10-Q 1 gwre-1312019x10q.htm 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________________________________
FORM 10-Q
______________________________________________________________
(Mark one)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2019
OR
¨  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             .
Commission file number: 001-35394
 ______________________________________________________________
Guidewire Software, Inc.
(Exact name of registrant as specified in its charter)
 ______________________________________________________________
Delaware
36-4468504
(State or other jurisdiction of
Incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
1001 E. Hillsdale Blvd., Suite 800
Foster City, California
94404
(Address of principal executive offices)
(Zip Code)
 
(650) 357-9100
(Registrant’s telephone number, including area code)
 ______________________________________________________________
N/A
(Former name, former address and former fiscal year, if changed since last report)
 ______________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes x    No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes x     No ¨
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 definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
 
x
 
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨
 
Smaller reporting company        
 
¨
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨




Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨     No x
On February 28, 2019, the registrant had 81,414,683 shares of common stock issued and outstanding.



Guidewire Software, Inc.
Index


 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
Item 1.
 
 
 
Item 1A.    
 
 
 
Item 6.
 
 



FORWARD-LOOKING STATEMENTS

The section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as other parts of this Quarterly Report on Form 10-Q and certain information incorporated herein by reference contain forward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, which are subject to risks and uncertainties. The forward-looking statements may include statements concerning, among other things, our business strategy (including anticipated trends and developments in, and management plans for, our business and the markets in which we operate), financial results, results of operations, revenue, gross margins, operating expenses, products, projected costs and capital expenditures, research and development programs, sales and marketing initiatives, and competition. In some cases, you can identify these statements by forward-looking words, such as “will,” “may,” “might,” “should,” “could,” “estimate,” “expect,” “suggest,” “believe,” “anticipate,” “intend,” “plan,” and “continue,” the negative or plural of these words and other comparable terminology. Actual events or results may differ materially from those expressed or implied by these statements due to various factors, including but not limited to the matters discussed below, in the section titled “Part II - Other Information - Item 1A. Risk Factors,” and elsewhere in this Quarterly Report on Form 10-Q. Many of the forward-looking statements are located in “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Examples of forward-looking statements include statements regarding:

growth prospects of the property & casualty (“P&C”) insurance industry and our company;
the developing market for subscription services and uncertainties attendant on emerging sales and delivery models;
trends in future sales, including the mix of licensing and subscription models and seasonality;
our competitive environment and changes thereto;
competitive attributes of our software applications and delivery models;
challenges to further increase sales outside of the United States;
our research and development investment and efforts;
expenses to be incurred, and benefits to be achieved from our acquisitions;
our gross and operating margins and factors that affect such margins;
our provision for tax liabilities, judgments related to revenue recognition, and other critical accounting estimates;
the impact of new accounting standards and any contractual changes we have made in anticipation of such changes;
our exposure to market risks, including geographical and political events that may negatively impact our customers; and
our ability to satisfy future liquidity requirements.

Forward-looking statements are not guarantees of future performance and involve risks and uncertainties. The forward-looking statements contained in this Quarterly Report on Form 10-Q are based on information available to us as of the filing date of this Quarterly Report on Form 10-Q and our current expectations about future events, which are inherently subject to change and involve risks and uncertainties. You should not place undue reliance on these forward-looking statements.

We do not undertake any obligation to update any forward-looking statements in this report or in any of our other communications, except as required by law. All such forward-looking statements should be read as of the time the statements were made and with the recognition that these forward-looking statements may not be complete or accurate at a later date.

_____________

Unless the context requires otherwise, we are referring to Guidewire Software, Inc. together with its subsidiaries when we use the terms “Guidewire,” the “Company,” “we,” “our,” or “us.”






PART I – Financial Information
 
ITEM 1.
Financial Statements (unaudited)
GUIDEWIRE SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands)
 
 
January 31,
2019
 
July 31,
2018
 
 
 
 
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
360,169

 
$
437,140

Short-term investments
706,203

 
630,008

Accounts receivable, net of allowances of $1,175 and $1,062, respectively
119,699

 
124,849

Unbilled accounts receivable, net
47,493

 

Prepaid expenses and other current assets
30,234

 
30,510

Total current assets
1,263,798

 
1,222,507

Long-term investments
171,873

 
190,952

Unbilled accounts receivable, net
11,459

 

Property and equipment, net
30,017

 
18,595

Intangible assets, net
81,037

 
95,654

Goodwill
340,877

 
340,877

Deferred tax assets, net
83,922

 
87,482

Other assets
35,330

 
22,525

TOTAL ASSETS
$
2,018,313

 
$
1,978,592

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable
$
20,967

 
$
30,635

Accrued employee compensation
44,448

 
60,135

Deferred revenue, net
90,979

 
114,138

Other current liabilities
13,276

 
20,280

Total current liabilities
169,670

 
225,188

Convertible senior notes, net
311,141

 
305,128

Deferred revenue, net
21,381

 
23,758

Other liabilities
1,739

 
774

Total liabilities
503,931

 
554,848

STOCKHOLDERS’ EQUITY:
 
 
 
Common stock
8

 
8

Additional paid-in capital
1,346,620

 
1,297,979

Accumulated other comprehensive loss
(7,554
)
 
(7,748
)
Retained earnings
175,308

 
133,505

Total stockholders’ equity
1,514,382

 
1,423,744

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
2,018,313

 
$
1,978,592

See accompanying Notes to Condensed Consolidated Financial Statements.

3


GUIDEWIRE SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands except shares and per share amounts)
 
 
Three Months Ended January 31,
 
Six Months Ended January 31,
 
2019
 
2018
 
2019
 
2018
Revenue:
 
 
 
 
 
 
 
License and subscription
$
87,124

 
$
84,221

 
$
181,393

 
$
114,314

Maintenance
21,264

 
19,110

 
42,267

 
38,040

Services
60,878

 
60,457

 
125,289

 
119,605

Total revenue
169,266

 
163,788

 
348,949

 
271,959

Cost of revenue:
 
 
 
 
 
 
 
License and subscription
14,739

 
9,040

 
28,069

 
15,755

Maintenance
3,954

 
3,593

 
7,822

 
7,060

Services
60,937

 
55,136

 
126,198

 
107,848

Total cost of revenue
79,630

 
67,769

 
162,089

 
130,663

Gross profit:
 
 
 
 
 
 
 
License and subscription
72,385

 
75,181

 
153,324

 
98,559

Maintenance
17,310

 
15,517

 
34,445

 
30,980

Services
(59
)
 
5,321

 
(909
)
 
11,757

Total gross profit
89,636

 
96,019

 
186,860

 
141,296

Operating expenses:
 
 
 
 
 
 
 
Research and development
46,471

 
43,657

 
91,967

 
79,368

Sales and marketing
31,173

 
31,961

 
63,492

 
55,571

General and administrative
17,541

 
21,066

 
35,886

 
39,737

Total operating expenses
95,185

 
96,684

 
191,345

 
174,676

Loss from operations
(5,549
)
 
(665
)
 
(4,485
)
 
(33,380
)
Interest income
7,553

 
1,573

 
14,404

 
3,485

Interest expense
(4,287
)
 
(7
)
 
(8,531
)
 
(11
)
Other income (expense), net
1,148

 
1,658

 
(341
)
 
1,396

Income (loss) before income taxes
(1,135
)
 
2,559

 
1,047

 
(28,510
)
Provision for (benefit from) income taxes
(1,891
)
 
48,114

 
(5,198
)
 
25,959

Net income (loss)
$
756

 
$
(45,555
)
 
$
6,245

 
$
(54,469
)
Net income (loss) per share:
 
 
 
 
 
 
 
Basic
$
0.01

 
$
(0.59
)
 
$
0.08

 
$
(0.72
)
Diluted
$
0.01

 
$
(0.59
)
 
$
0.08

 
$
(0.72
)
Shares used in computing net income (loss) per share:
 
 
 
 
 
 
 
Basic
81,217,511

 
76,859,040

 
81,058,562

 
76,023,237

Diluted
82,191,668

 
76,859,040

 
82,289,773

 
76,023,237


                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
See accompanying Notes to Condensed Consolidated Financial Statements.

4


GUIDEWIRE SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited, in thousands)

 
Three Months Ended January 31,
 
Six Months Ended January 31,
 
2019
 
2018
 
2019
 
2018
Net income (loss)
$
756

 
$
(45,555
)
 
$
6,245

 
$
(54,469
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
235

 
2,124

 
(577
)
 
1,428

Unrealized gains (losses) on available-for-sale securities
1,485

 
(457
)
 
1,285

 
(592
)
Tax benefit (expense) on unrealized gains (losses) on available-for-sale securities
(288
)
 
122

 
(241
)
 
167

Reclassification adjustment for realized (gains) losses included in net income (loss)
(273
)
 

 
(273
)
 
15

Other comprehensive income (loss)
1,159

 
1,789

 
194

 
1,018

Comprehensive income (loss)
$
1,915

 
$
(43,766
)
 
$
6,439

 
$
(53,451
)

See accompanying Notes to Condensed Consolidated Financial Statements

5


GUIDEWIRE SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(unaudited, in thousands except share amounts)

 
 
Common stock
 
Additional
paid-in
capital
 
Accumulated
other
comprehensive
income (loss)
 
Retained Earnings
 
Total
Stockholders’
Equity
 
 
Shares
 
Amount
 
Balance as of October 31, 2017
 
75,362,109

 
$
8

 
$
850,705

 
$
(6,567
)
 
$
144,255

 
$
988,401

Net loss
 

 

 

 

 
(45,555
)
 
(45,555
)
Issuance of common stock upon exercise of stock options
 
36,694

 

 
362

 

 

 
362

Issuance of common stock upon vesting of Restricted Stock Units (“RSU”)
 
311,119

 

 

 

 

 

Stock-based compensation
 

 

 
25,035

 

 

 
25,035

Foreign currency translation adjustment
 

 

 

 
2,124

 

 
2,124

Unrealized loss on available-for-sale securities, net of tax
 

 

 

 
(335
)
 

 
(335
)
Issuance of common stock for Cyence acquisition
 
1,569,238

 

 
117,457

 

 

 
117,457

Balance as of January 31, 2018
 
77,279,160

 
$
8

 
$
993,559


$
(4,778
)

$
98,700


$
1,087,489


 
 
Common stock
 
Additional
paid-in
capital
 
Accumulated
other
comprehensive
income (loss)
 
Retained Earnings
 
Total
Stockholders’
Equity
 
 
Shares
 
Amount
 
Balance as of July 31, 2017
 
75,007,625

 
$
8

 
$
830,014

 
$
(5,796
)
 
$
69,055

 
$
893,281

Net loss
 

 

 

 

 
(54,469
)
 
(54,469
)
Issuance of common stock upon exercise of stock options
 
59,078

 

 
729

 

 

 
729

Issuance of common stock upon vesting of RSUs
 
643,219

 

 

 

 

 

Stock-based compensation
 

 

 
44,170

 

 

 
44,170

Issuance of common stock for Cyence acquisition
 
1,569,238

 

 
117,935

 

 

 
117,935

Foreign currency translation adjustment
 

 

 

 
1,428

 

 
1,428

Unrealized loss on available-for-sale securities, net of tax
 

 

 

 
(410
)
 

 
(410
)
Adoption of ASU 2016-09 and related tax impact
 

 

 
711

 

 
84,114

 
84,825

Balance as of January 31, 2018
 
77,279,160

 
$
8

 
$
993,559

 
$
(4,778
)
 
$
98,700

 
$
1,087,489



See accompanying Notes to Condensed Consolidated Financial Statements.


6



GUIDEWIRE SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(unaudited, in thousands except share amounts)

 
 
Common stock
 
Additional
paid-in
capital
 
Accumulated
other
comprehensive
income (loss)
 
Retained Earnings
 
Total
Stockholders’
Equity
 
 
Shares
 
Amount
 
Balance as of October 31, 2018
 
81,009,507

 
$
8

 
$
1,321,878


$
(8,713
)

$
174,552


$
1,487,725

Net income
 

 

 

 

 
756

 
756

Issuance of common stock upon exercise of stock options
 
68,120

 

 
413

 

 

 
413

Issuance of common stock upon vesting of RSUs
 
312,878

 

 

 

 

 

Stock-based compensation
 

 

 
24,329

 

 

 
24,329

Foreign currency translation adjustment
 

 

 

 
235

 

 
235

Unrealized gain on available-for-sale securities, net of tax
 

 

 

 
924

 

 
924

Balance as of January 31, 2019
 
81,390,505

 
$
8

 
$
1,346,620


$
(7,554
)

$
175,308


$
1,514,382

 
 
Common stock
 
Additional
paid-in
capital
 
Accumulated
other
comprehensive
income (loss)
 
Retained Earnings
 
Total
Stockholders’
Equity
 
 
Shares
 
Amount
 
Balance as of July 31, 2018
 
80,611,698

 
$
8

 
$
1,297,979

 
$
(7,748
)
 
$
133,505

 
$
1,423,744

Net income
 

 

 

 

 
6,245

 
6,245

Issuance of common stock upon exercise of stock options
 
142,818

 

 
1,102

 

 

 
1,102

Issuance of common stock upon vesting of RSUs
 
684,957

 

 

 

 

 

Cancellation of Restricted Stock Awards (“RSA”)
 
(48,968
)
 

 

 

 

 

Stock-based compensation
 

 

 
47,539

 

 

 
47,539

Foreign currency translation adjustment
 

 

 

 
(577
)
 

 
(577
)
Unrealized gain on available-for-sale securities, net of tax
 

 

 

 
771

 

 
771

Adoption of ASC 606
 

 

 

 

 
35,558

 
35,558

Balance as of January 31, 2019
 
81,390,505

 
$
8

 
$
1,346,620

 
$
(7,554
)
 
$
175,308

 
$
1,514,382


See accompanying Notes to Condensed Consolidated Financial Statements.



7


GUIDEWIRE SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
 
 
Six Months Ended January 31,
 
 
2019
 
2018
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
 
Net income (loss)
 
$
6,245

 
$
(54,469
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
 
Depreciation and amortization
 
19,442

 
16,315

Amortization of debt discount and issuance costs
 
6,013

 

Stock-based compensation
 
47,686

 
44,655

Charges to bad debt and revenue reserves
 
352

 

Deferred income tax
 
(7,340
)
 
24,287

Amortization of premium (accretion of discount) on available-for-sale securities
 
(3,816
)
 
361

Other non-cash items affecting net income (loss)
 
515

 

Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable
 
4,414

 
(16,345
)
Unbilled accounts receivable
 
(30,190
)
 

Prepaid expenses and other assets
 
(66
)
 
(3,139
)
Accounts payable
 
(14,475
)
 
4,834

Accrued employee compensation
 
(15,262
)
 
(17,547
)
Deferred revenue
 
(27,650
)
 
16,690

Other liabilities
 
1,111

 
804

Net cash provided by (used in) operating activities
 
(13,021
)
 
16,446

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
 
Purchases of available-for-sale securities
 
(462,902
)
 
(110,820
)
Sales and maturities of available-for-sale securities
 
410,583

 
170,316

Purchases of property and equipment
 
(11,006
)
 
(4,620
)
Capitalized software development costs
 
(1,103
)
 
(769
)
Net cash used in investing activities
 
(64,428
)
 
(76,269
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
 
Proceeds from issuance of common stock upon exercise of stock options
 
1,103

 
727

Net cash provided by financing activities
 
1,103

 
727

Effect of foreign exchange rate changes on cash and cash equivalents
 
(625
)
 
1,207

NET DECREASE IN CASH AND CASH EQUIVALENTS
 
(76,971
)
 
(57,889
)
CASH AND CASH EQUIVALENTS—Beginning of period
 
437,140

 
263,176

CASH AND CASH EQUIVALENTS—End of period
 
$
360,169

 
$
205,287

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
 
 
 
 
Cash paid for income taxes, net of tax refunds
 
$
2,540

 
$
1,677

Accruals for purchase of property and equipment
 
$
3,609

 
$
1,497

Accruals for capitalized software costs
 
$
75

 
$
40


See accompanying Notes to Condensed Consolidated Financial Statements.

8


GUIDEWIRE SOFTWARE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1.
The Company and Summary of Significant Accounting Policies and Estimates
Company

Guidewire Software, Inc., a Delaware corporation, was incorporated on September 20, 2001. Guidewire Software, Inc., together with its subsidiaries (the “Company”), provides a technology platform which consists of three key elements: core transaction processing, data management and analytics, and digital engagement. The Company’s technology platform supports core insurance operations, including underwriting and policy administration, claim management and billing; insights into data that can improve business decision making; and digital sales, service and claims experiences for policyholders, agents, and other key stakeholders. The Company’s customers are primarily property and casualty insurance carriers.
Basis of Presentation and Consolidation
The accompanying condensed consolidated financial statements and accompanying notes include the Company and its wholly-owned subsidiaries and reflect all adjustments (all of which are normal and recurring in nature) that, in the opinion of management, are necessary for a fair presentation of the interim periods presented. All intercompany balances and transactions have been eliminated in consolidation. Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) have been condensed or omitted under the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”).
These condensed consolidated financial statements should be read in conjunction with the Company’s financial statements and related notes, together with management’s discussion and analysis of financial condition and results of operations, presented in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2018. There have been no changes in the Company’s significant accounting policies from those that were disclosed in the Company’s consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2018, except for changes to revenue recognition, customer acquisition costs, and costs to fulfill a contract resulting from the adoption of Accounting Standards Update No. 2014-09, “Revenue from Contracts with Customers” (“ASC 606”).
Use of Estimates
The preparation of the accompanying condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions about future events that affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenue and expenses. Significant items subject to such estimates include, but are not limited to, revenue recognition, the useful lives of property and equipment and intangible assets, allowance for doubtful accounts, valuation allowance for deferred tax assets, stock-based compensation, annual bonus attainment, income tax uncertainties, fair value of convertible senior notes, valuation of goodwill and intangible assets, software development costs to be capitalized, and contingencies. These estimates and assumptions are based on management’s best estimates and judgment. Management regularly evaluates its estimates and assumptions using historical experience and other factors; however, actual results could differ from these estimates.

Foreign Currency

The functional currency of the Company’s foreign subsidiaries is their respective local currency. The Company translates all assets and liabilities of foreign subsidiaries to U.S. dollars at the current exchange rate as of the applicable balance sheet date. Revenue and expenses are translated at the average exchange rate prevailing during the period in which the transactions occur. The effects of foreign currency translations are recorded in accumulated other comprehensive income (loss) as a separate component of stockholders’ equity in the accompanying condensed consolidated balance sheets. Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are recorded as other income (expense) in the condensed consolidated statements of operations.
Cash and Cash Equivalents
Cash and cash equivalents are comprised of cash and highly liquid investments with remaining maturities of 90 days or less at the date of purchase. Cash equivalents primarily consist of commercial paper and money market funds.

9


Investments

 Management determines the appropriate classification of investments at the time of purchase based upon management’s intent with regard to such investments. All current investments have been classified as available-for-sale. 

The Company classifies investments as short-term when they have remaining contractual maturities of one year or less from the balance sheet date, and as long-term when the investments have remaining contractual maturities of more than one year from the balance sheet date. All investments are recorded at fair value with unrealized holding gains and losses included in accumulated other comprehensive income (loss).

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets. Maintenance and repairs that do not extend the life or improve an asset are expensed in the period incurred.

The estimated useful lives of property and equipment are as follows:
Computer hardware
 
3 years
Purchased software
 
3 years
Furniture and fixtures
 
5 years
Leasehold improvements
 
Shorter of 10 years or remaining lease term
 
Software Development Costs

Certain on-premise software development costs incurred subsequent to the establishment of technological feasibility are subject to capitalization and amortized over the estimated lives of the related products. Technological feasibility is established upon completion of a working model. Costs incurred subsequent to the establishment of technological feasibility have not been material and, therefore, all software development costs related to on-premise software have been charged to research and development expense in the accompanying consolidated statements of operations as incurred.

For qualifying costs incurred for computer software developed for internal use, the Company begins to capitalize its costs to develop software when preliminary development efforts are successfully completed, management has authorized and committed project funding, it is probable that the project will be completed, and the software will be used as intended. If any of these criteria cease being met before the software reaches its intended use, any capitalized costs related to the project will be impaired. When the software reaches its intended use, capitalized costs are amortized to cost of revenue over the estimated useful life of the related assets, generally estimated to be three to five years. Costs incurred prior to meeting these capitalization criteria and costs incurred for training and maintenance are expensed as incurred and recorded in research and development expense on the Company’s condensed consolidated statements of operations. Capitalized software development costs are recorded in property and equipment on the Company’s condensed consolidated balance sheets.
Impairment of Long-Lived Assets, Intangible Assets, and Goodwill
The Company evaluates its long-lived assets, consisting of property and equipment and intangible assets, for indicators of possible impairment when events or changes in circumstances indicate that the carrying amount of certain assets may not be recoverable. Impairment exists if the carrying amount of such assets exceed the estimates of future net undiscounted cash flows expected to be generated by such assets. Should impairment exist, the impairment loss would be measured based on the excess carrying amount of the assets over the estimated fair value of the assets.
The Company tests goodwill for impairment annually, during the fourth quarter of each fiscal year, and in the interim whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company evaluates qualitative factors to determine whether it is more likely than not that the fair value of the Company’s single reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. In performing the qualitative assessment, the Company considers events and circumstances, including, but not limited to, macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, changes in management or key personnel, changes in strategy, changes in customers, changes in the composition or carrying amount of a reporting unit’s net assets, and changes in the price of the Company’s common stock. If, after assessing the totality of events or circumstances, the

10


Company determines that it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, then the two-step goodwill impairment test is not performed. There have been no goodwill impairments during the periods presented.
Convertible Senior Notes
In March 2018, the Company issued $400.0 million aggregate principal amount of 1.25% Convertible Senior Notes due 2025 (the “Convertible Senior Notes”). The Company accounts for the liability and equity components of the issued Convertible Senior Notes separately. The carrying amount of the equity component, representing the conversion option, was determined by deducting the fair value of the liability component from the par value of the Convertible Senior Notes as a whole. This difference represents a debt discount that is amortized to interest expense using the effective interest method over the term of the Convertible Senior Notes. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The liability and equity components will not be remeasured as long as the conversion option continues to meet the requirements for equity classification. The equity component is net of issuance costs and recorded in additional paid-in capital.
Business Combinations

The Company uses its best estimates and assumptions to assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date. Goodwill is calculated as the difference between the acquisition date fair value of the consideration transferred and the values assigned to the assets acquired and liabilities assumed. The Company’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and subject to refinement and, as a result, actual results may differ from estimates. During the measurement period, which may be up to one year from the acquisition date, if new information is obtained about facts and circumstances that existed as of the acquisition date, the Company may record adjustments to the fair value of these assets and liabilities, with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired or liabilities assumed, whichever comes first, subsequent adjustments, if any, are recorded to the Company’s condensed consolidated statements of operations.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash, cash equivalents, investments, and accounts receivable. The Company maintains its cash, cash equivalents, and investments with high quality financial institutions. The Company is exposed to credit risk for cash held in financial institutions in the event of a default to the extent that such amounts recorded on the condensed consolidated balance sheets are in excess of amounts that are insured by the Federal Deposit Insurance Corporation.
No customer individually accounted for 10% or more of the Company’s revenue in any of the periods presented or for 10% or more of the Company’s accounts receivable as of January 31, 2019 and July 31, 2018.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable are recorded at invoiced amounts and do not bear interest. While the Company does not require collateral, the Company performs ongoing credit evaluations of its customers. The Company maintains an allowance for doubtful accounts based upon the expected collectability of its accounts receivable. The expectation of collectability is based on historical loss patterns, the number of days that billings are past due, and an evaluation of the potential risk of loss associated with delinquent accounts.
Revenue Recognition
The Company’s revenue is derived from contracts with customers. The majority of the Company’s revenue is derived from licensing arrangements that can span multiple years, and implementation and other professional services arrangements. The Company accounts for revenue in accordance with ASC 606, which the Company adopted on August 1, 2018 using the modified retrospective method. Refer to the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2018 for a description of the Company’s revenue recognition policy prior to August 1, 2018. The core principle of ASC 606 is to recognize revenue upon the transfer of services or products to customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services or products. The Company applies the following framework to recognize revenue:
Identification of the contract, or contracts, with the customer

11


The Company considers the terms and conditions of written contracts and its customary business practices in identifying its contracts under ASC 606. The Company determines it has a contract with a customer when the contract is approved, the Company can identify each party’s rights regarding the services and products to be transferred, the Company can identify the payment terms for the services and products, the Company has determined that the customer has the ability and intent to pay, and the contract has commercial substance. In general, contract terms will be reflected in a written document that is signed by both parties. At contract inception, the Company evaluates whether two or more contracts should be combined and accounted for as a single contract. The Company also evaluates the customer’s ability and intent to pay, which is based on a variety of factors, including the customer’s historical payment experience or, in the case of a new customer, credit and financial information pertaining to the customer.
Identification of the performance obligation in the contract
Performance obligations promised in a contract are identified based on the services or products that will be transferred to the customer that are both:
i.
capable of being distinct, whereby the customer can benefit from the service or product either on its own or together with other resources that are readily available from the Company or third parties, and
ii.
distinct in the context of the contract, whereby the transfer of the services or products is separately identifiable from other promises in the contract.
To the extent a contract includes multiple promised services or products, the Company applies judgment to determine whether promised services or products are capable of being distinct and distinct in the context of the contract. If these criteria are not met the promised services or products are accounted for as a combined performance obligation.
The Company generates revenue from the following sources, which represent the performance obligations of the Company:
i.
On-premise software licenses related to term or perpetual agreements;
ii.
Maintenance activities that consist of email and phone support, bug fixes, and unspecified software updates and upgrades released when, and if, available during the maintenance term;
iii.
Subscription services related to the Company’s Software-as-a-Service (“SaaS”) offerings; and
iv.
Services related to the implementation and configuration of the Company’s software, reimbursable travel, and training.
Term licenses generally have a two-year initial term with a customer option to renew on an annual basis after the initial term. Maintenance for term licenses follows the same contract periods. Subscriptions are typically sold with a three- to five-year initial term with a customer option to renew on an annual basis after the initial term. Professional services typically are time and materials contracts that last for an average period of approximately one year.
Determination of the transaction price
The transaction price is determined based on the consideration to which the Company expects to be entitled in exchange for transferring services and products to the customer. Variable consideration is estimated and included in the transaction price if, in the Company’s judgment, it is probable that there will not be a significant future reversal of cumulative revenue under the contract.
On-premise software licenses and subscription services may be subject to either fixed or variable installments. Variable installments are generally subject to changes in a customer’s Direct Written Premium (“DWP”) or a customer’s Gross Written Premium (“GWP”). When consideration is subject to variable installments, the Company estimates variable consideration using the expected value method based on historical DWP or GWP usage to the extent that a significant revenue reversal is not probable to occur. When consideration is subject to a customer termination right, the Company estimates the total transaction price using the most likely method, and defers consideration associated with the customer’s termination right until it expires.
The Company evaluates whether a significant financing component exists when the timing of revenue recognition occurs in advance of invoicing. This timing difference occurs when control of the software license is transferred at a point in time, usually at the contract onset, but the customer payments occur over time. A significant financing component generally does not exist under the Company’s standard contracting and billing practices. For example, the Company’s typical time-based licenses have a two-year initial term with the final payment due at the end of the first year.
Allocation of the transaction price to the performance obligations in the contract
If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance

12


obligation based on its standalone selling price (“SSP”) in relation to the total fair value of all performance obligations in the arrangement. The majority of the Company’s contracts contain multiple performance obligations, such as when licenses are sold with maintenance, implementation services or training services. Some of the Company’s performance obligations, such as maintenance, implementation services, and training services, have observable inputs that are used to determine the SSP of those distinct performance obligations. Where SSP is not directly observable, the Company determines the SSP using information that may include market conditions and other observable inputs. In the circumstances when available information to determine SSP is highly variable or uncertain, such as for our term licenses, the Company will use the residual method.
Recognition of revenue when, or as, the Company satisfies a performance obligation
The Company recognizes revenue when control of the services or products are transferred to a customer, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those services or products. The Company is principally responsible for the satisfaction of its distinct performance obligations, which are satisfied either at a point in time or over a period of time.
Performance obligations satisfied at a point in time
On-premise software licenses
On-premise term and perpetual software licenses comprise the majority of distinct performance obligations that are satisfied at a point in time. Revenue is recognized at the point in which the on-premise software licenses are made available to a customer. Consideration for on-premise software licenses is typically billed in advance on an annual basis over the license term.
Performance obligations satisfied over a period of time
Subscriptions, maintenance activities, and professional service arrangements comprise the majority of distinct performance obligations that are satisfied over a period of time.
Subscription arrangements
Revenue from subscription arrangements is recognized ratably over the subscription period using a time-based measure of progress as customers receive the benefits from their subscriptions over the contractually agreed-upon term. The Company’s subscription periods are generally three to five years. Consideration from subscription arrangements is typically billed in advance on an annual basis over the contract period.
Maintenance activities
Revenue from maintenance activities associated with on-premise licenses is a stand-ready obligation, which is recognized over the contractually agreed-upon term using a time-based measure of progress as customers receive benefits from the availability of support technicians over the support period. Consideration for maintenance activities is typically billed in advance on an annual basis. The Company’s maintenance activities are consistently priced as a percentage of the associated on-premise software license.
Services
Revenue from professional service arrangements is recognized over the respective service period as the underlying services are performed.
In substantially all of the Company’s professional service contracts, services are separately identifiable performance obligations for which related revenue and costs are recognized according to when each respective service obligation is delivered. Substantially all professional services engagements are billed and recognized on a time and materials basis. In select situations, the Company will contract professional services on a fixed fee basis, where the Company generally recognizes services revenue over time, using an input method. The measure of progress of the professional services being provided under these fixed fee arrangements is based on hours incurred compared to estimates of the total hours to complete the performance obligation.
When professional services are sold with an on-premise license or subscription arrangement, the Company evaluates whether the performance obligations are distinct or separately identifiable, or whether they constitute a single performance obligation. In the limited cases where professional services are not considered to be distinct from the on-premise license or subscription services, the Company will recognize revenue based on the nature and term of the combined performance obligation when control of the combined performance obligation is transferred to the customer.

13



Contract Costs

Contract costs consists of two components, customer acquisition costs and costs to fulfill a contract.

Customer acquisition costs are capitalized only if the costs are incrementally incurred to obtain a customer contract, and mainly consist of sales commissions paid to sales personnel and their related taxes. Capitalized customer acquisition costs related to software licenses, subscriptions, and support services are amortized over the anticipated period of time that such goods and services are expected to be provided to a customer, which the Company estimates to be approximately five years. The amortization of customer acquisition costs is classified as a sales and marketing expense in the condensed consolidated statement of operations.

Costs to fulfill a contract, or fulfillment costs, mainly consist of royalties payable to third-party software providers that support both the Company’s software offerings and support services. Fulfillment costs are only capitalized if they relate directly to a contract with a customer, the costs generate or enhance resources that will be used to satisfy performance obligations in the future, and the costs are expected to be recoverable. Fulfillment costs would be generally amortized over the same period of time as the customer acquisition costs. The amortization of fulfillment costs is classified as a cost of revenue.
Advertising Costs
Advertising costs are expensed as incurred and amounts incurred were not material during the three and six months ended January 31, 2019 and 2018.
Stock-Based Compensation

The Company accounts for stock-based compensation using the fair value method, which requires the Company to measure stock-based compensation based on the grant-date fair value of the awards and recognize the compensation expense over the requisite service period. The Company recognizes compensation expense net of actual forfeitures. To date, the Company has granted or assumed stock options, restricted stock awards (“RSAs”), time-based restricted stock units (“RSUs”), performance-based restricted stock units (“PSUs”), and restricted stock units that may be earned subject to the Company’s total shareholder return ranking relative to the software companies in the S&P Software and Services Select Industry Index (“S&P Index”) for a specified performance period or specified performance periods, service periods, and in select cases, subject to certain performance conditions (“TSR PSUs”). RSAs, RSUs, PSUs, and TSR PSUs are collectively referred to as “Stock Awards.”
The fair value of the Company’s RSAs, RSUs, and PSUs is equal to the market value of the Company’s common stock on the date of grant. These awards are subject to time-based vesting, which generally occurs over a period of four years. The Company recognizes compensation expense for awards that contain only service conditions on a straight-line basis over the requisite service period, which is generally the vesting period of the respective awards. The Company recognizes the compensation cost for awards that contain either performance conditions, market conditions, or both using the graded vesting method.
The fair value of the Company’s stock options and TSR PSUs are estimated at the grant date using the Black-Scholes model and Monte Carlo simulation method, respectively. The assumptions utilized under these methods require judgments and estimates. Changes in these inputs and assumptions could affect the measurement of the estimated fair value of the related compensation expense of these stock options and stock awards. Compensation expense associated with TSR PSUs will be recognized over the vesting period regardless of whether the market condition is ultimately satisfied; however, the expense will be reversed if a grantee terminates prior to satisfying the requisite service period. For TSR PSUs containing an additional performance condition, a portion of the expense may fluctuate depending on estimates of the achievement of the performance conditions. All TSR PSUs will vest at the end of a three-year period.

Income Taxes
Income taxes are accounted for under the asset and liability method. Under this method, the Company determines deferred tax assets and liabilities on the basis of the differences between the financial statement carrying amounts and tax basis of existing assets and liabilities by using enacted tax rates in effect for the year in which the difference is expected to reverse. All deferred tax assets and liabilities are classified as non-current on the Company’s condensed consolidated balance sheets. 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. A valuation allowance against deferred tax assets is recorded when it is more likely than not that some portion or all of such deferred tax assets will not be realized and is based on both positive and negative evidence about the future, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations.

14


The effective tax rate in any given financial statement period may differ materially from the statutory rate. These differences may be caused by changes in tax regulations and resulting changes in the deferred tax valuation allowance; changes in the mix and level of income or losses; changes in the expected outcome of tax audits; permanent differences for stock-based compensation, including excess tax benefits; research and development credits; the tax rate differences between the United States and foreign countries; foreign withholding taxes; certain non-deductible expenses, including executive compensation; acquisition-related expenses; and provisions under the Tax Cuts and Jobs Act (“Tax Act”), including a provision to tax global intangible low-taxed income of foreign subsidiaries, a special deduction for foreign-derived intangible income, and a base erosion anti-abuse tax that may tax certain payments between a U.S. corporation and its foreign subsidiaries.
The Company records interest and penalties related to unrecognized tax benefits as income tax expense in its condensed consolidated statement of operations.
Recently Adopted Accounting Pronouncements
Interim Disclosure Requirement: Changes in Stockholders’ Equity
In August 2018, the SEC issued SEC Final Rule 33-10532, Disclosure Update and Simplification, which requires public companies to disclose the changes in each caption of stockholders’ equity and non-controlling interests for the current and comparative year-to-date periods, with subtotals for each interim period and the amount of dividends per share for each class of shares. This rule is effective for interim periods, beginning after November 5, 2018, with early adoption permitted. The Company has presented this disclosure beginning with its fiscal quarter ended January 31, 2019.
Revenue from Contracts with Customers (Topic 606): Revenue Recognition
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASC 606, which supersedes the revenue recognition requirements in Accounting Standards Codification Topic 605, “Revenue Recognition” (“ASC 605”) as well as other industry-specific guidance. The core principle of ASC 606 is that an entity should recognize revenue when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the Company expects to be entitled to in exchange for those goods or services.
The Company adopted ASC 606 as of August 1, 2018 using the modified retrospective transition method and applied ASC 606 to those contracts that were not completed, as defined under ASC 606, as of August 1, 2018. The results for reporting periods beginning after August 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be presented under ASC 605. The main difference in reporting between ASC 605 and ASC 606 is that under ASC 606, the Company recognizes the revenue associated with term licenses not when payments are made or due, but when control of the software license is transferred to the customer, which occurs at or near the time a contract with a customer is executed, whereas under ASC 605, revenue associated with term software licenses was recognized over time in the earlier of the period in which the payments are due or are actually made because of extended payment terms. As a result, under ASC 606, all contractually obligated payments under a term license that the Company reasonably expects to collect would be recognized upon the transfer of control of the on-premise software licenses, which is generally when made available to a customer. Under ASC 606, costs to obtain a contract and costs to fulfill a contract are capitalized as an asset and amortized on a basis that is consistent with the pattern of transfer of performance obligations with which the asset relates. In contrast, under ASC 605, costs to obtain and costs to fulfill a contract were historically expensed as incurred.
The Company recorded a net increase to opening retained earnings of $35.6 million as of August 1, 2018 due to the cumulative impact of adopting ASC 606 using the modified retrospective method. The cumulative impact results from the differences between applying ASC 606 as opposed to applying ASC 605 to existing contracts that were not yet completed as of the date of initial adoption. For contracts completed before August 1, 2018, the Company has not retrospectively applied ASC 606 to the contracts.

15


Under ASC 606, contracts with customers are reflected in the condensed consolidated balance sheets as follows:
Accounts receivable, net represents amounts billed to customers in accordance with contract terms for which payment has not yet been received. It is presented net of the allowance for doubtful accounts as part of current assets on the condensed consolidated balance sheets.
Unbilled accounts receivable, net represents revenue recognized prior to the end of the reporting period for performance on a portion of the contract in advance of both billing the customer and receiving consideration. Under ASC 606, this balance represents our contract assets.
Contract costs include deferred commissions and their related taxes, royalties, and referral fees. The short-term portion is presented as prepaid and other current assets, and the long-term portion is presented as other assets.
Deferred costs represent costs related to our professional services that have been deferred to align with revenue recognition. The short-term portion is presented as prepaid and other current assets, and the long-term portion is presented as other assets.
Deferred revenue represents amounts received as consideration from the Company’s customers in advance of performance on a portion of the contract as of the end of the reporting period. Under ASC 606, this balance represents our contract liabilities.

The Company may receive consideration from its customers in advance of performance on a portion of the contract and, on another portion of the contract, perform in advance of receiving consideration. Contract assets and liabilities related to rights and obligations in a contract are interdependent. Therefore, contract assets and liabilities are presented net at the contract level, as either a single contract asset or a single contract liability, on the condensed consolidated balance sheets.
The following table summarizes the impact to the financial statement line items within the condensed consolidated balance sheets as a result of the initial adoption of ASC 606 (in thousands):
 
Balances reported as of July 31, 2018
 
Cumulative effect adjustment due to adoption of ASC 606
 
Adjusted beginning balance as of August 1, 2018
Unbilled accounts receivable, net
$

 
$
28,762

 
$
28,762

Contract costs, net

 
12,932

 
12,932

Deferred tax asset, net
87,482

 
(10,612
)
 
76,870

Prepaid expenses and other assets
53,035

 
(239
)
 
52,796

Other liabilities
(21,054
)
 
7,055

 
(13,999
)
Deferred revenue, net
(137,896
)
 
(2,341
)
 
(140,237
)
Retained earnings
(133,505
)
 
(35,558
)
 
(169,063
)

The cumulative effect adjustment on unbilled accounts receivable is driven by revenue that is recognized in advance of billings under ASC 606. The Company’s on-premise software license arrangements result in revenue being recognized at the point in which the software license is transferred to customers, while agreed-upon contractual terms generally provide for billings to occur over a stated licensing period.
The cumulative effect adjustment on contract costs is driven by the requirement in ASC 606 to capitalize incremental, direct costs of either obtaining or fulfilling a contract. In prior periods, these costs were expensed as incurred under ASC 605.
The cumulative effect adjustment on deferred revenue is primarily driven by the requirement under ASC 606 to recognize revenue upfront rather than over the contract period as described in the paragraph above related to unbilled accounts receivable.
The following table summarizes the financial statement line items within the condensed consolidated balance sheets as of January 31, 2019 that were impacted as a result of the adoption of ASC 606 (in thousands):

16


 
As Reported
 
Change
 
As if presented under ASC 605
Unbilled accounts receivable, net
$
58,952

 
$
(58,952
)
 
$

Contract costs, net(1)
16,614

 
(16,614
)
 

Deferred tax asset, net
83,922

 
36,240

 
120,162

Prepaid expenses and other assets
48,950

 
1,431

 
50,381

Other liabilities
(15,015
)
 
(7,673
)
 
(22,688
)
Deferred revenue, net
(112,360
)
 
(75,648
)
 
(188,008
)
Retained earnings
(175,308
)
 
117,915

 
(57,393
)
(1)The short- and long-term portions of this balance are reported in ‘Prepaid expenses and other current assets’ and ‘Other assets,’ respectively, on the condensed consolidated balance sheets.
The difference between the 'As Reported' amounts and the 'As if presented under ASC 605' amounts within the condensed consolidated balance sheets is due to the same considerations described above with respect to the transition adjustments as a result of the adoption of ASC 606.
The following table summarizes the financial statement line items within the condensed consolidated statement of operations that were impacted as a result of the adoption of ASC 606 for the three months ended January 31, 2019 (in thousands):
 
As Reported
 
Change
 
As if presented under ASC 605
Revenue:
 
 
 
 
 
License and subscription
$
87,124

 
$
(39,330
)
 
$
47,794

Maintenance
21,264

 
357

 
21,621

Services
60,878

 
4,996

 
65,874

Total revenue
169,266

 
(33,977
)
 
135,289

Cost of revenue
79,630

 
(285
)
 
79,345

Gross profit
89,636

 
(33,692
)
 
55,944

Total operating expenses
95,185

 
2,409

 
97,594

Loss from operations
(5,549
)
 
(36,785
)
 
(42,334
)
Other income (expense), net
4,414

 
(421
)
 
3,993

Benefit from income taxes
(1,891
)
 
(8,724
)
 
(10,615
)
Net income (loss)
$
756

 
$
(28,481
)
 
$
(27,725
)
Net income (loss) per share
$
0.01

 
$
(0.35
)
 
$
(0.34
)


17


The following table summarizes the financial statement line items within the condensed consolidated statement of operations that were impacted as a result of the adoption of ASC 606 for the six months ended January 31, 2019 (in thousands):
 
As Reported
 
Change
 
As if presented under ASC 605
Revenue:
 
 
 
 
 
License and subscription
$
181,393

 
$
(110,487
)
 
$
70,906

Maintenance
42,267

 
994

 
43,261

Services
125,289

 
4,906

 
130,195

Total revenue
348,949

 
(104,587
)
 
244,362

Total cost of revenue
162,089

 
(327
)
 
161,762

Gross profit
186,860

 
(104,260
)
 
82,600

Total operating expenses
191,345

 
2,714

 
194,059

Loss from operations
(4,485
)
 
(107,674
)
 
(112,159
)
Other income (expense), net
5,532

 
(312
)
 
5,220

Benefit from income taxes
(5,198
)
 
(25,632
)
 
(30,830
)
Net income (loss)
$
6,245

 
$
(82,354
)
 
$
(76,109
)
Net income (loss) per share
$
0.08

 
$
(1.02
)
 
$
(0.94
)

The difference between the 'As Reported' amounts and the 'As if presented under ASC 605' amounts within revenue is primarily due to term license fees for the entire committed term being recognized upfront as reported under ASC 606 rather than annually or ratably under ASC 605 and subscription arrangements with escalating annual fees that are recognized ratably over the committed term under ASC 606, rather than as escalating fees in each year under ASC 605, partially offset by the difference in revenue recognized associated with a fixed fee contract. Also, hosting fees associated with our subscriptions are classified as subscription revenue under ASC 606 instead of services revenue under ASC 605.
The impact to the condensed consolidated statements of cash flows for the six months ended January 31, 2019 as a result of adopting ASC 606 was not significant.
Financial Instruments (Topic 825): Recognition and Measurement of Financial Assets and Financial Liabilities

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments (Topic 825) (“ASU 2016-01”), which impacts certain aspects of recognition, measurement, and presentation and disclosure of financial instruments. Under ASU 2016-01, unconsolidated non-equity method investments shall be measured at fair value. If such investments do not have a readily determinable fair value, an election may be made to measure them at cost after considering observable price changes for similar instruments. The Company adopted this standard beginning August 1, 2018, using the measurement alternative election, and the adoption did not result in a significant impact.
Recent Accounting Pronouncements Not Yet Adopted
Leases (Topic 842): Accounting for Leases

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) and subsequent amendments to the initial guidance: ASU No. 2017-13, ASU No. 2018-10, and ASU No. 2018-11 (collectively, “ASC 842”), which requires lessees to put most leases on their balance sheets but recognize the expenses on their income statements in a manner similar to current practice. ASC 842 states that a lessee would recognize a lease liability for the obligation to make lease payments and a right-to-use asset for the right to use the underlying asset for the lease term. The standard will be effective for the Company beginning August 1, 2019, and earlier adoption is permitted. The Company is evaluating the impact this guidance will have on its 2020 fiscal year and subsequent periods, and currently expects that most of its operating lease commitments will be subject to the new standard and recognized as operating lease liabilities and right-of-use assets upon our adoption of ASC 842, which will increase total assets and total liabilities that the Company reports relative to such amounts prior to adoption.

18


Income Statement, Reporting Comprehensive Income (Topic 220): Reclassification of Certain Effects from Accumulated Other Comprehensive Income
In February 2018, the FASB issued ASU No. 2018-02, Income Statement, Reporting Comprehensive Income (Topic 220): Reclassification of Certain Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”), which allows a reclassification of stranded tax effects from accumulated other comprehensive income to retained earnings, as a result of the Tax Act. The standard will be effective for the Company beginning August 1, 2019, and earlier adoption is permitted. The Company is currently evaluating the impact of adopting the new standard for its 2020 fiscal year and subsequent periods.
Intangibles, Goodwill and Other (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract
In August 2018, the FASB issued ASU No. 2018-15, Intangibles, Goodwill and Other (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract (“ASU 2018-15”), which requires implementation costs incurred by customers in cloud computing arrangements to be deferred and recognized over the term of the arrangement, if those costs would be capitalized by the customer in a software licensing arrangement under the internal-use software guidance in ASC 350-40. ASU 2018-15 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019, with early adoption permitted. The Company will evaluate the impact of adopting the new standard for its 2021 fiscal year and subsequent periods.

Other recent accounting pronouncements that are or will be applicable to the Company did not, or are not expected to, have a material impact on the Company's present or future financial statements.

2.
Revenue

Disaggregation of Revenue
Revenue for the three months ended January 31, 2019 by revenue type and by geography is as follows (in thousands):
 
License and subscription
Maintenance
Services
Total
Geography:
 
 
 
 
United States
$
59,361

$
13,291

$
41,449

$
114,101

Canada
8,748

2,272

2,514

13,534

Other Americas
385

1,100

1,581

3,066

Total Americas
68,494

16,663

45,544

130,701

United Kingdom
7,146

1,178

3,053

11,377

Other EMEA
7,170

1,749

7,801

16,720

Total EMEA
14,316

2,927

10,854

28,097

Total APAC
4,314

1,674

4,480

10,468

Total revenue
$
87,124

$
21,264

$
60,878

$
169,266



19


Revenue for the six months ended January 31, 2019 by revenue type and by geography is as follows (in thousands):
 
License and subscription
Maintenance
Services
Total
Geography:
 
 
 
 
United States
$
97,896

$
26,412

$
85,160

$
209,468

Canada
18,170

4,421

5,231

27,822

Other Americas
973

2,181

3,502

6,656

Total Americas
117,039

33,014

93,893

243,946

United Kingdom
15,633

2,309

5,753

23,695

Other EMEA
24,546

3,612

17,301

45,459

Total EMEA
40,179

5,921

23,054

69,154

Total APAC
24,175

3,332

8,342

35,849

Total revenue
181,393

42,267

125,289

348,949

Revenue for the three and six months ended January 31, 2019 by major product or service type is as follows (in thousands):
 
Three Months Ended January 31,
 
Six Months Ended January 31,
 
2019
 
2019
 License and subscription
 
 
 
Term license
$
72,002

 
$
150,928

Subscription
14,770

 
30,113

Perpetual license
352

 
352

 Maintenance
21,264

 
42,267

 Services
60,878

 
125,289

 Total revenue
$
169,266

 
$
348,949

Customer Contract - Related Balance Sheet Amounts
The Company generally invoices customers in annual installments payable in advance. The difference between the timing of revenue recognition and the timing of billings results in the recognition of unbilled accounts receivable or deferred revenue in the condensed consolidated balance sheets. Amounts related to customer contract-related arrangements are included on the condensed consolidated balance sheets as of August 1, 2018 and January 31, 2019 as follows (in thousands):
 
Beginning balance as of August 1, 2018 as adjusted
 
Ending balance as of January 31, 2019 as reported
Unbilled accounts receivable, net
$
28,762

 
$
58,952

Contract costs, net(1)
12,932

 
16,614

Deferred revenue, net
(140,237
)
 
(112,360
)
(1)The short- and long-term portions of this balance are reported in ‘Prepaid expenses and other current assets’ and ‘Other assets,’ respectively, on the condensed consolidated balance sheets.

Unbilled accounts receivable
Unbilled accounts receivable includes those amounts that are unbilled due to agreed-upon contractual terms in which billing occurs subsequent to revenue recognition. This situation typically occurs when the Company transfers control of time-based software licenses to customers up-front, but invoices customers annually over the term of the license, which is typically two years. Unbilled accounts receivable is classified as either current or non-current based on the duration of remaining time between the date of the condensed consolidated balance sheets and the anticipated due date of the underlying receivables. During the three and six months ended January 31, 2019, $5.2 million and $7.6 million, respectively, of the Company's unbilled contract revenue balance as of August 1, 2018 became an unconditional right to payment and was billed to its customers.

20


Contract costs
Contract costs consist of customer acquisition costs and costs to fulfill a contract, which includes commissions and their related taxes, royalties, and referral fees. Contract costs are classified as either current or non-current based on the duration of time remaining between the date of the condensed consolidated balance sheets and the anticipated amortization date of the associated costs. The current portion of contract costs in the amount of $3.1 million is included in prepaid and other current assets on the Company’s condensed consolidated balance sheets. The non-current portion of contract costs in the amount of $13.5 million is included in other assets on the Company’s condensed consolidated balance sheets. The Company amortized $1.3 million and $2.4 million of contract costs during the three and six months ended January 31, 2019, respectively.
Deferred revenue
Deferred revenue consists of amounts that have been invoiced and for which the Company has the right to bill, but that have not been recognized as revenue because the related goods or services have not been transferred. Deferred revenue that will be realized during the 12-month period following the date of the condensed consolidated balance sheets is recorded as current, and the remaining deferred revenue is recorded as non-current. During the three and six months ended January 31, 2019, the Company recognized revenue of $34.8 million and $85.0 million, respectively, related to the Company’s deferred revenue balance reported as of August 1, 2018.
Performance Obligations
Remaining performance obligations represent contracted revenue that has not yet been recognized, which includes deferred revenue and amounts that will be invoiced and recognized as revenue in future periods. The Company applied the practical expedient in accordance with ASC 606 to exclude amounts related to professional services contracts that are on a time and materials basis. The aggregate amount of consideration allocated to performance obligations either not satisfied or partially satisfied was $169.1 million as of January 31, 2019. Subscription services are typically satisfied over three to five years, maintenance services are generally satisfied within one year, and professional services are typically satisfied within one year.
3.
Fair Value of Financial Instruments
Available-for-sale investments within cash equivalents and investments consist of the following (in thousands):
 
January 31, 2019
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Estimated Fair Value
U.S. Government agency securities
$
7,084

 
$

 
$
(12
)
 
$
7,072

Commercial paper
438,248

 
4

 
(21
)
 
438,231

Corporate bonds
516,999

 
416

 
(292
)
 
517,123

U.S. Government bonds
65,187

 
6

 
(5
)
 
65,188

Foreign government bonds
9,340

 
30

 

 
9,370

Certificates of deposit
88,501

 
30

 
(6
)
 
88,525

Money market funds
57,403

 

 

 
57,403

     Total
$
1,182,762

 
$
486

 
$
(336
)
 
$
1,182,912


21


 
July 31, 2018
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Estimated Fair Value
U.S. Government agency securities
$
9,000

 
$

 
$
(27
)
 
$
8,973

Commercial paper
471,966

 
4

 
(141
)
 
471,829

Corporate bonds
432,234

 
69

 
(763
)
 
431,540

U.S. Government bonds
89,986

 

 
(55
)
 
89,931

Foreign government bonds
9,306

 
7

 
(1
)
 
9,312

Certificate of deposit
81,985

 
53

 
(8
)
 
82,030

Money market funds
90,766

 

 

 
90,766

    Total
$
1,185,243

 
$
133

 
$
(995
)
 
$
1,184,381

The following table shows the gross unrealized losses and fair value of the Company’s investments with unrealized losses, aggregated by investment category and the length of time that individual securities have been in an unrealized loss position (in thousands):
 
January 31, 2019
 
Less Than 12 Months
 
12 Months or Greater
 
Total
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
 
Fair Value
 
Gross Unrealized Losses
U.S. Government agency securities
$
7,072

 
$
(12
)
 
$

 
$

 
$
7,072

 
$
(12
)
Commercial paper
438,231

 
(21
)
 

 

 
438,231

 
(21
)
Corporate bonds
359,383

 
(240
)
 
157,741

 
(52
)
 
517,124

 
(292
)
U.S. Government bonds
65,188

 
(5
)
 

 

 
65,188

 
(5
)
Foreign government bonds
5,247

 

 
4,123

 

 
9,370

 

Certificate of deposit
78,516

 
(6
)
 
10,009

 

 
88,525

 
(6
)
     Total
$
953,637

 
$
(284
)
 
$
171,873

 
$
(52
)
 
$
1,125,510

 
$
(336
)

As of January 31, 2019, the Company had 149 investments in a gross unrealized loss position. The unrealized losses on its available-for-sale securities were primarily a result of unfavorable changes in interest rates subsequent to the initial purchase of these securities. The Company does not intend to sell, nor does it believe it will need to sell, these securities before recovering the associated unrealized losses. The Company does not consider any portion of the unrealized losses at January 31, 2019 to be other-than-temporarily impaired, nor are any unrealized losses considered to be credit losses. The Company has recorded the securities at fair value in its condensed consolidated balance sheets, with unrealized gains and losses reported as a component of accumulated other comprehensive income (loss). The amount of realized gains and losses reclassified into earnings are based on the specific identification of the securities sold. The realized gains and losses from sales of securities in the periods presented were not material.

22


The following table summarizes the contractual maturities of the Company’s available-for-sale investments measured at fair value (in thousands):
 
January 31, 2019
 
Less Than 12 Months
 
12 to 24 Months
 
Total
U.S. Government agency securities
$
7,072

 
$

 
$
7,072

Commercial paper
438,231

 

 
438,231

Corporate bonds
359,382

 
157,741

 
517,123

U.S. Government bonds
65,188

 

 
65,188

Foreign government bonds
5,247

 
4,123

 
9,370

Money market funds
57,403

 

 
57,403

Certificates of deposit
78,516

 
10,009

 
88,525

     Total
$
1,011,039

 
$
171,873

 
$
1,182,912

 
Fair Value Measurement
Accounting guidance for fair value measurements defines a three-level valuation hierarchy for disclosures as follows:
Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities;
Level 2—Inputs other than quoted prices included within Level 1 that are observable, unadjusted quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data; and
Level 3—Unobservable inputs that are supported by little or no market activity, which require the Company to develop its own assumptions.
    
Available-for-sale investments
The following tables summarize the Company’s available-for-sale investments measured at fair value on a recurring basis, by level within the fair value hierarchy (in thousands):
 
January 31, 2019
 
Level 1
 
Level 2
 
Level 3
 
Total
Cash equivalents:
 
 
 
 
 
 
 
     Corporate bonds
$

 
$
6,101

 
$

 
$
6,101

     Commercial paper

 
241,332

 

 
241,332

     Money market funds
57,403

 

 

 
57,403

Total cash equivalents
57,403

 
247,433

 

 
304,836

Short-term investments:
 
 
 
 
 
 
 
     U.S. Government agency securities

 
7,072

 

 
7,072

     Commercial paper

 
196,899

 

 
196,899

     U.S. Government bonds

 
65,188

 

 
65,188

Foreign government bonds

 
5,247

 

 
5,247

     Corporate bonds

 
353,281

 

 
353,281

Certificates of deposit

 
78,516

 

 
78,516

Total short-term investments

 
706,203

 

 
706,203

Long-term investments:
 
 
 
 
 
 
 
Certificates of deposit

 
10,009

 

 
10,009

     Corporate bonds

 
157,741

 

 
157,741

Foreign government bonds

 
4,123

 

 
4,123

Total long-term investments

 
171,873

 

 
171,873

       Total
$
57,403

 
$
1,125,509

 
$

 
$
1,182,912


23



 
July 31, 2018
 
Level 1
 
Level 2
 
Level 3
 
Total
Cash equivalents:
 
 
 
 
 
 
 
Commercial paper
$

 
$
269,654

 
$

 
$
269,654

Corporate bonds

 
3,001

 

 
3,001

     Money market funds
90,766

 

 

 
90,766

Total cash equivalents
90,766

 
272,655

 

 
363,421

Short-term investments:
 
 
 
 
 
 
 
     U.S. Government agency securities

 
1,999

 

 
1,999

     Commercial paper

 
195,376

 

 
195,376

U.S. Government bonds

 
89,931

 

 
89,931

Foreign government bonds

 
4,448

 

 
4,448

     Corporate bonds

 
277,248

 

 
277,248

Certificate of deposit

 
61,006

 

 
61,006

Total short-term investments

 
630,008

 

 
630,008

Long-term investments:
 
 
 
 
 
 
 
     U.S. Government agency securities

 
6,974

 

 
6,974

     Certificate of deposit

 
21,024

 

 
21,024

     Corporate bonds

 
151,291

 

 
151,291

Commercial paper

 
6,799

 

 
6,799

Foreign government bonds

 
4,864

 

 
4,864

Total long-term investment

 
190,952

 

 
190,952

      Total
$
90,766

 
$
1,093,615

 
$

 
$
1,184,381


Convertible Senior Notes

The fair value of the Convertible Senior Notes was $408.0 million at January 31, 2019. The Company estimates the fair value of the Convertible Senior Notes using commonly accepted valuation methodologies and market-based risk measurements that are directly observable, such as unadjusted quoted prices (Level 2). The Company carries the Convertible Senior Notes at initial fair value less unamortized debt discount and issuance costs on its condensed consolidated balance sheets. For further information on the Convertible Senior Notes, see Note 6.


24


4. Balance Sheet Components
Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following (in thousands):
 
January 31, 2019
 
July 31, 2018
Prepaid expenses
$
12,950

 
$
14,704

Contract costs
3,123

 

Deferred costs
6,272

 
9,120

Deposits and other receivables
7,889

 
6,686

Prepaid expenses and other current assets
$
30,234

 
$
30,510

Property and Equipment, net
Property and equipment consist of the following (in thousands):
 
January 31, 2019
 
July 31, 2018
Computer hardware
$
25,574

 
$
24,879

Purchased software
4,756

 
4,664

Capitalized software development costs
4,560

 
3,978

Furniture and fixtures
5,260

 
4,217

Leasehold improvements
23,526

 
10,751

      Total property and equipment
63,676

 
48,489

Less accumulated depreciation
(33,659
)
 
(29,894
)
      Property and equipment, net
$
30,017

 
$
18,595

As of January 31, 2019 and July 31, 2018, no property and equipment was pledged as collateral. Depreciation expense, excluding the amortization of software development costs, was $2.3 million and $1.9 million for each of the three months ended January 31, 2019 and 2018, respectively, and was $4.4 million and $3.8 million for each of the six months ended January 31, 2019 and 2018, respectively.
The Company capitalizes software development costs for technology applications that the Company will offer solely as cloud-based subscriptions, which is primarily comprised of compensation for employees who are directly associated with the software development projects. The Company begins amortizing the capitalized software development costs once the technology applications are available for general release over the estimated lives of the applications, ranging from three to five years. The Company recognized approximately $0.3 million and $0.1 million in amortization expense in cost of revenue - license and subscription on the accompanying condensed consolidated statements of operations during the three months ended January 31, 2019 and 2018, respectively, and recognized approximately $0.6 million and $0.1 million during the six months ended January 31, 2019 and 2018, respectively.
Other assets
Other assets consists of the following (in thousands):
 
 
January 31, 2019
 
July 31, 2018
Prepaid expenses
 
$
2,179

 
$
2,476

Contract costs
 
13,491

 

Deferred costs
 
8,988

 
9,377

Strategic investments
 
10,672

 
10,672

Other assets
 
$
35,330

 
$
22,525


25



The Company’s other assets includes a strategic equity investment in a privately-held company. The strategic investment is a non-marketable equity security, in which the Company does not have a controlling interest or the ability to exert significant influence. This investment does not have a readily determinable market value. The Company records this strategic investment at cost less impairment and adjusts cost for subsequent observable price changes. As of January 31, 2019 and July 31, 2018, there were no changes in the investment’s carrying value of $10.7 million.
Goodwill and Intangible Assets
Changes in the carrying amount of goodwill during the six months ended January 31, 2019 was as follows (in thousands):
Goodwill, July 31, 2018
$
340,877

Changes in carrying value

Goodwill, January 31, 2019
$
340,877


The Company’s intangible assets are amortized over their estimated useful lives. Intangible assets consist of the following (in thousands):
 
 
 
January 31, 2019
 
July 31, 2018
 
Weighted-Average Useful Life (in years)
 
Cost
 
Accumulated Amortization
 
Net Book Value
 
Cost
 
Accumulated Amortization
 
Net Book Value
Intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Acquired technology
4.5
 
$
93,600

 
$
44,079

 
$
49,521

 
$
93,600

 
$
34,189

 
$
59,411

Customer contracts and related relationships
5.9
 
35,700

 
9,600

 
26,100

 
35,700

 
6,633

 
29,067

Partner relationships
9.0
 
200

 
63