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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 April 30, 2022
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.


 


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 May 31, 2022, the registrant had 83,816,376 shares of common stock issued and outstanding.


Guidewire Software, Inc.
Index

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



FORWARD-LOOKING STATEMENTS

The section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as other parts of this Quarterly Report on Form 10-Q and certain information incorporated herein by reference contain forward-looking statements within the meaning of the Securities Act of 1933, as amended (the “Securities Act”), and the Securities Exchange Act of 1934, as amended (the “Exchange Act”) 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, services, 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.”
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 Quarterly Report on Form 10-Q 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.
SUMMARY OF MATERIAL RISKS ASSOCIATED WITH OUR BUSINESS
The principal risks and uncertainties affecting our business include the following:
growth prospects of the property and 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 cloud-based offerings on a subscription basis or failure to meet stipulated service levels with our 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;
change in our revenue mix resulting in potential declines in our subscription and support gross margin or our services gross margin;
our reliance on orders from a relatively small number of customers in the P&C insurance industry for a substantial portion of our revenue and Annual Recurring Revenue (“ARR”);
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;
potential failure of any of our established services or products to satisfy customer demands or to maintain market acceptance;
our sales and implementation cycles are lengthy and variable, depend upon factors outside our control, and could cause us to expend significant time and resources prior to generating revenue;
our large customers have substantial negotiating leverage, which may require that we agree to terms and conditions that result in increased cost of revenue, decreased revenue, and lower average selling prices and gross margins;
our business depends on customers renewing and expanding their license, support, and subscription contracts for our services and products;
potential inability to develop, introduce, and market new and enhanced versions of our services and products;


effectiveness of our research and development and cloud operations investment and efforts;
our ability to comply with current and evolving local and foreign data privacy laws, including the General Data Protection Regulation in the European Union (“EU”) and in the United Kingdom (“U.K.”), the California Consumer Privacy Act, the California Privacy Rights Act, and regulations in various other jurisdictions in the United States and abroad, and maintain the security of our customer’s data, our cloud-based services or products, and the related costs and liabilities that we may incur;
retaining existing and hiring new personnel;
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 or revised regulations, laws, including tax laws in jurisdictions in which we operate, and accounting standards;
our ability to apply accounting guidance that requires management to make estimates and assumptions and to adapt to and interpret the requirements of new guidance, or to clearly explain to stockholders how new guidance affects reporting of our results of operations;
our exposure to market risks, including geographical and political events such as escalation in the ongoing conflict between Russia and Ukraine, supply chain disruptions and inflation, that may negatively impact our customers, partners, and vendors or our business operations;
data privacy concerns could result in regulatory changes and impose additional costs and liabilities on us and limit our use of information;
the effect of uncertainties related to the global COVID-19 pandemic and future mutations or related strains of the virus 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;
data security breaches of our cloud-based services or products or unauthorized access to our customers’ and employees’ data;
our stock price may be volatile, which could result in securities class action litigation against us;
our ability to successfully defend litigation brought against us; and
our ability to satisfy future liquidity requirements.

The summary risk factors described above should be read together with the text of the Risk Factors included in Item 1A of Part II of this Quarterly Report on Form 10-Q and the other information set forth in this Quarterly Report on Form 10-Q, including our condensed consolidated financial statements and related notes thereto, as well as in other documents that we file with the U.S. Securities and Exchange Commission (the “SEC”). Additional risks and uncertainties beyond those summarized above or discussed elsewhere in this Quarterly Report on Form 10-Q may apply to our business, activities, or operations as currently conducted or as we may conduct them in the future or in the markets in which we operate or may in the future operate.

_____________

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)
2

GUIDEWIRE SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited, in thousands)
 
April 30,
2022
July 31,
2021
ASSETS
CURRENT ASSETS:
Cash and cash equivalents$326,861 $384,910 
Short-term investments481,086 734,517 
Accounts receivable, net of allowances of $462 and $1,057, respectively
85,703 104,068 
Unbilled accounts receivable, net104,359 79,061 
Prepaid expenses and other current assets58,260 52,729 
Total current assets1,056,269 1,355,285 
Long-term investments281,069 227,164 
Unbilled accounts receivable, net17,626 24,361 
Property and equipment, net80,079 80,061 
Operating lease assets89,438 97,447 
Intangible assets, net24,148 19,743 
Goodwill372,189 340,877 
Deferred tax assets, net184,910 138,428 
Other assets51,607 38,479 
TOTAL ASSETS$2,157,335 $2,321,845 
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable$30,257 $27,830 
Accrued employee compensation67,939 102,137 
Deferred revenue, net111,685 138,699 
Other current liabilities27,217 31,648 
Total current liabilities237,098 300,314 
Lease liabilities105,735 115,374 
Convertible senior notes, net354,544 343,825 
Deferred revenue, net3,809 7,237 
Other liabilities6,499 10,201 
Total liabilities707,685 776,951 
STOCKHOLDERS’ EQUITY:
Common stock8 8 
Additional paid-in capital1,721,241 1,617,204 
Accumulated other comprehensive income (loss)(18,647)(6,218)
Retained earnings (accumulated deficit)(252,952)(66,100)
Total stockholders’ equity1,449,650 1,544,894 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY$2,157,335 $2,321,845 
See accompanying Notes to Condensed Consolidated Financial Statements.
3

GUIDEWIRE SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands except shares and per share amounts)
 
 Three Months Ended April 30,Nine Months Ended April 30,
 2022202120222021
Revenue:
Subscription and support$86,851 $64,836 $250,138 $182,365 
License53,894 50,937 163,845 194,132 
Services56,703 48,195 154,032 137,335 
Total revenue197,448 163,968 568,015 513,832 
Cost of revenue:
Subscription and support54,758 41,284 155,654 118,448 
License1,951 1,991 6,544 7,762 
Services63,779 48,790 169,453 148,724 
Total cost of revenue120,488 92,065 331,651 274,934 
Gross profit:
Subscription and support32,093 23,552 94,484 63,917 
License51,943 48,946 157,301 186,370 
Services(7,076)(595)(15,421)(11,389)
Total gross profit76,960 71,903 236,364 238,898 
Operating expenses:
Research and development64,049 54,155 184,378 159,964 
Sales and marketing48,142 40,879 142,940 116,739 
General and administrative27,173 23,695 76,284 67,695 
Total operating expenses139,364 118,729 403,602 344,398 
Income (loss) from operations(62,404)(46,826)(167,238)(105,500)
Interest income1,000 1,559 2,373 6,363 
Interest expense(4,885)(4,698)(14,512)(13,969)
Other income (expense), net(6,932)5,259 (13,794)14,632 
Income (loss) before provision for (benefit from) income taxes(73,221)(44,706)(193,171)(98,474)
Provision for (benefit from) income taxes(15,777)(8,073)(43,770)(32,999)
Net income (loss)$(57,444)$(36,633)$(149,401)$(65,475)
Net income (loss) per share:
Basic and diluted$(0.69)$(0.44)$(1.79)$(0.78)
Shares used in computing net income (loss) per share:
Basic and diluted83,689,429 83,600,327 83,440,231 83,693,045 

See accompanying Notes to Condensed Consolidated Financial Statements.
4

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

 Three Months Ended April 30,Nine Months Ended April 30,
 2022202120222021
Net income (loss)$(57,444)$(36,633)$(149,401)$(65,475)
Other comprehensive income (loss):
Foreign currency translation adjustments(2,769)403 (5,856)2,435 
Unrealized gains (losses) on available-for-sale securities(5,163)(1,285)(8,818)(4,334)
Tax benefit (expense) on unrealized gains (losses) on available-for-sale securities1,218 228 2,072 801 
Reclassification adjustment for realized gains (losses) included in net income (loss)81 336 173 1,003 
Total other comprehensive income (loss)(6,633)(318)(12,429)(95)
Comprehensive income (loss)$(64,077)$(36,951)$(161,830)$(65,570)

See accompanying Notes to Condensed Consolidated Financial Statements
5

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 earnings (accumulated deficit)Total
stockholders’
equity
 SharesAmount
Balance as of July 31, 202183,194,157 $8 $1,617,204 $(6,218)$(66,100)$1,544,894 
Net income (loss)— — — — (51,276)(51,276)
Issuance of common stock upon exercise of stock options1,518 — 17 — — 17 
Issuance of common stock upon vesting of RSUs335,653 — — — — — 
Stock-based compensation— — 32,533 — — 32,533 
Repurchase and retirement of common stock(226,172)— — — (26,262)(26,262)
Foreign currency translation adjustment— — — (724)— (724)
Unrealized gain (loss) on available-for-sale securities, net of tax— — — (868)— (868)
Reclassification adjustment for realized gain (loss) on available-for-sale securities, included in net income (loss)— — — 69 — 69 
Balance as of October 31, 202183,305,156 $8 $1,649,754 $(7,741)$(143,638)$1,498,383 
Net income (loss)— — — — (40,681)(40,681)
Issuance of common stock upon exercise of stock options7,230 — 80 — — 80 
Issuance of common stock upon vesting of RSUs329,987 — — — — — 
Stock-based compensation— — 38,148 — — 38,148 
Repurchase and retirement of common stock(96,373)— — — (11,189)(11,189)
Foreign currency translation adjustment— — — (2,363)— (2,363)
Unrealized gain (loss) on available-for-sale securities, net of tax— — — (1,933)— (1,933)
Reclassification adjustment for realized gain (loss) on available-for-sale securities, included in net income (loss)— — — 23 — 23 
Balance as of January 31, 202283,546,000 $8 $1,687,982 $(12,014)$(195,508)$1,480,468 
Net income (loss)— — — — (57,444)(57,444)
Issuance of common stock upon exercise of stock options1,684 — 18 — — 18 
Issuance of common stock upon vesting of RSUs268,543 — — — — — 
Stock-based compensation— — 33,241 — — 33,241 
Foreign currency translation adjustment— — — (2,769)— (2,769)
Unrealized gain (loss) on available-for-sale securities, net of tax— — — (3,945)— (3,945)
Reclassification adjustment for realized gain (loss) on available-for-sale securities, included in net income (loss)— — — 81 — 81 
Balance as of April 30, 202283,816,227 $8 $1,721,241 $(18,647)$(252,952)$1,449,650 


6

 Common stockAdditional
paid-in
capital
Accumulated
other
comprehensive income (loss)
Retained earnings (accumulated deficit)Total
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 RSUs339,759 — — — — — 
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 
Net income (loss)— — — — (36,633)(36,633)
Issuance of common stock upon exercise of stock options3,647 — 102 — — 102 
Issuance of common stock upon vesting of RSUs266,927 — — — — — 
Stock-based compensation— — 28,568 — — 28,568 
Repurchase and retirement of common stock(764,782)— — — (79,898)(79,898)
Foreign currency translation adjustment— — — 403 — 403 
Unrealized gain (loss) on available-for-sale securities, net of tax— — — (1,057)— (1,057)
Reclassification adjustment for realized gain (loss) on available-for-sale securities, included in net income (loss)— — — 336 — 336 
Balance as of April 30, 202183,280,955 $8 $1,588,143 $(5,341)$(26,326)$1,556,484 
See accompanying Notes to Condensed Consolidated Financial Statements.
7


GUIDEWIRE SOFTWARE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
 Nine Months Ended April 30,
 20222021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)$(149,401)$(65,475)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization25,745 29,028 
Amortization of debt discount and issuance costs10,719 10,143 
Amortization of contract costs9,720 8,498 
Stock-based compensation103,033 86,203 
Changes to allowance for credit losses and revenue reserves2,707 10 
Deferred income tax(47,457)(30,294)
Amortization of premium (accretion of discount) on available-for-sale securities, net4,615 4,922 
Other non-cash items affecting net income (loss)221 745 
Changes in operating assets and liabilities:
Accounts receivable15,530 43,375 
Unbilled accounts receivable(18,450)(47,887)
Prepaid expenses and other assets(13,664)(4,587)
Operating lease assets8,009 2,984 
Accounts payable4,287 (118)
Accrued employee compensation(32,255)16,451 
Deferred revenue(31,218)(38,081)
Lease liabilities(9,891)28 
Other liabilities(3,782)(12,712)
Net cash provided by (used in) operating activities(121,532)3,233 
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale securities(506,006)(758,222)
Sales of available-for-sale securities64,746 127,331 
Maturities of available-for-sale securities627,527 685,559 
Purchases of property and equipment(7,976)(12,412)
Capitalized software development costs(9,187)(7,619)
Acquisition of strategic investments(10,521)(2,000)
Acquisition of business, net of acquired cash(43,830) 
Net cash provided by (used in) investing activities114,753 32,637 
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock upon exercise of stock options116 1,922 
Repurchase and retirement of common stock(37,451)(122,577)
Net cash provided by (used in) financing activities(37,335)(120,655)
Effect of foreign exchange rate changes on cash, cash equivalents, and restricted cash(5,641)2,264 
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH(49,755)(82,521)
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH—Beginning of period384,910 366,969 
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH—End of period$335,155 $284,448 
8

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest$5,000 $5,000 
Cash paid for income taxes, net of tax refunds$3,672 $3,492 
Accruals for purchase of property and equipment$164 $2,371 
Accruals for capitalized software development costs$910 $616 
Accrual for shares repurchased$ 1,230 
See accompanying Notes to Condensed Consolidated Financial Statements.
9

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 (“AI”) applications. The Company's technology platform supports core insurance operations, including underwriting, 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 Company's condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”). The condensed consolidated financial statements and 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 GAAP have been condensed or omitted under the rules and regulations of the 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, 2021. 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 its Annual Report on Form 10-K.
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 and unbilled 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, leases, 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.
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. 
10

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 holding gains and losses, net of taxes, generally included in accumulated other comprehensive income (loss) on the condensed consolidated balance sheets. 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, Equipment, and Software Development Costs
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, equipment, and software development are as follows:
Computer hardware 3 years
Purchased software 3 years
Software development
3 to 5 years
Equipment and machinery
3 to 5 years
Furniture and fixtures 5 years
Leasehold improvements Shorter of 10 years or remaining lease term
Certain development costs related to software delivered to customers (“self-managed software”) incurred subsequent to the establishment of technological feasibility are subject to capitalization and amortized over the estimated lives of the related products. Technological feasibility is established upon completion of a working model. Costs incurred subsequent to the establishment of technological feasibility have not been material and, therefore, all software development costs related to self-managed software have been charged to research and development expense in the accompanying condensed consolidated statements of operations as incurred.
The Company capitalizes software development costs for technology applications that provide new or significantly enhanced functionality that the Company will offer solely as cloud-based subscriptions. Capitalized costs are primarily comprised of compensation for employees who are directly associated with cloud software development projects. 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, which is typically once the technology applications are available for general release, 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 recorded as research and development expense in the Company's condensed consolidated statements of operations as incurred. Capitalized software development costs are recorded in property and equipment in the Company's condensed consolidated balance sheets.
Leases
The Company accounts for leases under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic 842: Leases (“ASC 842”). 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 non-cancellable 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, maintenance, and taxes, 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 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.
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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. There have been no long-lived assets and intangible assets impairments during the periods presented.
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.
Business Combinations
The Company uses its best estimates and assumptions to assign fair value to the tangible and intangible assets acquired and liabilities assumed at the acquisition date. Goodwill is calculated as the difference between the acquisition-date fair value of the consideration transferred and the values assigned to the assets acquired and liabilities assumed. The Company’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and subject to refinement and, as a result, actual results may differ from estimates. During the measurement period, which may be up to one year from the acquisition date, if new information is obtained about facts and circumstances that existed as of the acquisition date, the Company may record adjustments to the fair value of these assets and liabilities, with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the fair value of assets acquired and liabilities assumed, whichever comes first, subsequent adjustments, if any, are recorded to the Company’s condensed consolidated statements of operations.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash, cash equivalents, investments, 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.
One customer accounted for 10% or more of the Company's revenue in both the three months ended April 30, 2022, and 2021. No customer accounted for 10% or more of the Company's revenue for the nine months ended April 30, 2022 or 2021. One customer accounted for 10% or more of the Company's accounts receivable as of April 30, 2022, and no customer accounted for 10% or more of the Company's accounts receivable as of July 31, 2021.
Accounts Receivable and Allowances
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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”).
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. 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, recognized revenue 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 services or products is separately identifiable from other promises in the contract.
To the extent a contract includes multiple promised services or products, the Company applies judgment to determine whether promised services or products are capable of being distinct and distinct in the context of the contract. If these criteria are not met, the promised services or products are accounted for as a combined performance obligation.
The Company generates revenue from the following sources, which represent the performance obligations of the Company:
i.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.
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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 subscription agreements 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. New and migration subscription agreements also typically include implementation, configuration, and training services, 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.
Recognition of revenue when, or as, the Company satisfies a performance obligation
The Company recognizes revenue when control of the services or products is 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.
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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 for 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 any 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 collectibility of future accounts receivable, customer payment history, global economic conditions, and ongoing credit evaluations of 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 and related payroll taxes paid to sales personnel 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 thereby creating a contractual liability and, on another portion of the contract, perform in advance of receiving consideration thereby creating a contractual asset. 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 condensed consolidated balance sheets.
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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 consist 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 services and products to its customers for periods ranging from three to 12 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 non-conforming product or services. Warranty expense has been insignificant to date.
Advertising Costs
Advertising costs are expensed as incurred and amounts incurred were not material during the three and nine months ended April 30, 2022 and 2021.
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. For the periods presented, the Company has granted 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, service periods, and, in select cases, performance conditions (“TSR PSUs”). RSUs, PSUs, and TSR PSUs are collectively referred to as “Stock Awards.”
The fair value of the Company’s 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 three to 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 TSR PSUs is estimated at the grant date using the Monte Carlo simulation method. The assumptions utilized under this method require judgments and estimates. Changes in these inputs and assumptions could affect the measurement of the estimated fair value of the compensation expense of the related stock awards. Compensation expense associated with TSR PSUs will be recognized over the vesting period regardless of whether the market condition is ultimately satisfied; however, the expense will be reversed if a grantee terminates prior to satisfying the requisite service period. For TSR PSUs containing an additional performance condition, a portion of the expense may fluctuate depending on estimates of the achievement of the performance conditions. All TSR PSUs will vest at the end of a three-year period.
Income Taxes
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Income taxes are accounted for under the asset and liability method. Under this method, the Company determines deferred tax assets and liabilities on the basis of the differences between the financial statement carrying amounts and tax basis of existing assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to reverse. All deferred tax assets and liabilities are classified as non-current on the Company’s condensed consolidated balance sheets. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance against deferred tax assets is recorded when it is more likely than not that some portion or all of such deferred tax assets will not be realized and is based on both positive and negative evidence about the future, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations.
The effective tax rate in any given financial statement period may differ materially from the statutory rate. These differences may be caused by changes in tax regulations and resulting changes in the deferred tax valuation allowance; changes in the mix and level of income or losses; changes in the expected outcome of tax audits; permanent differences for stock-based compensation, including excess tax benefits; research and development credits; the tax rate differences between the United States and foreign countries; foreign withholding taxes; certain non-deductible expenses, including executive compensation; acquisition-related expenses; and provisions under the Tax Cuts and Jobs Act (the “Tax Act”), including a provision to tax global intangible low-taxed income of foreign subsidiaries, a special deduction for foreign-derived intangible income, and a base erosion anti-abuse tax that may tax certain payments between a U.S. corporation and its foreign subsidiaries.
The Company records interest and penalties related to unrecognized tax benefits as income tax expense in its condensed consolidated statement of operations.
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 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 standard is 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 will adopt this standard effective August 1, 2022, the beginning of its fiscal year 2023. The Company is currently assessing the impact of adopting this standard on the condensed 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 negatively affect its diluted earnings per share. Additionally, there will be an impact to the condensed consolidated financial statements due to the removal of the equity component of the debt and the associated impact of such adjustment to the accretion of debt discount, which will result in a decrease in interest expense.
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