 per share; and

 

  Ÿ  

         shares of our common stock reserved for future issuance under our stock-based compensation plans as of April 30, 2011, and any future increase in shares reserved for issuance under such plans.

 

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DILUTION

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

Net tangible book value per share is determined by dividing our total tangible assets less our total liabilities by the number of shares of common stock outstanding. Our historical net tangible book value as of April 30, 2011 was $13.4 million, or $0.94 per share. Our pro forma net tangible book value as of April 30, 2011 was $13.4 million, or $0.34 per share, based on the total number of shares of our common stock outstanding as of April 30, 2011, after giving effect to the conversion of all outstanding shares of our convertible preferred stock on a one-for-one basis into 25,357,721 shares of common stock, which we expect to occur immediately prior to the closing of this offering.

After giving effect to our sale of          shares of common stock by us in this offering at an assumed initial public offering price of $         per share, the midpoint of the price range set forth on the front cover of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses, our pro forma as adjusted net tangible book value as of April 30, 2011 will be $         million, or $         per share. This represents an immediate increase in net tangible book value of $         per share to existing stockholders and an immediate dilution in net tangible book value of $         per share to purchasers of common stock in this offering, as illustrated in the following table:

 

Assumed initial public offering price per share

      $           

Pro forma net tangible book value per share as of April 30, 2011, before giving effect to this offering

   $ 0.34      

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

     
  

 

 

    

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

     
     

 

 

 

Dilution per share to investors in this offering

      $     
     

 

 

 

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

 

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The following table presents on a pro forma basis as of April 30, 2011, after giving effect to the conversion of all outstanding shares of our convertible preferred stock on a one-for-one basis into common stock, which we expect to occur immediately prior to the closing of this offering, the difference between the existing stockholders and the purchasers of shares in this offering with respect to the number of shares purchased from us, the total consideration paid or to be paid to us, which includes net proceeds received from the issuance of common and convertible preferred stock, cash received from the exercise of stock options and the value of any stock issued for services and the average price paid per share or to be paid to us at an assumed initial public offering price of $         per share, the midpoint of the price range set forth on the front cover of this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us:

 

     Shares Purchased     Total Consideration     Average
Price per
Share
 
     

Number

   Percent     Amount      Percent    

Existing stockholders

                           $                                             $                    

New investors

            
  

 

  

 

 

   

 

 

    

 

 

   

Totals

        100.0   $                  100.0  
  

 

  

 

 

   

 

 

    

 

 

   

A $1.00 increase (decrease) in the assumed initial public offering price of $         per share would increase (decrease) the total consideration paid by new investors by $         million and increase (decrease) the percent of total consideration paid by new investors by     %, assuming the number of shares offered by us, as set forth on the front cover of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

If the underwriters exercise their over-allotment option in full, sales by us in this offering will reduce the percentage of shares held by existing stockholders to     % and will increase the number of shares held by our new investors to     , or     %.

The foregoing calculations are based on 39,516,598 shares of our common stock outstanding as of April 30, 2011 assuming conversion of all outstanding convertible preferred stock on a one-for-one basis into 25,357,721 shares of common stock, and exclude:

 

  Ÿ  

8,065,964 shares of common stock issuable upon the exercise of options outstanding as of April 30, 2011, with a weighted average exercise price of $2.64 per share;

 

  Ÿ  

3,491,773 shares of common stock issuable upon the vesting of outstanding RSUs as of April 30, 2011;

 

  Ÿ  

69,529 shares of common stock issuable upon the exercise of warrants to purchase convertible preferred stock outstanding as of April 30, 2011, assuming conversion of all outstanding shares of our convertible preferred stock, which we expect to occur immediately prior to the closing of this offering, with an exercise price of $5.03 per share; and

 

  Ÿ  

         shares of common stock reserved for future issuance under our stock-based compensation plans, and any future increases in shares reserved for issuance under such plans.

 

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SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated statements of operations data for the years ended July 31, 2008, 2009 and 2010 and the consolidated balance sheet data as of July 31, 2009 and 2010 are derived from our audited consolidated financial statements included elsewhere in this prospectus. The selected consolidated statements of operations for the nine months ended April 30, 2010 and 2011 and the consolidated balance sheet data as of April 30, 2011 are derived from our unaudited consolidated financial statements included elsewhere in this prospectus. The selected consolidated statements of operations for the years ended July 31, 2006 and 2007 and the consolidated balance sheet data as of July 31, 2006, 2007 and 2008 are derived from our audited consolidated financial statements which are not included in this prospectus. The unaudited interim consolidated financial statements have been prepared on a basis consistent with the audited consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, that management considers necessary to present fairly the financial information set forth in those statements. Our historical results are not necessarily indicative of the results that may be expected in the future and the results for the nine months ended April 30, 2011 are not necessarily indicative of results to be expected for the full year ended July 31, 2011 or any other future annual or interim period. You should read the following selected consolidated historical financial data below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included elsewhere in this prospectus.

 

00,000,000 00,000,000 00,000,000 00,000,000 00,000,000 00,000,000 00,000,000
    Years Ended July 31,     Nine Months
Ended April 30,
 
    2006     2007     2008     2009     2010     2010     2011  
          (unaudited)  
    (in thousands, except share and per share data)  

Consolidated Statements of Operations Data:

             

Total revenues

  $ 21,332      $ 42,945      $ 70,656      $ 84,745      $ 144,691      $ 98,909      $ 121,465   

Total cost of revenues(1)

    15,778        35,289        42,448        41,656        55,471        39,794        49,487   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gross profit

    5,554        7,656        28,208        43,089        89,220        59,115        71,978   

Operating expenses:

             

Research and development(1)

    9,645        16,108        21,162        22,356        28,273        20,601        24,704   

Sales and marketing(1)

    10,084        13,854        15,718        21,559        26,741        19,112        19,315   

General and administrative(1)

    4,237        6,170        8,506        9,646        16,192        12,905        16,069   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    23,966        36,132        45,386        53,561        71,206        52,618        60,088   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

    (18,412     (28,476     (17,178     (10,472     18,014        6,497        11,890   

Interest income (expense), net

    119        107        443        27        95        (17     100   

Other income (expense), net

    —          —          —          (123     (391     (400     1,221   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before provision for income taxes

    (18,293     (28,369     (16,735     (10,568     17,718        6,080        13,211   

Provision for (benefit from) income taxes

    71        84        148        398        2,199        694        (20,277
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (18,364   $ (28,453   $ (16,883   $ (10,966   $ 15,519      $ 5,386      $ 33,488   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share attributable to common stockholders(2):

             

Basic

  $ (1.57   $ (2.16   $ (1.28   $ (0.83   $ 0.32      $ 0.08      $ 0.79   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  $ (1.57   $ (2.16   $ (1.28   $ (0.83   $ 0.30      $ 0.07      $ 0.74   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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00,000,000 00,000,000 00,000,000 00,000,000 00,000,000 00,000,000 00,000,000
    Years Ended July 31,     Nine Months Ended
April 30,
 
    2006     2007     2008     2009     2010     2010     2011  
          (unaudited)  
    (in thousands, except share and per share data)  

Shares used in computing net income (loss) attributable to common stockholders(2):

             

Basic

    11,675,073        13,177,772        13,195,733        13,284,938        13,535,736        13,509,038        14,012,799   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

    11,675,073        13,177,772        13,195,733        13,284,938        15,933,374        15,847,015        16,879,578   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net income per share attributable to common stockholders (unaudited)(2):

             

Basic

          $ 0.40        $ 0.85   
         

 

 

     

 

 

 

Diluted

          $ 0.38        $ 0.79   
         

 

 

     

 

 

 

Shares used in computing pro forma net income per share attributable to common stockholders (unaudited)(2):

             

Basic

            38,893,457          39,370,520   
         

 

 

     

 

 

 

Diluted

            41,291,095          42,237,299   
         

 

 

     

 

 

 

Other Financial Data:

             

Adjusted EBITDA(3) (unaudited)

      $ (12,869   $ (6,377   $ 22,744      $ 9,956      $ 17,236   
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating cash flows

      $ (3,459   $ 11,379      $ 9,534      $ (2,191   $ 7,945   
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Includes stock-based compensation as follows:

 

00,000,000 00,000,000 00,000,000 00,000,000 00,000,000 00,000,000 00,000,000
    Years Ended July 31,     Nine Months Ended
April 30,
 
    2006     2007     2008     2009     2010         2010             2011      
                                  (unaudited)  
    (in thousands)  

Cost of revenues

  $               $ 428      $ 737      $ 780      $ 925      $ 695      $ 999   

Research and development

      638        872        688        769        565        943   

Sales and marketing

      300        825        857        755        559        630   

General and administrative

      542        690        464        905        635        1,739   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stock-based compensation

  $ 4,096      $ 1,908      $ 3,124      $ 2,789      $ 3,354      $ 2,454      $ 4,311   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

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

 

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     As of July 31,     As of
April 30,

2011
 
     2006     2007     2008     2009     2010    
           (unaudited)  
    

(in thousands)

 

Consolidated Balance Sheet Data:

            

Cash, cash equivalents and short-term investments

   $ 6,050      $ 4,634      $ 17,699      $ 27,585      $ 37,411      $ 40,121   

Working capital (deficit)

     2,114        (9,696     (11,767     (13,523     (5,382     14,292   

Total assets

     14,146        22,748        37,277        54,741        60,055        106,884   

Convertible preferred stock

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

Total stockholders’ equity (deficit)

     (15,861     (41,488     (36,775     (44,648     (25,145     13,354   

Adjusted EBITDA

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

 

  Ÿ  

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

 

  Ÿ  

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

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

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

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

 

     Years Ended July 31,     Nine Months Ended
April 30,
 
     2008     2009     2010          2010                2011       
     (unaudited)  
     (in thousands)  

Reconciliation of Adjusted EBITDA:

           

Net income (loss)

   $ (16,883   $ (10,966   $ 15,519      $ 5,386       $ 33,488   

Non-GAAP adjustments:

           

Provision for (benefit from) income taxes

     148        398        2,199        694         (20,277

Other (income) expense, net

     —          123        391        400         (1,221

Interest (income) expense, net

     (443     (27     (95     17         (100

Depreciation

     1,185        1,306        1,376        1,005         1,035   

Total stock-based compensation

     3,124        2,789        3,354        2,454         4,311   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Adjusted EBITDA

   $ (12,869   $ (6,377   $ 22,744      $ 9,956       $ 17,236   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

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

You should read the following discussion and analysis of our financial condition and results of operations together with the “Selected Consolidated Financial Data” and the consolidated financial statements and related notes that are included elsewhere in this prospectus. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” or in other parts of this prospectus. Our fiscal year end is July 31 and our fiscal quarters end on October 31, January 31, April 30 and July 31. Our fiscal years ended July 31, 2008, 2009 and 2010 are referred to herein as fiscal year 2008, fiscal year 2009 and fiscal year 2010, respectively.

Overview

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

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

Since August 2010, our license revenues from new orders and subsequent annual payments have generally been recognized when payment is due from our customers. Historically, and to a lesser extent in the nine months ended April 30, 2011, our license revenues from existing orders have been recognized under three methods: under the residual method when payment is due and payable from our customers, under the percentage-of-completion method as we complete customer implementations of our software or under the zero gross margin method as we complete customer implementations of our software. Our license revenues accounted for 32%, 42% and 39% of our total revenues during fiscal years 2009 and 2010 and the nine months ended April 30, 2011, respectively.

Our maintenance revenues are generally recognized annually over the committed maintenance term. Our maintenance fees are typically priced as a fixed percentage of the associated license fees and generate lower gross margins than our license revenues. Our maintenance revenues accounted for 11%, 13% and 13% of our total revenues during fiscal years 2009 and 2010 and the nine months ended April 30, 2011, respectively.

We charge services fees on a time and materials basis and revenues are typically recognized upon delivery of our services. We derive our services revenues primarily from implementation services performed for our customers, revenues related to reimbursable travel expenses and training fees. Our

 

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services revenues generate lower gross margins than our license and maintenance revenues and accounted for 57%, 45% and 48% of our total revenues during fiscal years 2009 and 2010 and the nine months ended April 30, 2011, respectively.

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

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

We sell our core system software primarily through our direct sales force. Our sales cycle for new customers is typically 12 to 24 months. Product implementations, the primary driver of our services revenues, typically last 6 to 24 months and can take longer. For fiscal years 2009 and 2010 and for the nine months ended April 30, 2011, no single customer accounted for more than 10% of our revenues, and our ten largest customers accounted for 42%, 48% and 38% of our total revenues, respectively. We count as customers distinct buying entities, which may include multiple national or regional subsidiaries of large, global P&C insurance carriers.

We generated revenues of $144.7 million in fiscal year 2010 and $121.5 million for the nine months ended April 30, 2011. We generate the majority of our revenues in the United States and Canada. Our revenues from outside the United States and Canada as a percentage of total revenues were 20%, 16%, 30% and 29% during fiscal years 2008, 2009 and 2010 and the nine months ended April 30, 2011, respectively. We experienced our first profit on a quarterly basis in the second quarter of fiscal year 2010 and generated net income of $15.5 million in fiscal year 2010 and $33.5 million in the nine months ended April 30, 2011, including a benefit of $24.4 million related to a release of a significant portion of our tax valuation allowance during the three months ended April 30, 2011.

Key Business Metrics

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

Four-Quarter Recurring Revenues

We measure four-quarter recurring revenues by adding the total term license revenues and total maintenance revenues recognized in the preceding four quarters ended in the stated period and excluding perpetual license revenues, revenues from perpetual buyout rights and services revenues. This metric allows us to better understand the trends in our recurring revenues because it typically reduces the variations in any particular quarter caused by seasonality, the effects of the annual

 

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invoicing of our term licenses and certain effects of contractual provisions that may accelerate or delay revenue recognition in some cases. Our four-quarter recurring revenues for each of the four periods presented were:

 

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

(unaudited)

(in thousands)

 

Term license revenues

  $ 47,933      $ 51,354      $ 53,121      $ 54,797   

Total maintenance revenues

    18,702        20,190        19,658        20,188   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total four-quarter recurring revenues

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

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

We define Adjusted EBITDA as net income (loss) plus provision for (benefit from) income taxes, other (income) expense, net, interest (income) expense, net, depreciation and stock-based compensation. 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 $(12,869), $(6,377), $22,744 and $17,236 for fiscal years 2008, 2009 and 2010 and the nine months ended April 30, 2011, respectively. For a further discussion of Adjusted EBITDA and a reconciliation of net income (loss) to Adjusted EBITDA, see Footnote 3 to “Selected Consolidated Financial Data.”

Operating Cash Flows

We monitor our cash flows from operating activities, or operating cash flows, as a key measure of our overall business performance, which enables us to analyze our financial performance without the effects of certain non-cash items such as depreciation and stock-based compensation expenses. Additionally, operating cash flows takes into account the impact of changes in deferred revenues, which reflects the receipt of cash payment for products before they are recognized as revenues. Our operating cash flows are significantly impacted by changes in deferred revenues, timing of bonus payments and collections of accounts receivable. As a result, our operating cash flows fluctuate significantly on a quarterly basis. Operating cash flows were $(3,459), $11,379, $9,534 and $7,945 for fiscal years 2008, 2009 and 2010 and the nine months ended April 30, 2011, respectively. For a further discussion of our operating cash flows, see “—Liquidity and Capital Resources—Cash Flows from Operating Activities.”

Components of Consolidated Statements of Operations

Revenues

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

 

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

Our total revenues are comprised of the following:

 

  Ÿ  

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

 

  Ÿ  

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

 

  Ÿ  

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

Cost of Revenues and Gross Profit

Our cost of revenues and gross profit are variable and depend on the type of revenues earned in each period. Our cost of license revenues is primarily comprised of royalty fees paid to third parties.

 

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Our cost of maintenance revenues is comprised of personnel-related expenses for our technical support team, including stock-based compensation for our support engineers and allocated employee benefits and facility costs. Our cost of services revenues is primarily comprised of personnel-related expenses for our professional service employees and contractors, including stock-based compensation and allocated employee benefits and travel-related costs. We expect our cost of revenues to increase in absolute dollars as we continue to hire personnel to provide technical support and consulting services to our growing customer base.

Operating Expenses

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

Research and Development

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

Sales and Marketing

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

General and Administrative

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

 

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Other Income (Expense)

Interest Income (Expense), Net

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

Interest expense consists of interest accrued or paid on letters of credit held by certain of our customers. Interest expense was not significant in our prior periods; however, we recently recognized interest expense related to a letter of credit issued in the three months ended April 30, 2011. Therefore, we expect interest expense to increase in the near term.

Other Income (Expense), Net

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

Provision for Income Taxes

We are subject to taxes in the United States as well as other tax jurisdictions or countries in which we conduct business. Earnings from our non-U.S. activities are subject to local country income tax and may be subject to current U.S. income tax.

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

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

As of July 31, 2010, we recorded a full valuation allowance on our deferred tax assets. During the nine months ended April 30, 2011, based on an accumulation of positive evidence such as cumulative profits over the prior three years and projections for future growth, management determined that it is more likely than not that the benefits of our deferred tax assets will be realized, and a significant portion of the tax valuation allowance was removed.

 

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Results of Operations

The following tables set forth our results of operations for the periods presented and as a percentage of our total revenues for those periods. The period-to-period comparison of financial results is not necessarily indicative of financial results to be achieved in future periods, and the results for the nine months ended April 30, 2011 are not necessarily indicative of results to be expected for the full year or for any other period.

 

     Years Ended July 31,     Nine Months Ended
April 30,
 
     2008     2009     2010     2010     2011  
                       (unaudited)  
                 (in thousands)        

Revenues:

          

License

   $ 16,202      $ 26,996      $ 60,315      $ 39,138      $ 47,890   

Maintenance

     5,531        9,572        18,702        13,934        15,420   

Services

     48,923        48,177        65,674        45,837        58,155   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     70,656        84,745        144,691        98,909        121,465   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cost of revenues:

          

License

     555        349        267        231        441   

Maintenance

     2,018        2,628        3,685        2,791        2,850   

Services

     39,875        38,679        51,519        36,772        46,196   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues

     42,448        41,656        55,471        39,794        49,487   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit:

          

License

     15,647        26,647        60,048        38,907        47,449   

Maintenance

     3,513        6,944        15,017        11,143        12,570   

Services

     9,048        9,498        14,155        9,065        11,959   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gross profit

     28,208        43,089        89,220          59,115        71,978   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

          

Research and development

     21,162        22,356        28,273        20,601        24,704   

Sales and marketing

     15,718        21,559        26,741        19,112        19,315   

General and administrative

     8,506        9,646        16,192        12,905        16,069   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     45,386        53,561        71,206        52,618        60,088   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     (17,178     (10,472     18,014        6,497        11,890   

Interest income (expense), net

     443        27        95        (17     100   

Other income (expense), net

     —          (123     (391     (400     1,221   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before provision for income taxes

     (16,735     (10,568     17,718        6,080        13,211   

Provision for (benefit from) income taxes

     148        398        2,199        694        (20,277
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (16,883   $ (10,966   $ 15,519      $ 5,386      $ 33,488   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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     Years Ended July 31,     Nine Months Ended
April 30,
 
         2008             2009             2010         2010     2011  
                       (unaudited)  

Revenues:

          

License

     23     32     42     40     39

Maintenance

     8        11        13        14        13   

Services

     69        57        45        46        48   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     100        100        100        100        100   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total cost of revenues

     60        49        38        40        41   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total gross profit

     40        51        62        60        59   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

          

Research and development

     30        26        20        21        20   

Sales and marketing

     22        25        18        19        16   

General and administrative

     12        12        11        13        13   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     64        63        49        53        49   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

     (24     (12     12        7        10   

Interest income (expense), net

     —          —          —          —          —     

Other income (expense), net

     —          —          —          1        1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before provision for income taxes

     (24     (12     12        6        11   

Provision for (benefit from) income taxes

     —          1        1        1        (17
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     (24 )%      (13 )%      11     5     28
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comparison of the Nine Months Ended April 30, 2010 and 2011

Revenues

 

     Nine Months Ended April 30,               
     2010     2011     Change  
     Amount      % of Total
revenues
    Amount      % of Total
revenues
    ($)      (%)  
     (unaudited)  
     (in thousands, except percentages)  

Revenues:

               

License

   $ 39,138         40   $ 47,890         39   $ 8,752         22

Maintenance

     13,934         14        15,420         13        1,486         11   

Services

     45,837         46        58,155         48        12,318         27   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

Total revenues

   $ 98,909         100   $ 121,465         100   $ 22,556         23
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

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License Revenues

The $8.8 million increase in license revenues was primarily driven by continued adoption of our ClaimCenter software and increased sales and marketing efforts in the United States and Canada.

 

     Nine Months Ended April 30,               
     2010     2011     Change  
     Amount      % of
License
revenues
    Amount      % of
License
revenues
    ($)      (%)  
               
    

(unaudited)

(in thousands, except percentages)

 

License revenues:

               

Term

   $ 31,060         79   $ 37,920         79   $ 6,860         22

Perpetual

     8,078         21        9,970         21        1,892         23   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

Total license revenues

   $ 39,138         100   $ 47,890         100   $ 8,752         22
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

The $6.9 million increase in term license revenues was driven by $9.2 million of revenues recognized during the nine months ended April 30, 2011 from new orders and $2.5 million due to the attainment of revenue recognition criteria related to prior years orders, which included $1.6 million recognized upon completion of project implementations and $0.5 million recognized upon release of a contractual contingency. This was partially offset by $4.8 million recognized upon delivery of product functionality during the nine months ended April 30, 2010, which did not recur in the nine months ended April 30, 2011.

The $1.9 million increase in perpetual license revenues was driven by $7.3 million of revenues recognized during the nine months ended April 30, 2011 from new orders and $0.2 million due to the attainment of revenue recognition criteria related to prior years orders. This was partially offset by $4.4 million recognized upon completion of project implementations during the nine months ended April 30, 2010 pursuant to the zero gross margin method.

Maintenance Revenues

The $1.5 million increase in maintenance revenues was primarily driven by $2.1 million of revenues recognized during the nine months ended April 30, 2011 associated with new orders and $1.2 million due to the attainment of revenue recognition criteria, partially offset by $1.8 million recognized upon completion of project implementations during the nine months ended April 30, 2010 pursuant to the zero gross margin method.

Services Revenues

The $12.3 million increase in services revenues was primarily driven by an additional $10.5 million related to implementation of our software, an additional $1.3 million related to reimbursable travel expenses that were recognized as revenues and an additional $0.5 million related to training revenues. This was driven by additional consulting services provided to our new and existing customers during the nine months ended April 30, 2011.

 

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Deferred Revenues

 

     As of         
     July 31,
2010
   April 30,
2011
   Change
     Amount    Amount    ($)         (%)      
     (unaudited)
     (in thousands, except percentages)

Deferred revenues:

                  

Deferred license revenues

     $ 33,968        $ 42,414        $ 8,446         25 %

Deferred maintenance revenues

       13,629          17,211          3,582         26  

Deferred services revenues

       12,552          12,467          (85 )       (1 )
    

 

 

      

 

 

      

 

 

     

Total deferred revenues

     $ 60,149        $ 72,092        $ 11,943         20 %
    

 

 

      

 

 

      

 

 

     

The $8.4 million increase in deferred license revenues was due to $14.3 million of revenues deferred for billing of new and existing orders during the nine months ended April 30, 2011. This was partially offset by $5.9 million of revenues recognized from existing orders entered into during a prior fiscal year where we attained the required revenue recognition criteria during the nine months ended April 30, 2011.

The $3.6 million increase in deferred maintenance revenues was primarily due to the annual billing of maintenance for new and existing orders during the nine months ended April 30, 2011.

Deferred services revenues remained relatively flat as of April 30, 2011 as compared to July 31, 2010. Deferred services revenues of $3.0 million was recognized pursuant to the zero gross margin method when we completed project implementations during the nine months ended April 30, 2011 offset by $2.9 million of services revenues that were deferred for ongoing project implementations as of April 30, 2011 pursuant to the zero gross margin method.

Cost of Revenues and Gross Profit

 

     Nine Months Ended
April 30,
     Change  
     2010      2011     
     Amount      Amount      ($)            (%)        
     (unaudited)  
     (in thousands, except percentages)  

Cost of revenues:

           

License

   $ 231       $ 441       $ 210         91

Maintenance

     2,791         2,850         59         2   

Services

     36,772         46,196           9,424         26   
  

 

 

    

 

 

    

 

 

    

Total cost of revenues

   $ 39,794       $ 49,487       $ 9,693         24
  

 

 

    

 

 

    

 

 

    

Includes stock-based compensation of:

           

Cost of revenues

   $ 695       $ 999       $ 304      
  

 

 

    

 

 

    

 

 

    

The $9.7 million increase in cost of revenues was primarily the result of an additional $8.7 million in personnel-related expenses due to an increase in our headcount to provide implementation services to our customers, a $1.3 million increase in travel expenses related to billable projects and a $1.1 million increase in bonus expense partially offset by a $0.8 million decrease in third-party contractor costs and $0.7 million cost savings from a holiday shut down in December 2010.

 

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     Nine Months Ended April 30,   Change
     2010   2011  
     Amount    Margin %   Amount    Margin %         ($)                (%)      
    

(unaudited)

     (in thousands, except percentages)

Gross profit:

                           

License

     $ 38,907          99 %     $ 47,449          99 %     $ 8,542          22 %

Maintenance

       11,143          80         12,570          82         1,427          13  

Services

       9,065          20         11,959          21         2,894          32  
    

 

 

          

 

 

          

 

 

      

Total gross profit

     $ 59,115          60 %     $ 71,978          59 %     $ 12,863          22 %
    

 

 

          

 

 

          

 

 

      

Gross profit increased by $12.9 million reflecting the general growth of our business during the nine months ended April 30, 2011, while gross margin remained relatively flat at 60% and 59% for the nine months ended April 30, 2010 and 2011, respectively.

Operating Expenses

 

     Nine Months Ended April 30,         
     2010   2011   Change
     Amount    % of Total
revenues
  Amount    % of Total
revenues
        ($)               (%)     
     (unaudited)
     (in thousands, except percentages)

Operating expenses:

         

Research and development

     $ 20,601          21 %     $ 24,704          20 %     $ 4,103          20 %

Sales and marketing

       19,112          19         19,315          16         203          1  

General and administrative

       12,905          13         16,069          13         3,164          25  
    

 

 

      

 

 

     

 

 

      

 

 

     

 

 

      

Total operating expenses

     $ 52,618          53 %     $ 60,088          49 %     $ 7,470          14 %
    

 

 

      

 

 

     

 

 

      

 

 

     

 

 

      

Includes stock-based compensation of:

                           

Research and development

     $ 565            $ 943            $ 378       

Sales and marketing

       559              630              71       

General and administrative

       635              1,739              1,104       
    

 

 

          

 

 

          

 

 

      

Total

     $ 1,759            $ 3,312            $ 1,553       
    

 

 

          

 

 

          

 

 

      

The $7.5 million increase in operating expenses was primarily driven by increased personnel-related expenses in research and development and general and administrative, partially offset by decreased professional services costs in legal, accounting and other professional services. As a percentage of total revenues, operating expenses decreased from 53% for the nine months ended April 30, 2010 to 49% for the nine months ended April 30, 2011 as we grew our revenues more quickly than our operating expenses.

Research and Development

The $4.1 million increase in research and development expenses was primarily due to higher personnel-related expenses for 29 additional research and development employees.

Sales and Marketing

The $0.2 million increase in sales and marketing expenses resulted from an increase in marketing programs of $0.4 million partially offset by a $0.2 million decrease in variable sales compensation expenses.

 

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General and Administrative

The $3.2 million increase in general and administrative expenses was primarily due to higher personnel-related expenses of $2.3 million for 14 additional general and administrative employees to support the growth of our business and preparation for our initial public offering process and additional stock-based compensation of $1.1 million, partially offset by a $0.7 million decrease in professional services costs and other general and administrative costs.

Other Income (Expense)

 

     Nine Months Ended April 30,                
     2010     2011      Change  
     Amount     Amount      ($)           (%)       
    

(unaudited)

 
     (in thousands, except percentages)  

Interest income (expense), net

   $ (17   $ 100       $ 117         *   

Other income (expense), net

     (400     1,221         1,621         *   
  

 

 

   

 

 

    

 

 

    

Total

   $ (417   $ 1,321       $ 1,738         *   
  

 

 

   

 

 

    

 

 

    

 

* Not meaningful

Interest Income (Expense), Net

Interest income increased by $0.1 million primarily due to higher average cash balances held during the nine months ended April 30, 2011. Interest expense remained flat at $0.1 million.

Other Income (Expense), Net

Other income (expense), net improved by $1.6 million primarily resulting from the settlement of foreign receivables as the U.S. dollar weakened during the nine months ended April 30, 2011, primarily against the Canadian and Australian dollars.

Provision for (Benefit From) Income Taxes

We recognized an income tax benefit of $20.3 million for the nine months ended April 30, 2011 compared to an income tax provision of $0.7 million for the nine months ended April 30, 2010. This change primarily resulted from a benefit of $24.4 million related to a release of a significant portion of our tax valuation allowance on our U.S. and state deferred tax assets in the three months ended April 30, 2011, partially offset by a $2.1 million provision for uncertain tax benefits associated with U.S. federal and California research and development credits that were previously not recognized due to the valuation allowance and $1.3 million in additional foreign and U.S. federal and state taxes during the nine months ended April 30, 2011 due to increased profitability.

During the nine months ended April 30, 2011, based on an accumulation of positive evidence such as cumulative profits over the prior three years and projections for future growth, management determined that it is more likely than not that the benefits of our deferred tax assets will be realized and a significant portion of the valuation allowance was released. As a result, we released $24.4 million of our tax valuation allowance during the nine months ended April 30, 2011.

 

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Comparison of the Years Ended July 31, 2009 and 2010

Revenues

 

     Years Ended July 31,               
     2009     2010     Change  
     Amount      % of Total
revenues
    Amount      % of Total
revenues
    ($)           (%)       
     (in thousands, except percentages)  

Revenues:

               

License

   $ 26,996         32   $ 60,315         42   $ 33,319         123

Maintenance

     9,572         11        18,702         13        9,130         95   

Services

     48,177         57        65,674         45        17,497         36   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

Total revenues

   $ 84,745         100   $ 144,691         100   $ 59,946         71
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

License Revenues

The $33.3 million increase in license revenues was primarily driven by continued sales of our ClaimCenter application.

 

     Years Ended July 31,               
     2009     2010     Change  
      Amount      % of
License
revenues
    Amount      % of
License
revenues
    ($)           (%)       
     (in thousands, except percentages)  

License revenues:

               

Term

   $ 20,964         78   $ 47,933         79   $ 26,969         129

Perpetual

     6,032         22        12,382         21        6,350         105   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

Total license revenues

   $ 26,996         100   $ 60,315         100   $ 33,319         123
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

The $27.0 million increase in term license revenues was driven by $15.0 million of revenues during fiscal year 2010 from new orders and $12.0 million due to attainment of revenue recognition criteria during fiscal year 2010 related to prior years orders, including $4.8 million recognized upon delivery of product functionality and $1.2 million recognized when VSOE of fair value of maintenance was established for one customer during fiscal year 2010.

The $6.4 million increase in perpetual license revenues was primarily driven by $8.4 million of revenues related to attainment of revenue recognition criteria during fiscal year 2010 on prior years orders, including $4.4 million recognized upon completion of a project implementation for one customer pursuant to the zero gross margin method and $1.5 million recognized upon establishing reliable estimates of implementation work to be performed for one customer during fiscal year 2010. This was partially offset by $2.0 million in perpetual license revenues recognized during fiscal year 2009.

Maintenance Revenues

The $9.1 million increase in maintenance revenues was primarily driven by $3.4 million of revenues recognized during fiscal year 2010 from new orders and $5.5 million related to attainment of revenue recognition criteria during fiscal year 2010 on existing orders from prior fiscal years, including $4.0 million recognized upon completion of project implementations pursuant to the zero gross margin method and $1.0 million recognized upon delivery of product functionality.

 

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Services Revenues

The $17.5 million increase in services revenues was driven by an additional $13.1 million related to implementation of our software, including a net increase of $2.4 million recognized upon completion of project implementations pursuant to the zero gross margin method, an additional $2.8 million related to reimbursable travel expenses that we recognized as revenues and an additional $1.6 million related to training revenues.

Deferred Revenues

 

     As of July 31,               
     2009      2010      Change  
     Amount      Amount      ($)          (%)       
     (in thousands, except percentages)  

Deferred revenues:

          

Deferred license revenues

   $ 49,475       $ 33,968       $ (15,507     (31 )% 

Deferred maintenance revenues

     14,231         13,629         (602     (4

Deferred services revenues

     14,975         12,552         (2,423     (16
  

 

 

    

 

 

    

 

 

   

Total deferred revenues

   $ 78,681       $ 60,149       $ (18,532     (24 )% 
  

 

 

    

 

 

    

 

 

   

The $15.5 million decrease in deferred license revenues was driven by $17.9 million of revenues recognized from existing orders entered into in prior fiscal years where we attained the required revenue recognition criteria during fiscal year 2010, partially offset by $2.4 million of revenues deferred for initial billings of new orders during fiscal year 2010.

The $0.6 million decrease in deferred maintenance revenues was driven by $1.8 million of revenues recognized from existing orders entered into in prior fiscal years upon attainment of the required revenue recognition criteria during fiscal year 2010, partially offset by $1.2 million of revenues deferred for the annual billing of maintenance for new and existing orders.

The $2.4 million decrease in deferred services revenues was driven by $6.3 million of deferred services profit margin from the zero gross margin method that was recognized upon completion of project implementations during fiscal year 2010, partially offset by $3.9 million of services profit margin that was deferred for ongoing project implementations as of July 31, 2010.

Cost of Revenues and Gross Profit

 

     Years Ended July 31,               
     2009      2010      Change  
     Amount      Amount      ($)           (%)        
     (in thousands, except percentages)  

Cost of revenues:

          

License

   $ 349       $ 267       $ (82     (23 )% 

Maintenance

     2,628         3,685         1,057        40   

Services

     38,679         51,519         12,840        33   
  

 

 

    

 

 

    

 

 

   

Total cost of revenues

   $ 41,656       $ 55,471       $ 13,815        33
  

 

 

    

 

 

    

 

 

   

Includes stock-based compensation of:

          

Cost of revenues

   $ 780       $ 925       $ 145     
  

 

 

    

 

 

    

 

 

   

The $13.8 million increase in cost of revenues was primarily due to higher personnel-related expenses of $9.9 million related to 74 additional employees, hired to provide implementation services

 

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to our customers, a $2.7 million increase in travel expenses related to billable projects, a $1.4 million increase in non-billable travel and other employee-related expenses and a $0.7 million increase in bonus expense, partially offset by a $0.9 million decrease in third-party contractor expenses.

 

     Years Ended July 31,               
     2009     2010     Change  
     Amount      Margin %     Amount      Margin %     ($)            (%)        
     (in thousands, except percentages)  

Gross profit:

               

License

   $ 26,647         99   $ 60,048         100   $ 33,401         125

Maintenance

     6,944         73        15,017         80        8,073         116   

Services

     9,498         20        14,155         22        4,657         49   
  

 

 

      

 

 

      

 

 

    

Total gross profit

   $ 43,089         51   $ 89,220         62   $ 46,131         107
  

 

 

      

 

 

      

 

 

    

Gross profit increased by $46.1 million and gross margin increased from 51% to 62%, primarily as a result of increased license and maintenance revenues, which have higher gross margins than services revenues.

Maintenance gross profit increased by $8.1 million and gross margin increased from 73% to 80%, primarily as a result of our commencement of revenue recognition on existing orders where we had already been expensing the related support costs as incurred.

Operating Expenses

 

    Years Ended July 31,              
    2009     2010     Change  
    Amount     % of Total
revenues
    Amount     % of Total
revenues
    ($)          (%)       
    (in thousands, except percentages)  

Operating expenses:

           

Research and development

  $ 22,356        26   $ 28,273        20   $ 5,917        26

Sales and marketing

    21,559        25        26,741        18        5,182        24   

General and administrative

    9,646        12        16,192        11        6,546        68   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Total operating expenses

  $ 53,561        63   $ 71,206        49   $ 17,645        33
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

Includes stock-based compensation of:

           

Research and development

  $ 688        $ 769        $ 81     

Sales and marketing

    857          755          (102  

General and administrative

    464          905          441     
 

 

 

     

 

 

     

 

 

   

Total

  $ 2,009        $ 2,429        $ 420     
 

 

 

     

 

 

     

 

 

   

The $17.6 million increase in operating expenses was primarily driven by increased personnel-related expenses and professional services costs. As a percentage of total revenues, operating expenses decreased from 63% during fiscal year 2009 to 49% during fiscal year 2010 primarily driven by the increase in our license revenues, which grew more quickly than our operating expenses.

Research and Development

The $5.9 million increase in research and development expenses primarily resulted from higher personnel-related expenses of $5.0 million due to 36 additional research and development employees and a $0.9 million increase in recruiting, travel and other administrative expenses.

 

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Sales and Marketing

The $5.2 million increase in sales and marketing expenses primarily resulted from higher employee compensation and benefit expenses of $3.0 million due to 19 additional sales and marketing employees, a $1.3 million increase in variable sales compensation expenses and a $0.6 million increase in marketing programs.

General and Administrative

The $6.5 million increase in general and administrative expenses primarily resulted from higher professional services costs of $4.8 million, including a $2.4 million increase in legal expenses related to litigation and a $2.4 million increase in additional tax and accounting services and higher personnel-related expenses of $2.0 million due to 18 additional general and administrative employees to support our global expansion and growing employee base.

Other Income (Expense)

 

     Years Ended July 31,              
     2009     2010     Change  
       Amount         Amount           ($)             (%)      
     (in thousands, except percentages)  

Interest income (expense), net

   $ 27      $ 95      $ 68        *   

Other income (expense), net

     (123     (391     (268     *   
  

 

 

   

 

 

   

 

 

   

Total

   $ (96   $ (296   $ (200     *   
  

 

 

   

 

 

   

 

 

   

 

* Not meaningful

Interest Income (Expense), Net

Interest income decreased by $0.2 million primarily due to lower average interest rates during fiscal year 2010. Interest expense decreased by $0.2 million primarily due to the timing of transfers of our outstanding letters of credit during the respective periods.

Other Income (Expense), Net

Other expense increased by $0.3 million primarily due to higher unrealized currency exchange losses of $0.2 million during fiscal year 2010.

Provision for Income Taxes

Income tax expense increased from $0.4 million during fiscal year 2009 to $2.2 million during fiscal year 2010 primarily as a result of an increase in foreign and U.S. state taxes due to increased profitability.

 

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Comparison of the Years Ended July 31, 2008 and 2009

Revenues

 

     Years Ended July 31,              
     2008     2009     Change  
       Amount        % of Total
revenues
      Amount        % of Total
revenues
    ($)         (%)      
              
     (in thousands, except percentages)  

Revenues:

              

License

   $ 16,202         23   $ 26,996         32   $ 10,794        67

Maintenance

     5,531         8        9,572         11        4,041        73   

Services

     48,923         69        48,177         57        (746     (2
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

Total revenues

   $ 70,656         100   $ 84,745         100   $ 14,089        20
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

License Revenues

The $10.8 million increase in license revenues was primarily driven by continued sales of our ClaimCenter software in the United States and Canada.

 

     Years Ended July 31,               
     2008     2009     Change  
     Amount      % of
License
revenues
    Amount      % of
License
revenues
    ($)          (%)      
     (in thousands, except percentages)  

License Revenues:

               

Term

   $ 10,453         65   $ 20,964         78   $ 10,511         101

Perpetual

     5,749         35        6,032         22        283         5   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

Total license revenues

   $ 16,202         100   $ 26,996         100   $ 10,794         67
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

The $10.5 million increase in term license revenues was driven by $3.6 million of revenues recognized during fiscal year 2009 from new orders and $6.9 million due to attainment of revenue recognition criteria during fiscal year 2009 related to prior years orders, including $5.0 million recognized upon completion of project implementations pursuant to the zero gross margin method and $0.7 million when VSOE of fair value for maintenance was established for one customer.

The $0.3 million increase in perpetual license revenues was primarily driven by $2.9 million of revenues recognized in fiscal year 2009 from new orders and $0.2 million of revenues recognized due to completion of project implementations during fiscal year 2009 pursuant to the zero gross margin method, partially offset by $2.8 million in perpetual licenses recognized during fiscal year 2008.

Maintenance Revenues

The $4.0 million increase in maintenance revenues was primarily driven by $1.5 million of revenues recognized during fiscal year 2009 from new orders and $2.2 million related to attainment of revenue recognition criteria during fiscal year 2009 on existing orders from prior years, including $1.7 million recognized upon completion of project implementations pursuant to the zero gross margin method.

 

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Services Revenues

The $0.7 million decrease in services revenues was related to a decrease of $1.1 million related to reimbursable travel, partially offset by an increase of $0.4 million related to the implementation of our software. Included in our services revenues during fiscal year 2009 is $1.6 million that was recognized upon completion of project implementations pursuant to the zero gross margin method.

Deferred Revenues

 

     As of July 31,               
     2008      2009      Change  
     Amount      Amount      ($)           (%)        
     (in thousands, except percentages)  

Deferred revenues:

          

Deferred license revenues

   $ 36,864       $ 49,475       $ 12,611        34

Deferred maintenance revenues

     10,452         14,231         3,779        36   

Deferred services revenues

     16,623         14,975         (1,648     (10
  

 

 

    

 

 

    

 

 

   

Total deferred revenues

   $ 63,939       $ 78,681       $ 14,742        23
  

 

 

    

 

 

    

 

 

   

The $12.6 million increase in deferred license revenues was driven by $13.0 million of revenues deferred for initial billings of new orders during fiscal year 2009 and $10.0 million deferred during fiscal year 2009 as we had not attained the required revenue recognition criteria, partially offset by $10.4 million of revenues recognized from past orders where we attained the required revenue recognition criteria during fiscal year 2009.

The $3.8 million increase in deferred maintenance revenues was driven by $5.6 million of annual billing of maintenance for new and existing orders during fiscal year 2009, partially offset by $1.7 million of revenues recognized upon attainment of the required revenue recognition criteria during fiscal year 2009.

The $1.6 million decrease in deferred services revenues was driven by deferred services profit margin recognized upon attainment of the required revenue recognition criteria resulting from the zero gross margin method during fiscal year 2009.

Cost of Revenues and Gross Profit

 

     Years Ended July 31,               
     2008      2009      Change  
     Amount      Amount      ($)           (%)        
     (in thousands, except percentages)  

Cost of revenues:

          

License

   $ 555       $ 349       $ (206     (37 )% 

Maintenance

     2,018         2,628         610        30   

Services

     39,875         38,679         (1,196     (3
  

 

 

    

 

 

    

 

 

   

Total cost of revenues

   $ 42,448       $ 41,656       $ (792     (2 )% 
  

 

 

    

 

 

    

 

 

   

Includes stock-based compensation of:

          

Cost of revenues

   $ 737       $ 780       $ 43     
  

 

 

    

 

 

    

 

 

   

The $0.8 million decrease in total cost of revenues primarily resulted from a $6.3 million decrease in third-party consulting and travel related expenses and a $0.4 million decrease in royalty and other

 

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administrative expenses, partially offset by a $2.9 million increase in personnel-related cost for 40 additional employees to service our new and existing customers and a $3.0 million increase in bonus expense related primarily to our services personnel.

 

     Years Ended July 31,               
     2008     2009     Change  
     Amount      Margin %     Amount      Margin %     ($)      (%)  
     (in thousands, except percentages)  

Gross profit:

               

License

   $ 15,647         97   $ 26,647         99   $ 11,000         70

Maintenance

     3,513         64        6,944         73        3,431         98   

Services

     9,048         18        9,498         20        450         5   
  

 

 

      

 

 

      

 

 

    

Total gross profit

   $ 28,208         40   $ 43,089