GUIDEWIRE SOFTWARE, INC. Management’s Discussion and Analysis of the Financial Position and Results of Operations (Form 10-Q)

The following discussion and analysis should be read in conjunction with our
condensed consolidated financial statements and the related notes thereto
included elsewhere in this Quarterly Report on Form 10-Q and the Risk Factors
included in Item 1A of Part II of this Quarterly Report on Form 10-Q. All
information presented herein is based on our fiscal calendar. Unless otherwise
stated, references in this report to particular years or quarters refer to our
fiscal years ended in July and the associated quarters of those fiscal years. We
assume no obligation to revise or update any forward-looking statements for any
reason, except as required by law.
Overview
Guidewire delivers a leading platform that P&C insurers trust to engage,
innovate, and grow efficiently. Guidewire's platform combines core operations,
digital engagement, analytics, and artificial intelligence ("AI") applications
delivered as a cloud service or self-managed software. As a partner to our
customers, we continually evolve to enable their success and assist them in
navigating a rapidly changing insurance market.
Our core operational services and products are InsuranceSuite via Guidewire
Cloud, InsuranceNow, and InsuranceSuite for self-managed installations. These
services and products are transactional systems of record that support the
entire insurance lifecycle, including insurance product definition,
distribution, underwriting, policyholder services, and claims management.
InsuranceSuite via Guidewire Cloud is a highly configurable and scalable
product, delivered as a service and primarily comprised of three core
applications (PolicyCenter, BillingCenter, and ClaimCenter) that can be
subscribed to separately or together. These applications are built on and
optimized for our Guidewire Cloud Platform ("GWCP") architecture and leverage
our in-house Guidewire Cloud operations team. InsuranceSuite via Guidewire Cloud
is designed to support multiple releases each year to ensure that cloud
customers remain on the latest version and gain fast access to our innovation
efforts. Additionally, InsuranceSuite via Guidewire Cloud embeds digital and
analytics capabilities natively into our platform. Most new sales and
implementations are for InsuranceSuite via Guidewire Cloud. InsuranceNow is a
complete, cloud-based application that offers policy, billing, and claims
management functionality to insurers that have limited internal information
technology resources. InsuranceSuite for self-managed installations is comprised
of three core applications (PolicyCenter, BillingCenter, and ClaimCenter) that
can be licensed separately or together and can be deployed and updated by our
customers and their implementation partners. Our digital engagement applications
enable digital sales, omni-channel service, and enhanced claims experiences for
policyholders, agents, vendor partners, and field personnel. Our Analytics and
AI offerings enable insurers to manage data more effectively, gain insights into
their business, drive operational efficiencies, and underwrite new and evolving
risks. To support P&C insurers globally, we have localized, and will continue to
localize, our platform for use in a variety of international regulatory,
language, and currency environments.

Our customers range from some of the largest global insurance companies or their
subsidiaries to predominantly national or local insurers that serve specific
states and/or regions. Our customer engagement is led by our direct sales team
and supported by our system integrator ("SI") partners. We maintain and continue
to grow our sales and marketing efforts globally, and maintain regional sales
centers throughout the world.

Because our platform is critical to our new and existing customers' businesses,
their decision-making and product evaluation process is long, which results in
an extended sales cycle. These evaluation periods can extend further if a
customer purchases multiple products or assesses the benefits of a cloud-based
subscription. Sales to new customers also involve extensive customer due
diligence and reference checks. Our sales cycle has lengthened due to the
COVID-19 pandemic. The success of our sales efforts relies on continued
improvements and enhancements to our current services and products, the
introduction of new services and products, efficient operation of our cloud
infrastructure, continued development of relevant local content and automated
tools for updating content, and successful implementations.

We sell our cloud-delivered offerings through subscription services and our
self-managed products through term licenses. We generally price our services and
products based on the amount of DWP that will be managed by our platform. Our
subscription, term license, and support fees are typically invoiced annually in
advance. Subscription services are generally sold with an initial term of
between three and five years with optional annual renewals commencing after the
initial term. Subscription revenue is recognized on a ratable basis over the
committed term, once all revenue recognition criteria is met including providing
access to the service. Term licenses are primarily sold with an initial two-year
committed term with optional annual renewals commencing after the initial term.
We may enter into term license arrangements with our customers that have an
initial term of more than two years or may renew license arrangements for longer
than one year. A small portion of our revenue is derived from perpetual
licenses. Term and perpetual license revenue are typically recognized when
software is made available to the customer, provided that all other revenue
recognition criteria have been met. Our support revenue is generally recognized
ratably over the committed support term of the licensed software. Our support
fees are typically priced as a fixed percentage of the associated license fees.
We also offer professional services, both directly and through SI partners, to
help our customers deploy, migrate, and utilize our platform, services, and
products. Substantially all of our services revenue is billed monthly on a time
and materials basis.
Over the past few years, we have primarily been entering into cloud-based
subscription arrangements with our new and existing customers and we anticipate
that subscription arrangements will be a majority of annual new sales going
forward. As this sales model
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matures, we may decide to change certain contract terms in new arrangements to
remain competitive or otherwise meet market demands.
To extend our technology leadership in the global market and to drive operating
efficiency, we continue to invest in product development and cloud operations to
enhance and improve our current services and products, introduce new services
and products, and advance our ability to securely and cost-effectively deliver
our services in the cloud. Continued investment is critical as we seek to assist
our customers in achieving their technology goals, maintain our competitive
advantage, grow our revenue, expand internationally, and meet evolving customer
demands. In certain cases, we may also acquire skills and technologies to manage
our cloud infrastructure and accelerate our time to market for new products,
solutions, and upgrades.
Our track record of success with customers and their implementations is central
to maintaining our strong competitive position. We rely on our global services
team and SI partners to ensure that teams with the right combination of product
and language skills are used in the most efficient way to meet our customers'
implementation and migration needs. We have extensive relationships with SI,
consulting, technology, and other industry partners. Our network of partners has
expanded as interest in and adoption of our platform has grown. We encourage our
partners to co-market, pursue joint sales initiatives, and drive broader
adoption of our technology, helping us grow our business more efficiently and
enabling us to focus our resources on continued innovation and further
enhancement of our solutions.
We work closely with our network of third-party SI partners to facilitate new
sales and implementations of both our subscription services and self-managed
products. Our partnership with leading SI partners allows us to increase
efficiency and scale while reducing customer implementation and migration costs.
We continue to invest time and resources to increase the number of qualified
consultants employed by our SI partners, develop relationships with new partners
in existing and new markets, and ensure that all SI partners are qualified to
assist with implementing our services and products. We believe this model will
continue to serve us well, and we intend to continue to expand our network of
partners and the number of certified consultants with whom we work so we can
leverage our SI partners more effectively, especially for future subscription
migrations and implementations.
We face a number of risks in the execution of our strategy, including risks
related to expanding to new markets, managing lengthy sales cycles, competing
effectively in the global market, relying on sales to a relatively small number
of large customers, developing new or acquiring existing services and products
successfully, migrating our business towards a subscription model with ratable
revenue recognition, increasing the overall adoption of our services and
products, and cost-effectively managing the infrastructure of our cloud-based
customers. In response to these and other risks we might face, we continue to
invest in many areas of our business, including product development, cloud
operations, implementation services and sales and marketing.
Seasonality

We have experienced seasonal variations in our license revenue and, to a lesser
extent, in our subscription revenue as a result of increased customer orders in
our fourth fiscal quarter. We generally see significantly increased orders in
our fourth fiscal quarter, which is the quarter ending July 31, due to efforts
by our sales team to achieve annual incentives. Because we recognize revenue
upfront for new term licenses and multi-year renewals compared to over time for
subscription services, changes in the mix between term license and subscription
services may impact our quarterly results. Additionally, any quarter in which a
significant multi-year term license or multi-year term license renewal or
non-renewal occurs could be impacted. For example, in the first quarter of
fiscal year 2021, we experienced license revenue growth due to a five-year term
license renewal under which revenue was recognized upfront, which overshadowed
the comparison with our second quarter of fiscal year 2021 and created a
challenging comparable period for the first quarter of fiscal year 2022.
Additionally, as subscriptions increase as a percentage of total sales, the
revenue we can recognize in the initial fiscal year of an order will be reduced,
deferred revenue will increase, and our reported revenue growth will be
adversely affected in the near term due to the ratable nature of these
arrangements. The concentration of our sales in our fiscal fourth quarter
increases this impact as the revenue impact of most fiscal fourth quarter
subscription sales will not be realized until the following fiscal year.

Our services revenue is also subject to seasonal fluctuations, though to a
lesser degree than our license revenue and subscription revenue. Our services
revenue is impacted by the number of billable days in a given fiscal quarter.
The fiscal quarter ending January 31 usually has fewer billable days due to the
impact of the Thanksgiving, Christmas, and New Year's holidays. The fiscal
quarter ending July 31 usually has fewer billable days due to the impact of
vacations taken by our services professionals. Because we pay our services
professionals the same amount throughout the year, our gross margins on our
services revenue are usually lower in these quarters. This seasonal pattern,
however, may be absent in any given year.
COVID-19 Impact
In March 2020, the World Health Organization declared the outbreak of COVID-19 a
pandemic, which has continued to spread throughout the United States and the
world and has resulted in authorities implementing numerous measures to contain
the virus, including travel bans and restrictions, quarantines, shelter-in-place
orders, and business limitations and shutdowns. While we are
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unable to accurately predict the full impact that COVID-19 will have on our
results of operations, financial condition, liquidity, and cash flows due to
numerous uncertainties, including the duration and severity of the pandemic and
containment measures and if there are any periods of increases in the number of
COVID-19 cases or future variants of the virus in areas in which we operate, our
compliance with containment measures has impacted our day-to-day operations and
could continue to disrupt our business and operations, as well as that of our
key customers, SI partners, vendors, and other counterparties, for an indefinite
period of time. To support the health and well-being of our employees,
customers, SI partners and communities, a vast majority of our employees are
working remotely. In addition, many of our existing and potential customers are
working remotely, which may continue to delay the timing of new orders and
professional services engagements in the future.
Our business and financial results since the third quarter of fiscal year 2020
have been impacted due to these disruptions, including decreases in annual
recurring revenue ("ARR") growth rates, services revenue and margins, operating
cash flow, potentially higher employee attrition, and the change in fair value
of strategic investments. ARR and revenue, especially services revenue,
continued to be impacted in fiscal year 2022 as a result of the challenges
related to our compliance with government-mandated or recommended
shelter-in-place orders in jurisdictions in which we, our customers, SI partners
and vendors operate.
Although vaccines are making progress against the COVID-19 pandemic in the
United States and certain other parts of the world where vaccinations are widely
available, the economic impact of the pandemic on our business and the
businesses of our customers, SI partners, and vendors may continue through
fiscal year 2022, if not longer. We believe that new sales activities are being
delayed, not cancelled, and implementation engagements are being rescheduled to
later periods or being completed over a longer period of time. Certain marketing
events have or will be cancelled or postponed, while others are being hosted
both in-person and virtually, like our customer conference, Connections. Our
customers may be unable to pay or may request amended payment terms for their
outstanding invoices due to the economic impacts from COVID-19, and we may need
to increase our accounts receivable allowances. A decrease in orders in a given
period could negatively affect our revenues and ARR in future periods,
particularly if experienced on a sustained basis, because a substantial
proportion of our new software subscription services orders is recognized as
revenue over time. Also, the pandemic's global economic impact could affect our
customers' DWP, which could ultimately impact our revenue as we generally price
our services and products based on the amount of DWP that will be managed by our
platform. Additionally, we may be required to record impairment related to our
operating lease assets, investments, long-lived assets, or goodwill.
In response to the pandemic, various government programs have been announced
which provide financial relief to affected businesses. As an example, the
Canadian Government enacted the Canada Emergency Wage Subsidy ("CEWS") under
their COVID-19 Economic Response Plan to prevent layoffs and help employers
offset, for a limited time, a portion of their employee salaries and wages.
Beginning in January 2021, we applied for the CEWS, to the extent we met the
requirements to receive a subsidy. We have not and do not expect to receive a
subsidy under the CEWS for the three months ended October 31, 2021.
We will continue to evaluate the nature and extent of the impact of COVID-19 on
our business.
Key Business Metrics
We use certain key metrics and financial measures not prepared in accordance
with United States Generally Accepted Accounting Principles ("GAAP") to evaluate
and manage our business, including ARR and Free Cash Flow. For a further
discussion of how we use key metrics and certain non-GAAP financial measures,
see "Non-GAAP Financial Measures" in this Quarterly Report on Form 10-Q.
Annual Recurring Revenue ("ARR")
We use ARR to quantify the annualized recurring value outlined in active
customer contracts at the end of a reporting period. ARR includes the annualized
recurring value of term licenses, subscription agreements, support contracts,
and hosting agreements based on customer contracts, which may not be the same as
the timing and amount of revenue recognized. All components of the licensing and
other arrangements that are not expected to recur (primarily perpetual licenses
and professional services) are excluded. In some arrangements with multiple
performance obligations, a portion of recurring license and support or
subscription contract value is allocated to services revenue for revenue
recognition purposes, but does not get allocated for purposes of calculating
ARR. This revenue allocation only impacts the initial term of the contract. This
means that as we increase arrangements with multiple performance obligations
that include services at discounted rates, more of the total contract value will
be recognized as services revenue, but our reported ARR amount will not be
impacted. During the three months ended October 31, 2021, the recurring license
and support or subscription contract value recognized as services revenue was
$0.9 million.
If a customer contract contains invoicing amounts that increase over the
contract term, then ARR reflects the annualized invoicing amount outlined in the
contract for the current reporting period. For example, given a contract with
annual invoicing of $1.0 million at the beginning of year one, $2.0 million at
the beginning of year two, and $3.0 million at the beginning of year three, and
the reporting period is subsequent to year two invoicing and prior to year three
invoicing, the reported ARR for that contract would be $2.0 million.

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As of October 31, 2021, ARR was $594 million, compared to $582 million as of
July 31, 2021. ARR results for interim quarterly periods in fiscal year 2022 are
measured on a constant currency basis, using the actual currency rates at the
end of fiscal year 2021 throughout the year.

Free Cash Flow
We monitor our free cash flow, as a key measure of our overall business
performance, which enables us to analyze our financial performance without the
effects of certain non-cash items such as depreciation, amortization, and
stock-based compensation expenses. Additionally, free cash flow takes into
account the impact of changes in deferred revenue, which reflects the receipt of
cash payment for products before they are recognized as revenue, and unbilled
accounts receivable, which reflects revenue that has been recognized that has
yet to be invoiced to our customers. Our net cash provided by (used in)
operating activities is significantly impacted by the timing of invoicing and
collections of accounts receivable, the timing and amount of annual bonus
payments, as well as payroll and tax payments. Our capital expenditures consists
of purchases of property and equipment, primarily computer hardware, software,
and leasehold improvements, and capitalized software development costs. In the
first quarter of fiscal year 2022, we paid the entire bonus amount for fiscal
year 2021 along with accrued vacation for employees in countries where we
adopted a non-accrued vacation policy effective September 2021. For a further
discussion of our operating cash flows, see "Liquidity and Capital Resources -
Cash Flows" in this Quarterly Report on Form 10-Q.
                                                                Three 

Ended months October 31,

                                                                  2021                     2020

Net cash provided by (used in) operating activities (107,042) $ $ (15,707)
Purchases of goods and equipment

                                  (3,333)                (1,907)
Capitalized software development costs                               (3,783)                (2,581)
Free cash flow                                            $        (114,158)         $     (20,195)


Critical accounting conventions and estimates

Our condensed consolidated financial statements are prepared in accordance with
GAAP. Accounting policies, methods, and estimates are an integral part of the
preparation of condensed consolidated financial statements in accordance with
GAAP and, in part, are based upon management's current judgments. Those
judgments are normally based on knowledge and experience with regard to past and
current events and assumptions about future events. Certain accounting policies,
methods, and estimates are particularly sensitive because of their significance
to the condensed consolidated financial statements and because of the
possibility that future events affecting them may differ markedly from
management's current judgments. While there are a number of significant
accounting policies, methods, and estimates affecting our condensed consolidated
financial statements, which are described in Note 1 "The Company and Summary of
Significant Accounting Policies and Estimates" to our condensed consolidated
financial statements included in this Quarterly Report on Form 10-Q, our revenue
recognition policies are critical to the periods presented.

There have been no material changes to our significant and critical accounting
policies as described in "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Critical Accounting Policies and
Estimates" in our Annual Report on Form 10-K for the fiscal year ended July 31,
2021 except for the addition of business combinations as a significant
accounting policy described in Note 1 "The Company and Summary of Significant
Accounting Policies and Estimates" to our condensed consolidated financial
statements included in this Quarterly Report on Form 10-Q.
Recent Accounting Pronouncements
See Note 1 "The Company and Summary of Significant Accounting Policies and
Estimates" to the condensed consolidated financial statements included in this
Quarterly Report on Form 10-Q, for a full description of recent accounting
pronouncements adopted, including the dates of adoption, and recent account
pronouncements not yet adopted.

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Results of Operations
The following table sets forth our results of operations for the periods
presented. The data has been derived from the condensed consolidated financial
statements contained in this Quarterly Report on Form 10-Q which, in the opinion
of our management, reflect all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the financial position and results of
operations for the interim periods presented. The results of operations for any
period should not be considered indicative of results for any future period.
This information should be read in conjunction with the consolidated financial
statements and notes thereto included in our Annual Report on Form 10-K for the
fiscal year ended July 31, 2021.
                                                                                    Three Months Ended October 31,
                                                                                      As a % of                               As a % of
                                                                  2021              total revenue            2020           total revenue
                                                                                  (in thousands, except percentages)
Revenue:
Subscription and support                                    $       78,990                   48  %       $  57,966                   35  %
License                                                             40,153                   24             65,283                   38
Services                                                            46,791                   28             46,553                   27
Total revenue                                                      165,934                  100            169,802                  100
Cost of revenue:
Subscription and support                                            50,331                   30             37,006                   22
License                                                              2,339                    1              2,937                    2
Services                                                            50,509                   30             51,024                   30
Total cost of revenue                                              103,179                   61             90,967                   54
Gross profit:
Subscription and support                                            28,659                   17             20,960                   13
License                                                             37,814                   23             62,346                   36
Services                                                            (3,718)                  (2)            (4,471)                  (3)
Total gross profit                                                  62,755                   38             78,835                   46
Operating expenses:
Research and development                                            59,926                   36             52,615                   30
Sales and marketing                                                 43,631                   26             36,644                   22
General and administrative                                          24,575                   15             21,180                   12
Total operating expenses                                           128,132                   77            110,439                   64
Income (loss) from operations                                      (65,377)                 (39)           (31,604)                 (18)
Interest income                                                        674                    -              2,789                    1
Interest expense                                                    (4,794)                  (3)            (4,620)                  (3)
Other income (expense), net                                          1,183                    1              2,568                    2

Profit (loss) before provision for (profit) income tax

                                                              (68,314)                 (41)           (30,867)                 (18)
Provision for (benefit from) income taxes                          (17,038)                 (10)           (10,677)                  (6)
Net income (loss)                                           $      (51,276)                 (31) %       $ (20,190)                 (12) %






Revenue
We derive our revenue primarily from delivering cloud-based services, licensing
our software applications, providing support, and delivering professional
services.
Subscription and Support
A growing portion of our revenue consists of fees for our subscription services,
which are generally priced based on the amount of DWP that is managed by our
subscription services. Subscription revenue is recognized ratably over the term
of the arrangement,
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beginning at the point in time our provisioning process has been completed and
access has been made available to the customer. The initial term of such
arrangements is generally from three to five years. Subscription agreements
contain optional annual renewals commencing upon the expiration of the initial
contract term. A majority of our subscription customers are billed annually in
advance. In some arrangements with multiple performance obligations, a portion
of recurring subscription contract value may be allocated to license revenue or
services revenue for revenue recognition purposes. For example, in arrangements
with multiple performance obligations that include services at discounted rates,
a portion of the total contract value related to subscription services will be
allocated and recognized as services revenue.
Our support revenue is generally recognized ratably over the committed support
term of the licensed software. Our support fees are typically priced as a fixed
percentage of the associated term license fees. We generally invoice support
annually in advance.
License
A substantial majority of our license revenue consists of term license fees. Our
term license revenue is primarily generated through license fees that are billed
annually in advance during the term of the contract, including any renewals. Our
term license fees are generally priced based on the amount of DWP that will be
managed by our licensed software. Our term licenses have generally been sold
under a two-year initial term with optional annual renewals after the initial
term. However, we do enter into license arrangements that have an initial term
of more than two years and renewal terms of more than one year. Term license
revenue for the committed term of the customer agreement is generally fully
recognized upon delivery of the software or at the beginning of the renewal
term.
In a limited number of cases, we license our software on a perpetual basis.
Perpetual license revenue is generally recognized upon delivery. We invoice our
perpetual license customers either in full at contract signing or on an
installment basis.
Services
Our services revenue is primarily derived from implementation and migration
services performed for our customers, reimbursable travel expenses, and training
fees. A substantial majority of our services engagements are billed and revenue
is recognized on a time and materials basis upon providing our services.
                                                                                      Three Months Ended October 31,
                                                           2021                                      2020                                   Change
                                                               As a % of total                           As a % of total
                                              Amount                revenue              Amount               revenue               ($)                (%)
                                                                                    (in thousands, except percentages)
Revenue:
Subscription and support:
Subscription                               $   57,129                     34  %       $  37,230                     22  %       $ 19,899                  53  %
Support                                        21,861                     13             20,736                     12             1,125                   5  %
License:
Term license                                   40,105                     24             65,225                     38           (25,120)                (39) %
Perpetual license                                  48                      -                 58                      -               (10)                (17) %
Services                                       46,791                     28             46,553                     28               238                   1  %
Total revenue                              $  165,934                     99  %       $ 169,802                    100  %       $ (3,868)                 (2) %




Subscription and Support
We anticipate subscriptions will continue to represent a majority of new
arrangements, including customers migrating from existing term license
arrangements to subscription services, in future periods. Due to the ratable
recognition of subscription revenue, growth in subscription revenue will lag
behind the growth of subscription orders and will impact the comparative growth
of our reported revenue. If we complete a higher percentage of subscription
arrangements in a given period, our short-term growth rates will be negatively
impacted. Due to the seasonal nature of our business, the impact of new
subscription orders in the fourth fiscal quarter, our historically largest
quarter for new orders, is not reflected in revenues until the following fiscal
year.
Subscription revenue increased by $19.9 million during the three months ended
October 31, 2021 compared to the same period a year ago, primarily due to the
impact of new cloud transition agreements for InsuranceSuite via Guidewire Cloud
entered into and provisioned since October 31, 2020.
Support revenue increased by $1.1 million during the three months ended
October 31, 2021 compared to the same period a year ago, primarily due to an
increase in extended support related to certain versions of our self-managed
licenses of $0.8 million. Support
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related to subscription arrangements is included in subscription revenue, as
support is not quoted or priced separately from the subscription services. As
customers enter into a subscription agreement to migrate from an existing term
license agreement, the timing and amount of revenue recognized will be impacted
by allocations of the total contract value between the license, subscription,
and support performance obligations. As a result, we expect the increase in
subscription orders as a percentage of total new sales and customers migrating
from term licenses to subscription services will continue to reduce the growth
in, or result in lower, support revenue in the future.

Licence

Revenue related to new term licenses and multi-year term license renewals is
generally recognized upfront and, as a result, no additional license revenue is
recognized until after the committed term expires. As a customer enters into a
subscription agreement to migrate from an existing term license agreement, the
timing and amount of revenue recognition will be impacted by allocations of
total contract value between license, subscription, and support performance
obligations. License revenue growth will be negatively impacted as subscription
sales increase as a percentage of total new sales and as customers migrate from
term licenses to subscription services instead of renewing their term licenses.
Term license revenue decreased by $25.1 million during the three months ended
October 31, 2021 compared to the prior year period, primarily due to a large
multi-year term license renewal in the three months ended October 31, 2020.
There was no impact of term license contracts with an initial term of greater
than two years or a renewal term of greater than one year during the three
months ended October 31, 2021 compared with $15.4 million in the prior year
period.
Perpetual license revenue accounted for less than 1% of total revenue during the
three months ended October 31, 2021. We expect perpetual license revenue to
continue to represent a small percentage of our total license revenue. We also
expect perpetual license revenue to potentially be volatile across quarters due
to the large amount of perpetual revenue that may be generated from a single
customer order.

Services

Services revenue increased by $0.2 million during the three months ended
October 31, 2021 compared to the same period a year ago. The increase is
primarily driven by higher training revenue, but services revenue overall
continues to be impacted by contracts with lower average services billing rates
and increased investments in customer implementations, including fixed fee or
capped arrangements, to accelerate their transition to the cloud. In these
arrangements when a project extends longer than originally anticipated, the
average billing rate we recognize may decrease which can result in revenue
adjustments and lower gross profit.
We expect modestly higher levels of variability in our services revenue in
future periods. As we successfully leverage our SI partners to lead more
implementations, our services revenue could decrease further. We expect
challenges related to COVID-19 will also continue to negatively impact services
revenue. As we continue to expand into new markets and develop new services and
products, we have, and may continue to, enter into contracts with lower average
billing rates, make investments in customer implementation and migration
engagements, and enter into fixed price contracts, which may impact services
revenue and services margins.

Cost of Revenue and Gross Profit
Our cost of subscription and support revenue consists of personnel costs for our
cloud operations and technical support teams, cloud infrastructure costs,
development of online training curriculum, amortization of intangible assets,
and royalty fees paid to third parties. Our cost of license revenue primarily
consists of development of online training curriculum, royalty fees paid to
third parties, and amortization of intangible assets. Our cost of services
revenue primarily consists of personnel costs for our professional service
employees, third-party consultants, and travel costs. In instances where we have
primary responsibility for the delivery of services, subcontractor fees are
expensed as cost of services revenue. In each case, personnel costs include
salaries, bonuses, benefits, and stock-based compensation.
We allocate overhead such as information technology support, information
security, facilities, and other administrative costs to all functional
departments based on headcount. As such, these general overhead expenses are
reflected in cost of revenue and each functional operating expense.
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Cost of Revenue:
                                                                 Three Months Ended October 31,
                                                 2021                  2020                         Change
                                                Amount                 Amount              ($)                 (%)
                                                               (in thousands, except percentages)
Cost of revenue:
Subscription and support                  $     50,331             $   37,006          $ 13,325                   36  %
License                                          2,339                  2,937              (598)                 (20)
Services                                        50,509                 51,024              (515)                  (1)
Total cost of revenue                     $    103,179             $   90,967          $ 12,212                   13

Includes stock-based compensation of:

    Cost of subscription and support
revenue                                   $      3,348             $    2,602          $    746
    Cost of license revenue                        182                    251               (69)
    Cost of services revenue                     5,637                  5,543                94
    Total                                 $      9,167             $    8,396          $    771




Cost of subscription and support revenue during the three months ended
October 31, 2021 increased by $13.3 million compared to the same period a year
ago. The increase is primarily due to increases in personnel costs of $8.2
million due to our continued investment in our cloud operations to increase
operational efficiency and scale, cloud infrastructure expense of $6.5 million
for our growing cloud customer base, higher amortization of previously
capitalized software development costs of $0.5 million, and professional
services expense of $0.4 million, partially offset by a net decrease in
amortization of acquired intangibles of $2.3 million due to certain acquired
intangible assets being fully amortized.
Due to our continued investment in cloud-based operations, increase in new
cloud-based customers, and increased usage from existing cloud-based customers,
the costs to provide our subscription services has increased. We expect our cost
of subscription revenue to increase as we continue to invest in our cloud
operations and incur higher cloud infrastructure costs to support our growing
cloud customer base, to improve efficiencies, and to continuously improve and
maintain secure environments. However, we believe that the cost of subscription
revenue will grow at a slower rate than subscription revenue in future years as
we achieve economies of scale and other efficiencies. Cost of support revenue is
expected to remain flat or slightly decrease over time as term license customers
transition to the cloud. The short-term impact of these trends along with mix
within subscription and support revenue may result in a decline in subscription
and support gross margin even though subscription and support gross profit
increases in absolute dollars.
The cost of license revenue decreased by $0.6 million during the three months
ended October 31, 2021 compared to the same period a year ago primarily due to
decreases in amortization of acquired intangible assets due to certain acquired
intangible assets being fully amortized and lower costs associated with the
development of online training curriculum included with the latest releases of
InsuranceSuite. We continue to anticipate lower cost of license revenue over
time as our term license customers transition to cloud subscription agreements.
The $0.5 million decrease in cost of services revenue during the three months
ended October 31, 2021 compared to the same period a year ago was primarily
attributable to a decrease of $1.6 million in personnel costs, partially offset
by increases of $0.7 million in subcontractor expenses for InsuranceSuite
implementation resources, $0.2 million in software subscription expenses, and
$0.1 million in web hosting expenses.
We had 634 cloud operations and technical support employees and 659 professional
services employees at October 31, 2021, compared to 475 cloud operations and
technical support employees and 699 professional services employees at
October 31, 2020.

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Gross Profit:
                                                    Three Months Ended October 31,
                                      2021                         2020                      Change
                              Amount        Margin %       Amount       Margin %         ($)          (%)
                                                  (in thousands, except percentages)
Gross profit:
Subscription and support   $   28,659           36  %    $ 20,960           36  %    $   7,699        37  %
License                        37,814           94         62,346           96         (24,532)      (39)
Services                       (3,718)          (8)        (4,471)         (10)            753        17
Total gross profit         $   62,755           38       $ 78,835           46       $ (16,080)      (20)



Our gross profit decreased $16.1 million during the three months ended
October 31, 2021 compared to the same period a year ago. Gross profit was
impacted by the decrease in term license revenue due to the impact of multi-year
term license arrangements entered into in the first quarter of fiscal year 2022
being significantly lower than the impact of multi-year term license
arrangements in the same period a year ago.
Our gross margin decreased to 38% during the three months ended October 31, 2021
from 46% during the same period a year ago. Gross margin was primarily impacted
by the increased percentage of subscription and support revenue to total revenue
as subscription and support revenue has lower gross margin compared to license
revenue.



We expect subscription and support gross margins will fluctuate as our
subscription revenue increases and we continue to invest in our cloud
operations. However, as we gain efficiencies and increase the number of cloud
customers, we expect subscription gross margins to improve over time. In
addition to the impact of our investment in customer migrations and
implementations, challenges related to COVID-19 may negatively impact services
gross margin for at least the remainder of this fiscal year. We expect license
gross margin will fluctuate based on changes in revenue due to the timing of
delivery of new multi-year term licenses and the execution of multi-year term
license renewals, as cost of license revenue is expected to be relatively
consistent from period to period in the future. Overall, we expect gross margins
to decline in the short-term primarily due to the mix between license revenue
and subscription and support revenue.
Operating Expenses
Our operating expenses consist of research and development, sales and marketing,
and general and administrative expenses. The largest components of our operating
expenses are personnel costs for our employees and, to a lesser extent,
professional services. In each case, personnel costs include salaries, bonuses,
commissions, benefits, and stock-based compensation. We allocate overhead such
as information technology support, information security, facilities, and other
administrative costs to all functional departments based on headcount. As a
result, general overhead expenses are reflected in cost of revenue and each
functional operating expense.
                                                                                    Three Months Ended October 31,
                                                           2021                                           2020                                  Change
                                                                                                                 As a % of
                                          Amount            As a % of total revenue            Amount          total revenue            ($)               (%)
                                                                                  (in thousands, except percentages)
Operating expenses:
Research and development              $    59,926                     36%                   $  52,615                   30  %       $  7,311                14  %
Sales and marketing                        43,631                      26                      36,644                   22             6,987                19
General and administrative                 24,575                      15                      21,180                   12             3,395                16
Total operating expenses              $   128,132                      77                   $ 110,439                   64          $ 17,693                16

Includes stock-based compensation of:

 Research and development             $     8,614                                           $   7,247                               $  1,367
 Sales and marketing                        7,489                                               5,977                                  1,512
 General and administrative                 6,970                                               6,464                                    506
Total                                 $    23,073                                           $  19,688                               $  3,385




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Research and Development
Our research and development expenses primarily consist of personnel costs for
our technical staff and consultants providing professional services.
The $7.3 million increase in research and development expenses during the three
months ended October 31, 2021 compared to the same period a year ago, was
primarily due to increases of $4.6 million in personnel costs associated with
higher headcount, inclusive of $0.7 million in acquisition consideration
holdback costs relating to the Hazard Hub acquisition, and $2.0 million of cloud
infrastructure costs for our development environments.
Our research and development headcount was 871 at October 31, 2021 compared with
810 at October 31, 2020.
We expect our research and development expenses to increase in absolute dollars
as we continue to hire and dedicate internal resources to develop, improve, and
expand the functionality of our solutions and migrate our solutions to the
cloud. Research and development expenses may also increase if we pursue
additional acquisitions.
Sales and Marketing
Our sales and marketing expenses primarily consist of personnel costs for our
sales and marketing employees. Included in our personnel costs are commissions,
which are considered contract acquisition costs and are capitalized when earned
and expensed over the anticipated period of time that goods and services are
expected to be provided to a customer, which we estimate to be approximately
five years. Sales and marketing expenses also includes travel expenses,
professional services for marketing activities, and amortization of certain
acquired intangibles.
The $7.0 million increase in sales and marketing expenses during the three
months ended October 31, 2021 compared to the same period a year ago was
primarily attributable to increases of $7.2 million in personnel costs due to
higher headcount to sell and market our services and products, including an
increase of $0.9 million related to the net effect of the capitalization and
amortization of contract acquisition costs (primarily commissions). These
increases were partially offset by a decrease of $0.4 million in marketing and
advertising expense due to costs associated with Connections Reimagined, our
virtual annual sales conference in the first quarter of fiscal year 2021. Our
annual sales conference in fiscal year 2022 was primarily an in-person event,
supplemented with virtual content, held in November 2021, the second quarter of
fiscal year 2022.
Our sales and marketing headcount was 457 at October 31, 2021 compared with 416
at October 31, 2020.
We expect our sales and marketing expenses to continue to increase in absolute
dollars as we continue to invest in sales and marketing activities to support
our business growth and objectives.

General and Administrative
Our general and administrative expenses include executive, finance, human
resources, legal, and corporate development and strategy functions, and
primarily consist of personnel costs, as well as professional services.
The $3.4 million increase during the three months ended October 31, 2021
compared to the same period a year ago was primarily due to increases of $1.9
million in software and professional services to support our growth and $1.4
million in personnel costs due to higher headcount.
Our general and administrative headcount was 410 at October 31, 2021 compared
with 359 at October 31, 2020. General and administrative headcount includes
personnel in information technology support, information security, facilities,
and recruiting whose expenses are allocated across all functional departments.
We expect that our general and administrative expenses will increase in absolute
dollars as we continue to invest in personnel, corporate infrastructure, and
systems required to support our strategic initiatives, the growth of our
business, and our compliance and reporting obligations.
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Other Income (Expense)
                                             Three Months Ended October 31,
                                       2021              2020               Change
                                      Amount            Amount          ($)         (%)
                                           (in thousands, except percentages)
Interest income                 $       674           $  2,789      $ (2,115)      (76) %
Interest expense                $    (4,794)          $ (4,620)     $   (174)        4  %
Other income (expense), net     $     1,183           $  2,568      $ (1,385)      (54) %


*Not meaningful


Interest Income

Interest income represents interest earned on our cash, cash equivalents, and
investments.
Interest income decreased $2.1 million during the three months ended October 31,
2021 compared to the same period a year ago, primarily due to lower yields on
invested funds.

Interest Expense

Interest expense includes both stated interest and the amortization of debt
discount and issuance costs associated with the $400.0 million aggregate
principal amount of our Convertible Senior Notes. The amortization of debt
discount and issuance costs are recognized on an effective interest basis.
Stated interest expense is consistent in the comparative periods as the
outstanding principal and stated interest rate have not changed.
Interest expense for the three months ended October 31, 2021 and 2020 consists
of non-cash interest expense related to the amortization of debt discount and
issuance costs of $3.5 million and $3.3 million, respectively, and stated
interest of $1.3 million in both periods.

Other Income (Expense), Net
Other income (expense), net includes foreign exchange gains and losses resulting
from fluctuations in foreign exchange rates on monetary asset and monetary
liability balances that are denominated in currencies other than the functional
currency of the entity in which they are recorded. Our monetary assets and
liabilities denominated in currencies other than the functional currency of the
entity in which they are recorded consist primarily of trade accounts
receivable, unbilled accounts receivable and intercompany receivables and
payables. We currently have entities with a functional currency of the Argentine
Peso, Australian Dollar, Brazilian Real, British Pound, Canadian Dollar, Chinese
Yuan, Danish Krone, Euro, Hong Kong Dollar, Indian Rupee, Japanese Yen,
Malaysian Ringgit, Mexican Peso, New Zealand Dollar, Polish Zloty, Russian
Ruble, South African Rand, and Swiss Franc.
Other income (expense), net during the three months ended October 31, 2021 was
income of $1.2 million compared to $2.6 million during the same period a year
ago. Due to fluctuations in exchange rates, the three months ended October 31,
2021 included realized and unrealized foreign currency gains of $1.2 million,
while the three months ended October 31, 2020 included realized and unrealized
foreign currency gains of $2.3 million.
Provision for (benefit from) Income Taxes
We are subject to taxes in the United States as well as other tax jurisdictions
and countries in which we conduct business. Earnings from our non-U.S.
activities are subject to local country income tax and may also be subject to
U.S. income tax.
                                                         Three Months Ended October 31,
                                                  2021             2020               Change
                                                 Amount           Amount           ($)         (%)
                                                       (in thousands, except percentages)
Provision for (benefit from) income taxes    $   (17,038)      $ (10,677)      $ (6,361)      60  %
Effective tax rate                                    25  %           35  %




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We recognized an income tax benefit of $17.0 million and $10.7 million for the
three months ended October 31, 2021 and 2020, respectively. The change in the
amount of income taxes recorded for the three months ended October 31, 2021
compared to the same period a year ago was primarily due to the increase in the
loss before taxes and research and development credits, offset by a tax status
change of certain foreign subsidiaries for U.S. tax purposes and certain
non-deductible expenses.
The effective tax rate of 25% for the three months ended October 31, 2021
differs from the statutory U.S. federal income tax rate of 21% due to permanent
differences for stock-based compensation including excess tax benefits, research
and development credits, and certain non-deductible expenses including executive
compensation.
During the three months ended October 31, 2021, unrecognized tax benefits
increased by $0.4 million. As of October 31, 2021, we had unrecognized tax
benefits of $11.1 million that, if recognized, would affect our effective tax
rate.
Non-GAAP Financial Measures
In addition to the key business metrics presented above, we believe that the
following non-GAAP financial measures provide useful information to management
and investors regarding certain financial and business trends relating to our
financial condition and results of operations. Management uses these non-GAAP
measures to compare our performance to that of prior periods for trend analysis,
for purposes of determining executive and senior management incentive
compensation, and for budgeting and planning purposes. We believe that the use
of these non-GAAP financial measures provides an additional tool for investors
to use in evaluating ongoing operating results and trends and in comparing our
financial results with other software companies because it provides consistency
and comparability with past financial performance and assists in comparisons
with other companies, many of which present similar non-GAAP financial measures
to investors. However, our management does not consider these non-GAAP measures
in isolation or as an alternative to financial measures determined in accordance
with GAAP.
The non-GAAP financial information is presented for supplemental informational
purposes only, should not be considered a substitute for financial information
presented in accordance with GAAP, and may be different from similarly-titled
non-GAAP measures used by other companies. The principal limitation of these
non-GAAP financial measures is that they exclude significant expenses and income
that are required by GAAP to be recorded in our financial statements. In
addition, they are subject to inherent limitations as they reflect the exercise
of judgment by management about which expenses and income are excluded or
included in determining these non-GAAP financial measures. We urge investors to
review the reconciliation of non-GAAP financial measures to the comparable GAAP
financial measures included herein and not to rely on any single financial
measure to evaluate the Company's business.
The following table reconciles the specific items excluded from GAAP in the
calculation of non-GAAP financial measures for the periods indicated below.
                                                                  Three 

Ended months October 31,

                                                                   2021                     2020
Gross profit reconciliation:
GAAP gross profit                                           $         62,755          $      78,835
Non-GAAP adjustments:
Stock-based compensation                                               9,167                  8,396
Amortization of intangibles                                            1,944                  4,526

Non-GAAP gross profit                                       $         73,866          $      91,757

Income (loss) from operations reconciliation:
GAAP income (loss) from operations                          $        (65,377)         $     (31,604)
Non-GAAP adjustments:
Stock-based compensation                                              32,240                 28,084
Amortization of intangibles                                            3,754                  6,323
Acquisition consideration holdback(1)                                    673                      -

Non-GAAP income (loss) from operations                      $        

(28,710) $ 2,803

Net income (loss) reconciliation:
GAAP net income (loss)                                      $        (51,276)         $     (20,190)
Non-GAAP adjustments:
Stock-based compensation                                              32,240                 28,084


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Amortization of intangibles                                           3,754                   6,323
Amortization of debt discount and issuance costs                      3,524                   3,335

Acquisition consideration holdback(1)                                   673                       -

Tax impact of non-GAAP adjustments(2)                                (6,966)                 (3,143)
Non-GAAP net income (loss)                                   $      

(18,051) $ 14,409

Tax provision (benefit) reconciliation:
GAAP tax provision (benefit)                                 $      (17,038)         $      (10,677)
Non-GAAP adjustments:
Stock-based compensation                                             11,548                 (22,291)
Amortization of intangibles                                           1,345                  (5,019)
Amortization of debt discount and issuance costs                      1,262                  (2,647)

Acquisition consideration holdback(1)                                   241                       -

Tax impact of non-GAAP adjustments(2)                                (7,430)                 33,100
Non-GAAP tax provision (benefit)                             $      

(10,072) $ (7,534)

Net income (loss) per share reconciliation:
GAAP net income (loss) per share - diluted                   $        (0.62)         $        (0.24)
Non-GAAP adjustments:
Stock-based compensation                                               0.39                    0.34
Amortization of intangibles                                            0.05                    0.08
Amortization of debt discount and issuance costs                       0.04                    0.04

Acquisition consideration holdback(1)                                  0.01                       -

Tax impact of non-GAAP adjustments(2)                                 (0.08)                  (0.04)

Non-GAAP dilutive shares excluded from the calculation of GAAP earnings per share (3)

                                           -                   (0.01)
Non-GAAP net income (loss) per share - diluted               $        

(0.21) $ 0.17

Equities used in the calculation of non-GAAP income (loss) per share: average GAAP weighted stocks – diluted

                           83,225,743              83,613,287

Non-GAAP dilutive shares excluded from the calculation of earnings (loss) per share GAAP (3)

                                                  -                 586,287
Pro forma weighted average shares - diluted                      83,225,743              84,199,574



(1) Effective the first quarter of fiscal year 2022, the acquisition
consideration holdback that is earned and recognized as expense over a
post-acquisition service period is excluded from non-GAAP measures. Prior to the
first quarter of fiscal year 2022, there was no acquisition consideration
holdback in any periods presented.
(2) Adjustments reflect the impact on the tax benefit (provision) from all
non-GAAP adjustments.
(3) Due to the occurrence of a net loss on a GAAP basis, potentially dilutive
securities were excluded from the calculation of GAAP net income (loss) per
share, as they would have an anti-dilutive effect. However, these shares have a
dilutive effect on non-GAAP net income (loss) per share and, therefore, are
included in the non-GAAP net income (loss) per share calculation.
Liquidity and Capital Resources
Our principal sources of liquidity are as follows (in thousands):
                                           October 31, 2021       July 31, 

2021

Cash, cash equivalents and investments $ 1,139,623 $ 1,346,591
Working capital

                           $         876,498      $    1,054,971



Cash, cash equivalents and investments

Our cash and cash equivalents are comprised of cash and liquid investments with
remaining maturities of 90 days or less from the date of purchase, primarily
commercial paper and money market funds. Our investments primarily consist of
corporate debt
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securities, U.S. government and agency debt securities, commercial paper,
asset-backed securities, and non-U.S. government securities, which include
state, municipal and foreign government securities.
As of October 31, 2021, approximately $37.2 million of our cash and cash
equivalents were domiciled in foreign jurisdictions. While we have no current
plans to repatriate these funds to the United States, we may repatriate foreign
earnings in the future to the extent that the repatriation is not restricted by
local laws or there are no substantial incremental costs associated with such
repatriation.

Share Repurchase Program
In October 2020, our board of directors authorized and approved a stock
repurchase program of up to $200.0 million of our outstanding common stock.
During the three months ended October 31, 2021, we repurchased 226,172 shares of
common stock at an average price of $116.12 per share, for an aggregate purchase
price of $26.3 million. As of October 31, 2021, $11.2 million remained available
for future share repurchases.

Cash Flows
Our cash flows from operations are significantly impacted by timing of invoicing
and collections of accounts receivable, annual bonus payments, as well as
payments of payroll, commissions, payroll taxes and other taxes. We expect that
we will continue to generate positive cash flows from operations on an annual
basis, although this may fluctuate significantly on a quarterly basis. In
particular, we typically use more cash during the first fiscal quarter ended
October 31, as we generally pay cash bonuses to our employees for the prior
fiscal year and seasonally higher sales commissions from increased customer
orders booked in our fourth fiscal quarter of the prior year. Additionally, our
capital expenditures may fluctuate depending on future office build outs and
development activities subject to capitalization.
We believe that our existing cash and cash equivalents and sources of liquidity
will be sufficient to fund our operations for at least the next 12 months. Our
future cash requirements will depend on many factors, including our rate of
revenue growth, the expansion of our sales and marketing activities, the timing
and extent of our spending to support our research and development efforts,
investments in cloud infrastructure and operating costs, and expansion into
other markets. We also may invest in or acquire complementary businesses,
applications or technologies, or may expand our board-authorized stock
repurchase program, which may require the use of significant cash resources
and/or additional financing.
The following summary of cash flows for the periods indicated has been derived
from our condensed consolidated financial statements included elsewhere in this
Quarterly Report on Form 10-Q (in thousands):
                                                                     Three 

Ended months October 31,

                                                                        2021                2020
Net cash provided by (used in) operating activities                $  (107,042)         $  (15,707)
Net cash provided by (used in) investing activities                $     8,081          $  (53,399)
Net cash provided by (used in) financing activities                $   

(26,245) $ (3,284)


Cash Flows from Operating Activities
Net cash used in operating activities was $107.0 million for the three months
ended October 31, 2021 compared to net cash used in operating activities of
$15.7 million during the three months ended October 31, 2020. This $91.3 million
increase in operating cash used was primarily attributable to $69.1 million from
the payout of our fiscal year 2021 corporate bonus and accrued vacation balances
in countries in which we adopted a non-accrual vacation policy, offset by
$11.1 million in cash provided by other working capital activities, and a $33.3
million increase in net loss after excluding the impact of non-cash charges such
as deferred taxes, stock-based compensation expense, depreciation and
amortization expense, and other non-cash items.
Cash Flows from Investing Activities
Net cash provided by investing activities was $8.1 million for the three months
ended October 31, 2021 compared to net cash used in investing activities of
$53.4 million for the three months ended October 31, 2020. The $61.5 million
increase in cash provided by investing activities was primarily due to a $105.9
million decrease in net purchases of available-for-sale securities and a $2.0
million decrease in strategic investments, partially offset by $43.8 million
paid as purchase consideration for the acquisition of HazardHub and a $2.6
million decrease in capital expenditures and capitalized software development
costs.
Cash Flows from Financing Activities
Net cash used in financing activities for the three months ended October 31,
2021 was $26.2 million compared to $3.3 million net cash used in financing
activities for the three months ended October 31, 2020. This $23.0 million
increase in cash used was primarily because we repurchased $21.3 million more of
our common stock under our share repurchase program and, to a lesser extent, a
decrease in proceeds from option exercises of $1.7 million.
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Commitments and Contractual Obligations
Our estimated future obligations consist of leases, royalties, purchase
obligations, debt, and unrecognized tax benefits as of October 31, 2021. Refer
to Note 7 "Convertible Senior Notes," Note 8 "Leases," Note 9 "Commitments and
Contingencies," and Note 11 "Income Taxes" to our condensed consolidated
financial statements included in this Quarterly Report on Form 10-Q.
There has been no material change in our contractual obligations and commitments
other than in the ordinary course of business since our fiscal year ended
July 31, 2021. See the Annual Report on Form 10-K for the fiscal year ended
July 31, 2021 for additional information regarding the Company's contractual
obligations.
Off-Balance Sheet Arrangements
Through October 31, 2021, we did not have any relationships with unconsolidated
entities or financial partnerships, such as entities often referred to as
structured finance or special purpose entities, which would have been
established for the purpose of facilitating off-balance sheet arrangements or
other contractually narrow or limited purposes.
ITEM 3.  Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risks in the ordinary course of our business. Market
risk represents the risk of loss that may impact our financial position due to
adverse changes in financial market prices and rates. Our market risk exposure
is primarily a result of fluctuations in interest rates and foreign currency
exchange rates. We do not hold or issue financial instruments for trading
purposes.

Interest rate sensitivity

Our exposure to market risk for changes in interest rates relates primarily to
our cash, cash equivalents, and investments. Our cash, cash equivalents, and
investments as of October 31, 2021 and July 31, 2021 were $1,139.6 million and
$1,346.6 million, respectively, primarily consisting of cash, money market
funds, corporate debt securities, U.S. government and agency debt securities,
commercial paper, asset-backed securities, and non-U.S. government securities,
which include state, municipal, and foreign government securities. Changes in
interest rates, primarily in the United States, affect the interest earned on
our cash, cash equivalents, and investments, and their market value. A
hypothetical 100 basis point increase in interest rates is estimated to result
in a decrease of $6.1 million and $5.2 million in the market value of our
available-for-sale securities as of October 31, 2021 and July 31, 2021,
respectively. Any realized gains or losses resulting from such interest rate
changes would only occur if we sold the investments prior to maturity.
Foreign Currency Exchange Risk
Our results of operations and cash flows are subject to fluctuations due to
changes in foreign currency exchange rates, particularly changes in the
Argentine Peso, Australian Dollar, Brazilian Real, British Pound, Canadian
Dollar, Danish Kroner, Euro, Indian Rupee, Japanese Yen, Malaysian Ringgit, New
Zealand Dollar, Polish Zloty, Russian Ruble, and Swiss Franc, the currency of
the locations within which we currently operate. The volatility of exchange
rates depends on many factors that we cannot forecast with reliable accuracy. We
believe our operating activities act as a natural hedge for a substantial
portion of our foreign currency exposure because we typically collect revenue
and incur costs in the currency of the location in which we provide our
services. However, our relationships with our customers are long-term in nature
so it is difficult to predict if our operating activities will provide a natural
hedge in the future. Additionally, changes in foreign currency exchange rates
can affect our financial results due to transaction gains or losses related to
revaluing certain monetary asset and monetary liability balances that are
denominated in currencies other than the functional currency of the entity in
which they are recorded. Our monetary assets and liabilities denominated in
currencies other than the functional currency of the entity in which they are
recorded consist primarily of trade accounts receivable, unbilled accounts
receivable and intercompany receivables and payables. For the three months ended
October 31, 2021 and 2020, we recorded foreign currency gains of $1.2 million
and $2.6 million, respectively, in other income (expense) in our condensed
consolidated statement of operations primarily due to currency exchange rate
fluctuations. We will continue to experience fluctuations in foreign currency
exchange rates. If a hypothetical ten percent change in foreign exchange rates
were to occur in the future, the resulting transaction gain or loss is estimated
to be approximately $18.6 million. As our international operations grow, we will
continue to assess our approach to managing our risk relating to fluctuations in
currency rates.
Fair Value of Financial Instruments
We do not have material exposure to market risk with respect to investments in
financial instruments, as our investments primarily consist of high quality
liquid investments purchased with a remaining maturity of three years or less.
We do not use derivative financial instruments for speculative or trading
purposes. However, this current position does not preclude our adoption of
specific hedging strategies in the future.
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Our strategic investments in privately held securities are in various classes of
equity and convertible debt. The particular securities we hold, and their rights
and preferences relative to those of other securities within the capital
structure, may impact the magnitude by which our investment value moves in
relation to movements in the total enterprise value of the company in which we
are invested. As a result, our investment in a specific company may move by more
or less than any change in value of that overall company. In addition, the
financial success of our investment in any company is typically dependent on a
liquidity event, such as public offering, acquisition, or other favorable market
event reflecting appreciation to the value of our investment. All of our
investments, particularly those in privately held companies, are therefore
subject to a risk of partial or total loss of invested capital.

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Margie D. Carlisle