false2020Q10001528396--07-311,3191,441P3Y10101010three yearsTerm licenses generally have a two-year initial term with a customer option to renew on an annual basis after the initial term. The related maintenance for term licenses follow 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 a period of approximately one year. The Company’s subscription periods are generally three to five years. 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 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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________________________________
FORM 10-Q
______________________________________________________________
(Mark one)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 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)
 ______________________________________________________________
Delaware36-4468504
(State or other jurisdiction of
Incorporation or organization)
(I.R.S. Employer
Identification No.)
2850 S. Delaware St., Suite 400
San Mateo, California
94403
(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)
 ______________________________________________________________

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.0001 par valueGWRENew York Stock Exchange

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     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      No 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 


Table of Contents
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller 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 
On November 30, 2019, the registrant had 82,579,682 shares of common stock issued and outstanding.


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Guidewire Software, Inc.
Index


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



Table of Contents
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.”





Table of Contents
PART I – Financial Information
 
ITEM 1.Financial Statements (unaudited)
GUIDEWIRE SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands)
 
October 31,
2019
July 31,
2019
ASSETS
CURRENT ASSETS:
Cash and cash equivalents$179,089  $254,101  
Short-term investments832,127  870,136  
Accounts receivable, net of allowances of $1,319 and $1,441, respectively79,480  138,443  
Unbilled accounts receivable, net59,778  36,728  
Prepaid expenses and other current assets39,251  35,566  
Total current assets1,189,725  1,334,974  
Long-term investments300,797  213,524  
Unbilled accounts receivable, net9,428  9,375  
Property and equipment, net67,440  65,809  
Operating lease assets90,673  —  
Intangible assets, net59,375  66,542  
Goodwill340,877  340,877  
Deferred tax assets, net97,387  90,308  
Other assets43,322  45,554  
TOTAL ASSETS$2,199,024  $2,166,963  
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable$25,666  $34,255  
Accrued employee compensation33,494  73,365  
Deferred revenue, net85,845  108,304  
Other current liabilities19,681  16,348  
Total current liabilities164,686  232,272  
Lease liabilities105,624  —  
Convertible senior notes, net320,477  317,322  
Deferred revenue, net21,277  23,527  
Other liabilities1,435  19,641  
Total liabilities613,499  592,762  
STOCKHOLDERS’ EQUITY:
Common stock8  8  
Additional paid-in capital1,417,037  1,391,904  
Accumulated other comprehensive loss(6,683) (7,758) 
Retained earnings175,163  190,047  
Total stockholders’ equity1,585,525  1,574,201  
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY$2,199,024  $2,166,963  
See accompanying Notes to Condensed Consolidated Financial Statements.
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GUIDEWIRE SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands except shares and per share amounts)
 
 Three Months Ended October 31,
 20192018
Revenue:
License and subscription$82,423  $94,680  
Maintenance20,971  21,003  
Services53,616  64,572  
Total revenue157,010  180,255  
Cost of revenue:
License and subscription23,796  13,330  
Maintenance3,694  3,868  
Services53,366  64,410  
Total cost of revenue80,856  81,608  
Gross profit:
License and subscription58,627  81,350  
Maintenance17,277  17,135  
Services250  162  
Total gross profit76,154  98,647  
Operating expenses:
Research and development46,496  45,496  
Sales and marketing33,016  32,319  
General and administrative21,239  18,345  
Total operating expenses100,751  96,160  
Income (loss) from operations(24,597) 2,487  
Interest income7,636  6,851  
Interest expense(4,429) (4,244) 
Other income (expense), net(251) (1,489) 
Income (loss) before provision for income taxes(21,641) 3,605  
Benefit from income taxes(6,650) (2,704) 
Net income (loss)$(14,991) $6,309  
Net income (loss) per share:
Basic$(0.18) $0.08  
Diluted$(0.18) $0.08  
Shares used in computing net income (loss) per share:
Basic82,360,891  80,821,227  
Diluted82,360,891  82,209,988  

See accompanying Notes to Condensed Consolidated Financial Statements.
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GUIDEWIRE SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited, in thousands)

 Three Months Ended October 31,
 20192018
Net income (loss)$(14,991) $6,309  
Other comprehensive income (loss):
Foreign currency translation adjustments133  (812) 
Unrealized gains (losses) on available-for-sale securities1,331  (200) 
Tax benefit (expense) on unrealized gains (losses) on available-for-sale securities(328) 47  
Reclassification adjustment for realized gains (losses) included in net income (loss)46    
Total other comprehensive income (loss)1,182  (965) 
Comprehensive income (loss)$(13,809) $5,344  

See accompanying Notes to Condensed Consolidated Financial Statements
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GUIDEWIRE SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(unaudited, in thousands except share amounts)

 Common stockAdditional
paid-in
capital
Accumulated
other
comprehensive income (loss)
Retained EarningsTotal
Stockholders’
Equity
 SharesAmount
Balance as of July 31, 201982,140,883  $8  $1,391,904  $(7,758) $190,047  $1,574,201  
Net loss—  —  —  —  (14,991) (14,991) 
Issuance of common stock upon exercise of stock options21,698  —  368  —  —  368  
Issuance of common stock upon vesting of Restricted Stock Units (“RSUs”)411,825  —  —  —  —    
Stock-based compensation—  —  24,765  —  —  24,765  
Foreign currency translation adjustment—  —  —  133  —  133  
Unrealized gain on available-for-sale securities, net of tax—  —  —  1,003  —  1,003  
Reclassification adjustment for realized gain on available-for-sale securities, included in net loss—  —  —  46  —  46  
Adoption of Accounting Standards Update ("ASU") 2018-02—  —  —  (107) 107    
Balance as of October 31, 201982,574,406  $8  $1,417,037  $(6,683) $175,163  $1,585,525  

 Common stockAdditional
paid-in
capital
Accumulated
other
comprehensive income (loss)
Retained EarningsTotal
Stockholders’
Equity
 SharesAmount
Balance as of July 31, 201880,611,698  $8  $1,296,380  $(7,748) $124,976  $1,413,616  
Net income—  —  —  —  6,309  6,309  
Issuance of common stock upon exercise of stock options74,698  —  689  —  —  689  
Issuance of common stock upon vesting of RSUs372,079  —  —  —  —    
Stock-based compensation—  —  23,210  —  —  23,210  
Cancellation of common stock issued as part of Cyence acquisition(48,968) —  —  —  —    
Foreign currency translation adjustment—  —  —  (812) —  (812) 
Unrealized loss on available-for-sale securities, net of tax—  —  —  (153) —  (153) 
Adoption of new accounting standard (Topic 606)—  —  —  —  44,339  44,339  
Balance as of October 31, 201881,009,507  $8  $1,320,279  $(8,713) $175,624  $1,487,198  
See accompanying Notes to Condensed Consolidated Financial Statements.

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GUIDEWIRE SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
 Three Months Ended October 31,
 20192018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)$(14,991) $6,309  
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization10,886  9,652  
Amortization of debt discount and issuance costs3,156  2,986  
Stock-based compensation24,558  23,335  
Charges to bad debt and revenue reserves357  238  
Deferred income tax(7,375) (3,382) 
Accretion of discount on available-for-sale securities, net(1,360) (1,790) 
Other non-cash items affecting net income (loss)  374  
Changes in operating assets and liabilities:
Accounts receivable58,567  28,200  
Unbilled accounts receivable(23,103) (25,661) 
Prepaid expenses and other assets(1,446) 3,898  
Operating lease assets2,340  —  
Accounts payable(3,009) (7,931) 
Accrued employee compensation(39,780) (29,048) 
Deferred revenue(24,709) (32,736) 
Lease liabilities285  —  
Other liabilities(2,514) (1,691) 
Net cash used in operating activities(18,138) (27,247) 
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale securities(406,762) (253,469) 
Sales and maturities of available-for-sale securities360,237  238,389  
Purchases of property and equipment(9,625) (2,945) 
Capitalized software development costs(1,346) (459) 
Net cash used in investing activities(57,496) (18,484) 
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock upon exercise of stock options368  689  
Net cash provided by financing activities368  689  
Effect of foreign exchange rate changes on cash and cash equivalents254  (776) 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS(75,012) (45,818) 
CASH AND CASH EQUIVALENTS—Beginning of period254,101  437,140  
CASH AND CASH EQUIVALENTS—End of period$179,089  $391,322  
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for income taxes, net of tax refunds$1,061  $853  
Accruals for purchase of property and equipment$5,167  $1,591  
Accruals for capitalized software costs$95  $22  

See accompanying Notes to Condensed Consolidated Financial Statements.
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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 an industry platform, which combines software, services, and a partner ecosystem to enable its customers to run, differentiate, and grow their business. The Company's software products and solutions support core insurance operations, provide insights and enable smarter decision-making, and support digital engagement with customers and agents across the insurance life-cycle. The Company and its system integrator partners provide professional services to implement the Company's software, and the Company offers post-production software support. 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, 2019, as amended by the Company's Annual Report on Form 10-K/A for the fiscal year ended July 31, 2019 (collectively, the "Annual Report on Form 10-K"). 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, except for changes to operating lease recognition resulting from the adoption of ASU No. 2016-02, “Leases”, Accounting Standards Codification 842 ("ASC 842").
Immaterial Revisions to Interim Condensed Consolidated Financial Statements
On June 3, 2019, the Company filed Amendment No. 1 to its Annual Report on Form 10-K for the fiscal year ended July 31, 2018 (the “2018 Form 10-K/A”). In addition to the correction of errors primarily related to a misapplication of the vendor specific objective evidence ("VSOE") provisions of the prior revenue recognition guidance applicable to certain customer contracts under ASC 605, the Company also corrected the previously filed consolidated financial statements for the year ended July 31, 2018 for errors related to professional services arrangements (the “other corrections”) that were deemed immaterial when they were originally identified. The other corrections resulted in immaterial revisions to professional services revenue, cost of revenue - services, and related tax and balance sheet items in the interim condensed consolidated financial statements as of and for the period ended October 31, 2018, which are presented herein as revised.
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 and revenue reserves, 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
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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 of the recording entity are presented 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.
Investments
Management determines the appropriate classification of investments at the time of purchase based upon management’s intent with regard to such investments. All investments in the periods presented 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) in the accompanying condensed consolidated balance sheets.

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
Equipment and machinery
3 to 5 years
Furniture and fixtures 5 years
Leasehold improvements Shorter of 10 years or remaining lease term
Software Development Costs
Certain development costs related to software delivered to customers ("self-managed software") 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 self-managed software have been charged to research and development expense in the accompanying condensed consolidated statements of operations as incurred.

For qualifying costs incurred for computer software developed for internal use, the Company begins to capitalize 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.
Leases
On August 1, 2019, the Company adopted ASC 842 using the modified retrospective transition approach by applying the new standard to all leases existing at the date of initial application. Under ASC 842, the Company determines if an arrangement is a lease at inception of the agreement. If an arrangement is determined to be a lease, an operating lease asset, also known as a
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right-of-use asset, and lease liability are recorded based on the present value of lease payments over the lease term. In connection with determining the present value of the lease payments, the Company considers only payments that are fixed and determinable at the time of commencement, including non-lease components that are fixed throughout the lease term. Variable components of the lease payments such as utilities and maintenance costs, are expensed as incurred and not included in determining the present value of the lease liability. As the Company's leases generally do not provide an implicit rate, the Company's incremental borrowing rate, calculated based on available information at the lease commencement date, is used in determining the present value of the lease payments. The Company's incremental borrowing rate is a hypothetical rate based on the Company's understanding of its credit rating. The Company's lease term used to calculate the lease liability and operating lease asset includes options to extend or terminate the lease if it is reasonably certain the Company will exercise that option. Operating lease assets also include any lease payments made prior to commencement and are recorded net of any lease incentives received. Lease expense is recognized on a straight-line basis over the lease term and is reflected in the condensed consolidated statements of operations in each of the cost of revenue and operating expense categories.

The Company also enters into agreements to sublease unoccupied office space. Any sublease payments received in excess of the straight-line rent expense related to the subleased space are recorded as an offset to operating expenses over the sublease term.

Operating leases are included in operating lease assets, other current liabilities, and lease liabilities on the 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, operating lease assets, 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 and circumstances, the 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.
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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 and 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 for the three months ended October 31, 2019 or 2018. No customer individually accounted for 10% or more of the Company’s accounts receivable as of October 31, 2019 and July 31, 2019.
Accounts Receivable and Allowance for Doubtful Accounts and Revenue Reserves
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, subscriptions to our cloud services, and implementation and other professional services arrangements. The Company accounts for revenue in accordance with Accounting Standards Codification 606, Revenue from Contracts with Customers ("ASC 606"), which the Company adopted on August 1, 2018. The Company recorded a net increase to opening retained earnings of $44.3 million as of August 1, 2018 due to the cumulative impact of adopting ASC 606 using the modified retrospective method. Refer to Note 1 to the consolidated financial statements included in the Company’s 2018 Form 10-K/A 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
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
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Performance obligations promised in a contract are identified based on the services or products that will be transferred to the customer that are both:
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
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:
Self-managed software licenses related to term or perpetual agreements;
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;
Subscription services related to the Company’s Software-as-a-Service (“SaaS”) offerings; and
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.
Self-managed 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 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.
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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
Self-managed software licenses
Self-managed 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 self-managed software licenses are made available to a customer. Consideration for self-managed 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 self-managed 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 self-managed 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 a self-managed 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 self-managed 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.
Balance Sheet Presentation

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 and revenue reserves as part of current assets on the condensed consolidated balance sheets.
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Unbilled accounts receivable, net represents 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. Under ASC 606, this balance represents contract assets. As of October 31, 2019, there was no allowance for doubtful accounts associated with unbilled accounts receivable.
Contract costs include deferred commissions and their related payroll taxes, royalties, and referral fees. The short-term portion is presented as prepaid and other current assets. 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. The long-term portion is presented as other assets.
Deferred revenue, net represents 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. The remaining deferred revenue is recorded as non-current. Under ASC 606, this balance represents 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 consolidated balance sheets.

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 excludes amounts related to professional services contracts that are on a time and materials basis from remaining performance obligations.

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 payroll taxes, 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. 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 months ended October 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
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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 differences are 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.
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 (the “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
Leases
On August 1, 2019, the Company adopted ASC 842 using the modified retrospective transition approach by applying the new standard to all leases existing at the date of initial application. Results and disclosure requirements for reporting periods beginning after August 1, 2019 are presented under ASC 842, while prior period amounts have not been adjusted and continue to be reported in accordance with our historical accounting under ASC 840, Leases ("ASC 840").
The Company elected the package of practical expedients permitted under the transition guidance, such that, for any leases that existed prior to August 1, 2019, the Company did not reassess the lease classification, whether contracts are or contain embedded leases, and the capitalization of initial direct costs. The Company also elected to combine lease and non-lease components for all leases and to keep leases with an initial term of 12 months or less off the balance sheet and recognize the associated lease payments in the condensed consolidated statement of operations on a straight-line basis over the lease term.
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Upon adoption, the Company recognized total operating lease assets of $93.0 million, with corresponding lease liabilities of $111.7 million on the condensed consolidated balance sheets. The operating lease assets include adjustments for prepayments and lease incentives. The adoption did not impact opening retained earnings.
Income Statement, Reporting Comprehensive Income (Topic 220): Reclassification of Certain Effects from Accumulated Other Comprehensive Income
In February 2018, the Financial Accounting Standard Board ("FASB") issued ASU No. 2018-02, Income Statement, Reporting Comprehensive Income (Topic 220): Reclassification of Certain Effects from Accumulated Other Comprehensive Income, which allows a reclassification of stranded tax effects from accumulated other comprehensive income to retained earnings, as a result of the Tax Act. The adoption had an immaterial impact on retained earnings.
Recent Accounting Pronouncements Not Yet Adopted
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 is in the process of evaluating the impact of adopting the new standard for its 2021 fiscal year and subsequent periods.

Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued ASU No. 2016-13 (ASU 2016-13) "Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments", which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 2016-13 replaces the existing incurred loss impairment model with an expected loss model which requires the use of forward-looking information to calculate credit loss estimates. It also eliminates the concept of other-than-temporary impairment and requires credit losses related to available-for-sale debt securities to be recorded through an allowance for credit losses rather than as a reduction in the amortized cost basis of the securities. These changes will result in earlier recognition of credit losses. ASU 2016-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019, with early adoption permitted. The Company is in the process of evaluating 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.


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2. Revenue

Disaggregation of Revenue
Revenue by revenue type and by geography is as follows (in thousands):
Three Months Ended October 31, 2019
License and subscriptionMaintenanceServicesTotal
Geography:
United States$47,386  $13,729  $37,328  $98,443  
Canada11,775  1,760  1,250  14,785  
Other Americas234  1,085  2,169  3,488  
Total Americas59,395  16,574  40,747  116,716  
United Kingdom6,413  1,207  2,314  9,934  
Other EMEA3,407  1,659  6,049  11,115  
Total EMEA9,820  2,866  8,363  21,049  
Total APAC13,208  1,531  4,506  19,245  
Total revenue$82,423  $20,971  $53,616  $157,010  


Three Months Ended October 31, 2018
License and subscriptionMaintenanceServicesTotal
Geography:
United States$38,535  $13,121  $43,439  $95,095  
Canada9,833  2,149  2,717  14,699  
Other Americas588  1,081  1,921  3,590  
Total Americas48,956  16,351  48,077  113,384  
United Kingdom8,487  1,131  2,700  12,318  
Other EMEA17,376  1,863  9,500  28,739  
Total EMEA25,863  2,994  12,200  41,057  
Total APAC19,861  1,658  4,295  25,814  
Total revenue$94,680  $21,003  $64,572  $180,255  

Revenue by major product or service type is as follows (in thousands):
Three Months Ended October 31,  
20192018
 License and subscription
Term license$54,178  $79,337  
Subscription28,196  15,343  
Perpetual license49    
 Maintenance20,971  21,003  
 Services53,616  64,572  
 Total revenue$157,010  $180,255  

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Customer Contract - Related Balance Sheet Amounts
Amounts related to customer contract-related arrangements are included on the condensed consolidated balance sheets as follows (in thousands):
July 31, 2019October 31, 2019
Unbilled accounts receivable, net$46,103  $69,206  
Contract costs, net
30,390  29,313  
Deferred revenue, net(131,831) (107,122) 

Contract costs
The current portion of contract costs in the amount of $7.2 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 $22.1 million is included in other assets on the Company’s condensed consolidated balance sheets. The Company amortized $1.4 million and $1.0 million of contract costs during the three months ended October 31, 2019 and 2018, respectively.
Deferred revenue
During the three months ended October 31, 2019, the Company recognized revenue of $32.1 million related to the Company’s deferred revenue balance reported as of July 31, 2019.
Performance Obligations
The aggregate amount of consideration allocated to performance obligations either not satisfied or partially satisfied was $380.0 million as of October 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):
October 31, 2019
Amortized CostUnrealized GainsUnrealized LossesEstimated Fair Value
U.S. Government agency securities$85,668  $59  $(7) $85,720  
Commercial paper165,218      165,218  
Corporate bonds651,550  2,528  (4) 654,074  
U.S. Government bonds148,035  279  (1) 148,313