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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 January 31, 2021
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. 


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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 February 26, 2021, the registrant had 83,739,231 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 2.
Item 6.



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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, including the migration of our existing term license customers to subscription services;
trends in and timing of future sales, including the mix between license and subscription revenue and seasonality;
our competitive environment and changes thereto;
competitive attributes of our software applications and delivery models;
the timing and number of professional services engagements and the billing rates and utilization of our professional services employees and contractors;
challenges to further increase sales both in the United States and internationally;
our research and development and cloud operations 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, including costs related to operating, securing and enhancing our subscription services;
our provision for tax liabilities, judgments related to revenue recognition, and other critical accounting estimates;
the timing and amount of any share repurchases by us;
the impact of new regulations and laws, including tax laws and accounting standards;
our exposure to market risks, including geographical and political events that may negatively impact our customers, partners, and vendors or our business operations;
the effect of uncertainties related to the global COVID-19 pandemic on U.S. and global economies, our business, our employees, results of operations, financial condition, demand for our products, sales and implementation cycles, and the health of our customers' and partners' businesses;
our ability to successfully defend litigation brought against us; 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.

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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)


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GUIDEWIRE SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands)
 
January 31,
2021
July 31,
2020
ASSETS
CURRENT ASSETS:
Cash and cash equivalents$331,387 $366,969 
Short-term investments814,845 766,527 
Accounts receivable, net of allowances of $1,392 and $1,276, respectively
92,581 114,242 
Unbilled accounts receivable, net81,591 49,491 
Prepaid expenses and other current assets48,560 45,989 
Total current assets1,368,964 1,343,218 
Long-term investments228,795 300,771 
Unbilled accounts receivable, net34,695 34,737 
Property and equipment, net73,130 65,235 
Operating lease assets103,706 103,797 
Intangible assets, net27,061 39,708 
Goodwill340,877 340,877 
Deferred tax assets, net122,659 101,565 
Other assets35,844 34,944 
TOTAL ASSETS$2,335,731 $2,364,852 
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable$23,593 $22,634 
Accrued employee compensation64,249 58,547 
Deferred revenue, net97,510 118,311 
Other current liabilities25,371 25,706 
Total current liabilities210,723 225,198 
Lease liabilities121,770 119,408 
Convertible senior notes, net336,922 330,208 
Deferred revenue, net11,075 14,685 
Other liabilities10,578 18,585 
Total liabilities691,068 708,084 
STOCKHOLDERS’ EQUITY:
Common stock8 8 
Additional paid-in capital1,559,473 1,499,050 
Accumulated other comprehensive income (loss)(5,023)(5,246)
Retained earnings90,205 162,956 
Total stockholders’ equity1,644,663 1,656,768 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY$2,335,731 $2,364,852 
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 January 31,Six Months Ended January 31,
 2021202020212020
Revenue:
Subscription and support$59,563 $49,550 $117,529 $98,581 
License77,912 76,520 143,195 130,883 
Services42,587 47,388 89,140 101,004 
Total revenue180,062 173,458 349,864 330,468 
Cost of revenue:
Subscription and support40,158 28,212 77,164 53,145 
License2,834 2,904 5,771 5,461 
Services48,910 52,480 99,934 105,846 
Total cost of revenue91,902 83,596 182,869 164,452 
Gross profit:
Subscription and support19,405 21,338 40,365 45,436 
License75,078 73,616 137,424 125,422 
Services(6,323)(5,092)(10,794)(4,842)
Total gross profit88,160 89,862 166,995 166,016 
Operating expenses:
Research and development53,194 49,954 105,809 96,450 
Sales and marketing39,216 37,339 75,860 70,355 
General and administrative22,820 20,599 44,000 41,838 
Total operating expenses115,230 107,892 225,669 208,643 
Income (loss) from operations(27,070)(18,030)(58,674)(42,627)
Interest income2,015 6,958 4,804 14,594 
Interest expense(4,651)(4,462)(9,271)(8,891)
Other income (expense), net6,805 (182)9,373 (433)
Income (loss) before provision for (benefit from) income taxes(22,901)(15,716)(53,768)(37,357)
Provision for (benefit from) income taxes(14,249)4,228 (24,926)(2,422)
Net income (loss)$(8,652)$(19,944)$(28,842)$(34,935)
Net income (loss) per share:
Basic$(0.10)$(0.24)$(0.34)$(0.42)
Diluted$(0.10)$(0.24)$(0.34)$(0.42)
Shares used in computing net income (loss) per share:
Basic83,830,624 82,725,641 83,737,889 82,543,267 
Diluted83,830,624 82,725,641 83,737,889 82,543,267 

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 January 31,Six Months Ended January 31,
 2021202020212020
Net income (loss)(8,652)(19,944)(28,842)(34,935)
Other comprehensive income (loss):
Foreign currency translation adjustments2,726 (422)2,032 (289)
Unrealized gains (losses) on available-for-sale securities(1,210)(169)(3,049)1,162 
Tax benefit (expense) on unrealized gains (losses) on available-for-sale securities214 48 573 (280)
Reclassification adjustment for realized gains (losses) included in net income (loss)320 (33)667 13 
Total other comprehensive income (loss)2,050 (576)223 606 
Comprehensive income (loss)$(6,602)$(20,520)$(28,619)$(34,329)

See accompanying Notes to Condensed Consolidated Financial Statements
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GUIDEWIRE SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS 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, 202083,461,925 $8 $1,499,050 $(5,246)$162,956 $1,656,768 
Net income (loss)— — — — (20,190)(20,190)
Issuance of common stock upon exercise of stock options39,169 — 1,716 — — 1,716 
Issuance of common stock upon vesting of Restricted Stock Units (“RSUs”)339,759 — — — —  
Stock-based compensation— — 28,394 — — 28,394 
Repurchase and retirement of common stock(48,997)— — — (5,000)(5,000)
Foreign currency translation adjustment— — — (694)— (694)
Unrealized gain (loss) on available-for-sale securities, net of tax— — — (1,480)— (1,480)
Reclassification adjustment for realized gain (loss) on available-for-sale securities, included in net income (loss)— — — 347 — 347 
Balance as of October 31, 202083,791,856 $8 $1,529,160 $(7,073)$137,766 $1,659,861 
Net income (loss)— — — — (8,652)(8,652)
Issuance of common stock upon exercise of stock options9,415 — 104 — — 104 
Issuance of common stock upon vesting of RSUs283,454 — — — —  
Stock-based compensation— — 30,209 — — 30,209 
Repurchase and retirement of common stock(309,562)— — — (38,909)(38,909)
Foreign currency translation adjustment— — — 2,726 — 2,726 
Unrealized gain (loss) on available-for-sale securities, net of tax— — — (996)— (996)
Reclassification adjustment for realized gain (loss) on available-for-sale securities, included in net income (loss)— — — 320 — 320 
Balance as of January 31, 202183,775,163 $8 $1,559,473 $(5,023)$90,205 $1,644,663 


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 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 income ( loss)— — — — (14,991)(14,991)
Issuance of common stock upon exercise of stock options21,698 — 368 — — 368 
Issuance of common stock upon vesting of RSUs411,825 — — — —  
Stock-based compensation— — 24,765 — — 24,765 
Foreign currency translation adjustment— — — 133 — 133 
Unrealized gain (loss) on available-for-sale securities, net of tax— — — 1,003 — 1,003 
Reclassification adjustment for realized gain (loss) on available-for-sale securities, included in net income (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 
Net income (loss)— — — — (19,944)(19,944)
Issuance of common stock upon exercise of stock options25,155 — 872 — — 872 
Issuance of common stock upon vesting of RSUs272,821 — — — —  
Stock-based compensation— — 26,688 — — 26,688 
Foreign currency translation adjustment— — — (422)— (422)
Unrealized gain (loss) on available-for-sale securities, net of tax— — — (121)— (121)
Reclassification adjustment for realized gain (loss) on available-for-sale securities, included in net income (loss)— — — (33)— (33)
Balance as of January 31, 202082,872,382 $8 $1,444,597 $(7,259)$155,219 $1,592,565 
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)
 Six Months Ended January 31,
 20212020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)$(28,842)$(34,935)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization20,971 21,644 
Amortization of debt discount and issuance costs6,715 6,354 
Stock-based compensation57,980 51,294 
Changes to allowance for credit losses and revenue reserves118 878 
Deferred income tax(20,294)(4,361)
Amortization of premium (accretion of discount) on available-for-sale securities, net3,128 (2,012)
Other non-cash items affecting net income (loss)800 572 
Changes in operating assets and liabilities:
Accounts receivable22,368 36,259 
Unbilled accounts receivable(32,058)(17,018)
Prepaid expenses and other assets1,914 (3,527)
Operating lease assets91 4,493 
Accounts payable(4,312)(4,032)
Accrued employee compensation3,844 (28,794)
Deferred revenue(24,411)(23,583)
Lease liabilities2,669 241 
Other liabilities(13,059)(2,137)
Net cash provided by (used in) operating activities(2,378)1,336 
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale securities(523,601)(601,403)
Sales of available-for-sale securities85,553 67,942 
Maturities of available-for-sale securities456,198 508,807 
Purchases of property and equipment(5,517)(11,254)
Capitalized software development costs(4,884)(2,210)
Acquisition of strategic investments(2,000) 
Net cash provided by (used in) investing activities5,749 (38,118)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock upon exercise of stock options1,820 1,239 
Repurchase and retirement of common stock(42,679) 
Net cash provided by (used in) financing activities(40,859)1,239 
Effect of foreign exchange rate changes on cash and cash equivalents1,906 (95)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS(35,582)(35,638)
CASH AND CASH EQUIVALENTS—Beginning of period366,969 254,101 
CASH AND CASH EQUIVALENTS—End of period$331,387 $218,463 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest$2,500 $2,500 
Cash paid for income taxes, net of tax refunds$1,603 $2,668 
Accruals for purchase of property and equipment$5,127 $6,516 
Accruals for capitalized software costs$344 $37 
Accrual for shares repurchased$1,230 $ 

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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 a technology platform, which combines core operations, digital engagement, analytics, and artificial intelligence applications. 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 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 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, 2020. 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.
Reclassification
Beginning with the Annual Report on Form 10-K for fiscal year 2020, the Company changed the presentation in the consolidated statements of operations for revenue and cost of revenue to include subtotals for "subscription and support," "license," and "services". The Company's previous presentation included subtotals for "license and subscription," "maintenance" (now referred to as "support"), and "services". Accordingly, prior period amounts have been reclassified to conform to the current period presentation in the Company's condensed consolidated financial statements and the accompanying notes.
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, accounts receivable allowances, valuation allowance for deferred tax assets, stock-based compensation, annual bonus attainment, income tax uncertainties, fair value of convertible senior notes and investments, valuation of goodwill and intangible assets, fair value of acquired assets and assumed liabilities, 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 of the recording entity are included in other income (expense) in the condensed consolidated statements of operations.
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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. Investments are recorded at fair value with unrealized gains and losses, net of taxes, generally included in accumulated other comprehensive income (loss). Unrealized losses related to the credit worthiness of an investment, if any, are recorded in other income (expense), net on the condensed consolidated statements of operations.

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 condensed consolidated statements of operations as incurred.

For qualifying costs incurred for computer software developed for internal use, which includes software used to deliver subscription services exclusively through the cloud, the Company begins to capitalize costs 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 lives 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 in the condensed consolidated statements of operations. Capitalized software development costs are recorded in property and equipment in the condensed consolidated balance sheets.
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Leases
On August 1, 2019, the Company adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic 842: Leases (“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 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 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 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 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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Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash, cash equivalents, investments, accounts receivable and unbilled 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 in the condensed consolidated balance sheets are in excess of amounts that are insured by the Federal Deposit Insurance Corporation.
No customer accounted for 10% or more of the Company’s revenue for the three and six months ended January 31, 2021 or 2020. No customer accounted for 10% or more of the Company's accounts receivable as of January 31, 2021 or July 31, 2020.
Accounts Receivable and Allowances
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 credit losses 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. Credit losses are recorded in general and administrative expense while billing and other revenue adjustments are recorded against the corresponding revenue financial statement line item in the condensed consolidated statements of operations.
Revenue Recognition
The Company’s revenue is derived from contracts with customers. The majority of the Company’s revenue is derived from subscriptions to its cloud services, licensing arrangements for its software, 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 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.
Contracts may be modified to account for changes in contract scope or price. The Company considers contract modifications to exist when the modification either creates new rights or obligations or changes the existing enforceable rights and obligations of either party. Contract modifications for services and products that are distinct from the existing contract and are priced commensurate with their standalone selling price are treated as separate contracts, and are accounted for prospectively. Contract modifications for services and products that are distinct but are not priced commensurate with their standalone selling price or are not distinct from the existing contract may affect the initial transaction price or the allocation of the transaction price to the performance obligations in the contract. In such cases, revenue recognized may be adjusted.
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 service or product is separately identifiable from other promises in the contract.
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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 generally represent the performance obligations of the Company:
i.Subscription services related to the Company's Software-as-a-Service ("SaaS") offerings, including hosting;
ii.Support activities that consist of email and phone support, bug fixes, and unspecified software updates and upgrades released when, and if, available during the support term;
iii.Self-managed software licenses related to term or perpetual agreements; and
iv.Services related to the implementation and configuration of the Company’s services and products, reimbursable travel, and training.
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. Term licenses generally have a two-year initial term with a customer option to renew on an annual basis after the initial term. In certain circumstances, the Company will enter into term licenses with an initial term of more than two years or a renewal period longer than one year. Support for term licenses follows the same contract periods. 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. Consideration may vary due to discounts, incentives, and potential service level credits or contractual penalties. 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 elected the practical expedient to evaluate whether a significant financing component exists when the contract term is greater than one year and 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 and the Company's typical subscription services are generally billed in advance of providing the services.
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 support, implementation services or training services. Additionally, as customers enter into a subscription agreement to migrate from an existing term license agreement, customers may be under contract for self-managed licenses and support, in addition to subscription services, for a period of time, which may require an allocation of the transaction price to each performance obligation. Some of the Company’s performance obligations, such as support, 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 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, support activities, and professional service arrangements comprise the majority of distinct performance obligations that are satisfied over a period of time.
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 arrangements are generally three to five years in duration. Consideration from subscription arrangements is typically billed in advance on an annual basis over the contract period.
Revenue from support activities associated with self-managed licenses is a stand-ready obligation, which is generally 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 support activities is typically billed in advance on an annual basis. The Company’s support activities are consistently priced as a percentage of the associated self-managed software license.
Revenue from professional service arrangements is recognized over the 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 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 allowances as part of current assets in the condensed consolidated balance sheets.
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 self-managed software licenses to customers up-front, but invoices customers annually over the term of the license. 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. Unbilled accounts receivable is evaluated for credit losses based upon the expected collectability of future accounts receivable, customer payment history, global economic conditions, and ongoing credit evaluations of
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customers. Unbilled accounts receivable is presented net of allowance for credit losses, if applicable, in the condensed consolidated balance sheets. This balance represents contract assets.
Contract costs include customer acquisition costs, which consist primarily of sales commissions paid to sales personnel and their related payroll taxes and referral fees paid to third-parties, and costs to fulfill a contract, which consist primarily of royalties payable to third-party software providers that support both the Company’s software offerings and support services. 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 services or products have not been transferred to the customer. 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. 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, in 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 the expected amortization period is greater than one year. 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, 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 in the condensed consolidated statement of operations.
Warranties
The Company generally provides a warranty for its software products and services to its customers for periods ranging from three to twelve months. The Company's software products are generally warranted to be free of defects in materials and workmanship under normal use and to substantially perform as described in published documentation. The Company's services are generally warranted to be performed in a professional manner and to materially conform to the specifications set forth in the related customer contract. In the event there is a failure of such warranties, the Company generally will correct the problem or provide a reasonable workaround or replacement product. If the Company cannot correct the problem or provide a workaround or replacement product, then the customer's remedy is generally limited to a refund of the fees paid for the nonconforming product or services. Warranty expense has been insignificant to date.
Advertising Costs
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Advertising costs are expensed as incurred and amounts incurred were not material during the three and six months ended January 31, 2021 and 2020.
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”) over a specified performance period or periods and, in select cases, are 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 and a portion of the expense may fluctuate depending on changing estimates of the achievement of the performance conditions.
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 changing estimates of the achievement of the performance conditions. All TSR PSUs 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 based on the differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities, 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
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, which requires implementation costs incurred in cloud computing arrangements to be deferred and recognized over the term of the
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arrangement, if those costs would be capitalized in a software licensing arrangement under the internal-use software guidance in ASC 350-40. On August 1, 2020 the Company adopted this ASU prospectively. The adoption of this standard did not have a material impact on the condensed consolidated financial statements and related disclosures.

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. On August 1, 2020 the Company adopted this ASU using the modified retrospective method. The adoption of this standard did not have a material impact on the condensed consolidated financial statements and related disclosures.
Recent Accounting Pronouncements Not Yet Adopted
Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity
In August 2020, the FASB issued ASU No. 2020-06, “Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity”, which simplifies the accounting for convertible instruments by eliminating the requirement to separate embedded conversion features from the host contract when the conversion features are not required to be accounted for as derivatives under Topic 815, Derivatives and Hedging, or that do not result in substantial premiums accounted for as paid-in capital. By removing the separation model, a convertible debt instrument will be reported as a single liability instrument with no separate accounting for embedded conversion features. This new standard also removes certain settlement conditions that are required for contracts to qualify for equity classification and simplifies the diluted earnings per share calculations by requiring that an entity use the if-converted method and that the effect of potential share settlement be included in diluted earnings per share calculations. This new standard will be effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. The Company is currently assessing the impact of adopting this standard on the consolidated financial statements, however, it believes the requirement to use the if-converted method instead of the treasury stock method of accounting for the shares issuable upon conversion of the Convertible Senior Notes, could adversely affect its diluted earnings per share.
Other Accounting Pronouncements
Other recent accounting pronouncements that will be applicable to the Company are not expected to have a material impact on its 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 January 31, 2021
Subscription and supportLicenseServicesTotal
Geography:
United States$39,865 $39,438 $28,295 $107,598 
Canada7,862 8,606 2,653 19,121 
Other Americas1,112 188 1,517 2,817 
Total Americas48,839 48,232 32,465 129,536 
United Kingdom1,650 6,449 848 8,947 
Other EMEA4,694 11,282 6,691 22,667 
Total EMEA6,344 17,731 7,539 31,614 
Total APAC4,380 11,949 2,583 18,912 
Total revenue$59,563 $77,912 $42,587 $180,062 

Three Months Ended January 31, 2020
Subscription and supportLicenseServicesTotal
Geography:
United States$33,679 $37,987 $34,731 $106,397 
Canada4,511 8,237 1,468 14,216 
Other Americas1,133 2,180 2,453 5,766 
Total Americas39,323 48,404 38,652 126,379 
United Kingdom1,715 9,444 1,270 12,429 
Other EMEA4,395 6,480 3,897 14,772 
Total EMEA6,110 15,924 5,167 27,201 
Total APAC4,117 12,192 3,569 19,878 
Total revenue$49,550 $76,520 $47,388 $173,458 


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Six Months Ended January 31, 2021
Subscription and supportLicenseServicesTotal
Geography:
United States$78,878 $80,415 $60,655 $219,948 
Canada15,004 19,359 3,790 38,153 
Other Americas2,225 423 3,363 6,011 
Total Americas96,107 100,197 67,808 264,112 
United Kingdom3,680 14,748 2,163 20,591 
Other EMEA9,814 12,085 13,669 35,568 
Total EMEA