Guidewire Software
Annual Report 2013

Plain-text annual report

Table of ContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549________________________________________ FORM 10-K ________________________________________(Mark one)x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended July 31, 2013OR¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from to .Commission file number: 001-35394________________________________________ Guidewire Software, Inc.(Exact name of registrant as specified in its charter)________________________________________ Delaware 7372 36-4468504(State or other jurisdiction ofIncorporation or organization) (Primary Standard IndustrialClassification Code Number (I.R.S. EmployerIdentification No.)1001 E. Hillsdale Blvd., Suite 800 Foster City, California, 94404(Address of principal executive offices, including zip code)(650) 357-9100(Registrant’s telephone number, including area code)________________________________________ Securities registered pursuant to Section 12(b) of the Act:(Title of class) (Name of exchange on which registered)Common Stock, $0.0001 par value New York Stock ExchangeSecurities registered pursuant to Section 12(g) of the Act:None________________________________________ Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No xIndicate 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 12months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted andposted 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 and postsuch files). Yes x No ¨Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§232.405 of this chapter) is not contained herein, and will not be contained, tothe best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or in any amendment to this Form 10-K. xIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large acceleratedfiler,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.Large accelerated filerx Accelerated filer¨Non-accelerated filer¨ (Do not check if a smaller reporting company) Smaller reporting company¨Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No xThe aggregate market value of common stock held by non-affiliates of the registrant, computed by reference to the closing price at which the common stock was sold on January 31,2013, the last business day of the registrant’s most recently completed second fiscal quarter, as reported on the New York Stock Exchange, was approximately $1.5 billion. Shares ofcommon stock held by each executive officer, director and holder of 5% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates.This determination of affiliate status does not reflect a determination that such persons are affiliates of the registrant for any other purpose.On August 31, 2013, the registrant had 57,943,601 shares of common stock outstanding.DOCUMENTS INCORPORATED BY REFERENCEPortions of the registrant’s definitive Proxy Statement relating to its 2013 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form10-K where indicated. Such Proxy Statement will be filed with the U.S. Securities and Exchange Commission within 120 days after the end of the fiscal year to which this report relates.Table of ContentsGuidewire Software, Inc.Table of Contents Part IItem 1.Business1Item 1A.Risk Factors7Item 1B.Unresolved Staff Comments23Item 2.Properties23Item 3.Legal Proceedings23Item 4.Mine Safety Disclosures23 Part IIItem 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities24Item 6.Selected Financial Data25Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations28Item 7A.Quantitative and Qualitative Disclosures About Market Risk48Item 8.Financial Statements and Supplementary Data50Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosures77Item 9A.Controls and Procedures77Item 9B.Other Information78 Part IIIItem 10.Directors, Executive Officers and Corporate Governance79Item 11.Executive Compensation79Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters79Item 13.Certain Relationships and Related Transactions, and Director Independence79Item 14.Principal Accounting Fees and Services79 Part IVItem 15.Exhibits, Financial Statement Schedules80 iTable of ContentsFORWARD-LOOKING STATEMENTSThe Business section and other parts of this Annual Report on Form 10-K and certain information incorporated herein by reference containforward-looking statements within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934, which are subject to risks anduncertainties. The forward-looking statements include statements concerning, among other things, our business strategy (including anticipated trendsand developments in, and management plans for, our business and the markets in which we operate), financial results, operating results, revenues,gross margins, operating expenses, products, projected costs and capital expenditures, research and development programs, sales and marketinginitiatives 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 andother comparable terminology. Actual events or results may differ materially from those expressed or implied by these statements due to variousfactors, including but not limited to the matters discussed below, in the section titled “Item 1A. Risk Factors,” and elsewhere in this Annual Report onForm 10-K. Many of the forward-looking statements are located in “Management’s Discussion and Analysis of Financial Condition and Results ofOperations.” Examples of forward-looking statements include statements regarding:•growth prospects of the Property & Casualty (“P&C”) insurance industry and our company;•trends in our future sales, including seasonality;•opportunities for growth by technology leadership;•competitive advantages of our platform of software application solutions;•our market strategy in relation to our competitors;•competitive attributes of our software application solutions;•opportunities to further expand our position outside of the United States;•risk of exposure to product liability;•our research and development investment and efforts;•satisfying our future liquidity requirements;•our gross margins and factors that affect gross margins;•our provision for tax liabilities and other critical accounting estimates;•our exposure to market risks; and•future payments required pursuant to lease agreements and commitments.Forward-looking statements are not guarantees of future performance and involve risks and uncertainties. The forward-looking statementscontained in this Annual Report on Form 10-K are based on information available to us as of the filing date of this Annual Report on Form 10-K andour current expectations about future events, which are inherently subject to change and involve risks and uncertainties. You should not place unduereliance on these forward-looking statements.We do not undertake any obligation to update any forward-looking statements in this report or in any of our other communications, except asrequired by law. All such forward-looking statements should be read as of the time the statements were made and with the recognition that theseforward-looking statements may not be complete or accurate at a later date. _________________________________________________________Unless the context requires otherwise, we are referring to Guidewire Software, Inc. when we use the terms “Guidewire,” the “Company,” “we,” “our” or“us.”iiTable of ContentsItem 1.BusinessOverviewGuidewire Software, Inc. is a provider of software products for Property & Casualty ("P&C") insurers. Our solutions serve as the transactionalsystems-of-record for, and enable the key functions of a P&C insurance carrier’s business: underwriting and policy administration, claims management andbilling. Since our inception, our mission has been to empower P&C insurance carriers to transform and improve their businesses by replacing their legacycore systems with our innovative modern software platform. Our solutions enable our customers to respond to evolving market needs, while improving theefficiency of their core operations, thereby increasing their revenues and reducing their costs.We have developed an integrated suite of highly configurable applications that support our customers’ most fundamental business processes. Oursoftware product architecture enables extensive configurability of business rules, workflows and user interfaces without modifications to the underlying codebase. This approach allows our customers to easily make changes in response to specific, evolving business needs. More recently, we have created, and areinvesting in, adjacent products to our core solutions, which provide added value to our customers.Our solutions are delivered through a web-based interface and can be deployed either on-premise or in cloud environments. Our customers typicallychoose to deploy our solutions on-premise due to security requirements and numerous integration points with other systems. To support the global operationsof our customers, our software has been localized for use in a variety of international regulatory, language and currency environments.Our Guidewire InsuranceSuite enables core P&C insurance operations and is comprised of:•Guidewire PolicyCenter—A flexible underwriting and policy administration application that serves as a comprehensive system-of-record forpolicies and supports the entire policy lifecycle;•Guidewire ClaimCenter—An end-to-end claims management application for claim intake, assessment, settlement and processing of relatedfinancial transactions; and•Guidewire BillingCenter—A comprehensive billing and receivables application that enables flexible billing, payment and commission options.Our more recent product initiatives include:•InsuranceSuite Add-on Modules—Additional modules which add additional flexibility and functionality to our core products.•Data Management and Business Intelligence—Tools to assist insurers to better map and convert data into new core systems and to create acentral data hub that can keep downstream processes intact and deliver an enterprise-wide view and insights to fine-tune the business.•Guidewire Live —A cloud-based network connecting peer insurers, core system data and external data. Customers access Guidewire Livethrough applications which enable more informed, context-driven decisions and actions.Strong customer relationships are a key component of our business which supports the long-term nature of our contracts and importance of customerreferences for new sales. Our customers range from some of the largest global insurance carriers or their subsidiaries such as Tokio Marine & Nichido FireInsurance Co., Ltd. and Zurich Financial Services Group Ltd. to national carriers such as Nationwide Mutual Insurance Company to regional carriers suchas AAA affiliates. As of July 31, 2013, we had 158 customers.We began our principal business operations in 2001 and sold the initial versions of ClaimCenter in 2003, PolicyCenter in 2004 and BillingCenter in2006. We conducted our initial public offering of our common stock on January 25, 2012 and our follow-on public offering of our common stock onApril 19, 2012. We primarily generate software license revenues through annual license fees that recur during the multi-year term of a customer’s contract. Theaverage initial length of our contracts is approximately five years, and these contracts are renewable on an annual or multi-year basis. We typically invoice ourcustomers annually in advance or, in certain cases, quarterly for both recurring term license and maintenance fees, and we invoice our perpetual licensecustomers either in full at contract signing or on an installment basis and we invoice related maintenance fees annually, in advance. We primarily derive ourservices revenues from implementation and training services performed for our customers. A significant majority of services are billed on a time and materialsbasis and recognized as revenues upon delivery of the services.1Table of ContentsBackgroundThe P&C insurance industry is large, fragmented, highly regulated and complex. The P&C insurance industry is highly competitive and carrierscompete primarily on the following factors: product differentiation, pricing options, customer service, marketing and advertising, affiliate programs andchannel strategies. The key functional areas in P&C insurance are underwriting and policy administration, claims management and billing. Underwriting andpolicy administration are the cornerstone functions of all P&C insurance carriers’ operations.These processes involve collecting information from potential policyholders, determining appropriate coverage and terms, pricing the policy, issuing thepolicy and updating and maintaining the policy over its lifetime. Claims management includes loss report intake, investigation and evaluation of incidents,claims negotiation, payment processing and litigation management. Billing includes account creation, policyholder invoicing, payment collection, commissioncalculation and disbursement.Effective policy management requires IT systems that integrate with other internal systems and have the ability to control workflow, enable extensiveconfigurability and provide visibility to every user. The varying regulatory requirements of each region requires customization of data and business rules,rendering the design of comprehensive IT solutions on a regional, national and global basis a major challenge for IT providers serving this industry.Additionally, stringent archiving and audit requirements, along with frequent changes in regulatory policy, have imposed a significant burden on IT systemsand staff, which struggle to adequately support such requirements in IT environments dominated by legacy core systems. P&C insurance carriers spendconsiderable amounts of time and capital on software to maintain and attempt to improve legacy systems, manage workflows in highly distributedenvironments and respond to changing and interrelated customer and employee needs.ProductsWe provide an integrated suite of software applications built on a unified platform that address the core processes for P&C insurance carriers:underwriting and policy administration, claims management and billing. Our customers buy our software applications separately or in combination as a suite.Guidewire InsuranceSuiteGuidewire InsuranceSuite includes each of our individual applications: PolicyCenter, ClaimCenter and BillingCenter. We have built our suite ofapplications on a unified technology platform, providing enhanced workflow and functionality between applications.Guidewire PolicyCenterGuidewire PolicyCenter is our flexible underwriting and policy administration application that serves as a comprehensive system-of-record that supportsthe entire policy lifecycle, including product definition, underwriting, quoting, binding, issuances, endorsements, audits, cancellations and renewals.Guidewire ClaimCenterGuidewire ClaimCenter is our claims management application for claim intake, assessment, settlement and processing of claim-related financialtransactions. ClaimCenter enables claims lifecycle management improvements including dynamic, intuitive loss report intake, advanced adjudicationprocesses and integrated operational reporting. ClaimCenter provides P&C insurance carriers with modern productivity tools built within a sophisticatedbusiness rules-based claims application.Guidewire BillingCenterGuidewire BillingCenter is our billing and receivables management application. It automates the billing lifecycle, enables the design of a wide variety ofbilling and payment plans, manages agent commissions and integrates with external payment systems.InsuranceSuite Add-on ModulesWe also offer the following add-on modules for InsuranceSuite:Guidewire Rating Management. Guidewire Rating Management enables P&C insurance carriers to manage the pricing of their insurance products.Guidewire Reinsurance Management. Guidewire Reinsurance Management enables P&C insurance carriers to use rules-based logic to execute theirreinsurance strategy through their underwriting and claims processes.2Table of ContentsGuidewire Client Data Management. Guidewire Client Data Management helps P&C insurance carriers capitalize on customer information morecoherently, overcoming traditional siloed practices that impair efficiency and customer service.Guidewire Standards-Based Templates. Guidewire Standards-Based Templates help facilitate both initial implementation and ongoing maintenance ofISO-based insurance products.Data Management and Business Intelligence ("BI")Guidewire DataHub. Guidewire DataHub is an operational data store that unifies, standardizes and stores data from the patchwork of an insurer'ssystems as well as external sources, which also enables carriers to accelerate legacy system replacement.Guidewire InfoCenter. Guidewire InfoCenter is a business intelligence warehouse for P&C insurers which provides information in easy-to-use formatsfor business intelligence, analysis and enhanced decision making. With InfoCenter, customers gain operational insight as well as fine-tune their business bybuilding views and understanding across the enterprise.Guidewire LiveGuidewire Live is a cloud-based network connecting peer insurers, core system data and external data through applications. Customers access GuidewireLive through applications which enable more informed, context-driven decisions and actions.TechnologyWe developed our suite of applications on our unified technology platform, which combines standards-based elements and proprietary components. Webased our platform on the most common software industry standard, Java EE, to provide flexibility and deployability into P&C insurance carrier enterpriseenvironments worldwide. P&C insurance carrier IT departments can manage and administer our applications through their development, test and productionenvironments by leveraging the broad set of supporting infrastructure and proprietary tools we have built around the Java EE framework.ServicesWe provide implementation and integration services to help our customers realize benefits from our software solutions. Guidewire implementation teamsassist customers in building implementation plans, integrating our software solutions with their existing systems and defining business rules and specificrequirements unique to each customer and installation. We also partner with several leading system integration consulting firms, certified on our software, toachieve scalable, cost-effective implementations for our customers. We expect our services revenues and related costs of revenues to increase in future periodsas we provide more implementation services to our customers.CustomersWe market and sell our products to a wide variety of global P&C insurance carriers ranging from some of the largest global insurers to national carriersto regional carriers. We believe strong customer relationships are a key component of our success given the long-term nature of our contracts and importance ofcustomer references for new sales. We focus on developing and maintaining our customer relationships through customer service and account management. Asof July 31, 2013, we had 158 customers in 17 countries using one or more of our products.Strategic RelationshipsWe have extensive relationships with system integration, consulting and industry partners. Our network of partners has expanded as the interest in andadoption of our solutions 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 engineering resources on continued innovation and further enhancement of oursolutions. We partner with leading system integrators including Capgemini, Ernst & Young, IBM Global Services and PricewaterhouseCoopers.Sales and MarketingConsistent with our industry focus and the mission-critical needs our solutions address, our sales and marketing efforts are tailored to communicateeffectively to senior executives within the P&C industry. Our sales, marketing and executive teams work together to cultivate long-term relationships with ourcurrent and prospective customers in each of the geographies in which we are active.As of July 31, 2013, we employed 177 employees in a sales and marketing capacity, including 36 direct sales representatives organized by geographicregion across the U.S., Canada, U.K., France, Germany, Australia, Japan and Hong3Table of ContentsKong. This team serves as both our exclusive sales channel and our account management function. We augment our sales professionals with a pre-sales teampossessing insurance domain and technical expertise, who engage customers in sessions to understand their specific business needs and then represent ourproducts through demonstrations tailored to address those needs.Our marketing team supports sales with competitive analysis and sales tools, while investing to strengthen our brand name and reputation. Weparticipate at industry conferences, are published frequently in the industry press and have active relationships with all of the major industry analysts. Wealso host Connections, an annual user conference where customers both participate in and deliver programs on a wide range of Guidewire and insurancetechnology topics. We invite potential customers and partners to our user conference, as we believe customer references are a key component of driving newsales. Our strong relationships with leading system integrators, including Capgemini, Ernst & Young, IBM Global Services and PricewaterhouseCoopers,enhance our direct sales through co-marketing efforts and providing additional market validation of our products’ distinctiveness and quality.Research and DevelopmentOur research and development efforts reflect the extensive IT needs of P&C insurance carriers. These systems are required to perform millions ofcomplex transactions that must balance on a daily basis. This accuracy must be maintained not only during normal business operations, but also duringextraordinary events such as catastrophes, which may result in extremely high transaction volume in a short period of time. Our research and developmentefforts focus on enhancing our solutions to meet the increasingly complex requirements of P&C insurance carriers and broadening our suite of applicationswith new product initiatives to form an end-to-end software solution for P&C insurance carriers.As of July 31, 2013, our research and development department had 330 employees. We incurred $66.3 million, $50.5 million and $34.8 million inresearch and development expenses for fiscal years 2013, 2012 and 2011, respectively.CompetitionThe market to provide core system software to the P&C insurance industry is highly competitive and fragmented. This market is subject to changingtechnology, shifting client needs and introductions of new products and services. Our competitors vary in size and in the breadth and scope of the productsand services offered. Our current principal competitors include: Internally developed software Many large insurance companies have sufficient IT resources to maintain and augment their own proprietaryinternal systems, or consider developing new custom systems;IT services firms Firms such as Accenture, CSC, MajescoMastek and Tata Consultancy Services Limited offer software andsystems or develop custom, proprietary solutions for the P&C insurance industry;P&C insurance software vendors Vendors such as Accenture, FINEOS, Innovation Group, ISCS, OneShield, Inc., StoneRiver, Inc., and TIATechnology A/S provide software solutions that are specifically designed to meet the needs of P&C insurancecarriers; andHorizontal software vendors Vendors such as Pegasystems Inc. and SAP AG offer software that can be customized to address the needsof P&C insurance carriers.The principal competitive factors in our industry include total cost of ownership, product functionality, flexibility and performance, customer referencesand in-depth knowledge of the P&C insurance industry. We believe that we compete favorably with our competitors on the basis of each of these factors.However, many of our current or potential competitors have greater financial and other resources, greater name recognition and longer operating histories thanwe do.Intellectual PropertyOur success and ability to compete depend in part upon our ability to protect our proprietary technology and to establish and adequately protect ourintellectual property rights. To accomplish these objectives, we rely on a combination of patent, trademark, copyright and trade secret laws in the UnitedStates and other jurisdictions, as well as license agreements and other contractual protections.As of July 31, 2013, we owned seven issued U.S. patents. We also have 29 regular U.S. patent applications pending. Our issued patents are scheduledto expire from 2026 to 2032. Our patents and patent applications generally apply to our InsuranceSuite and applications. Given the costs, effort, risks anddownside of obtaining patent protection, including the requirement to ultimately disclose the invention to the public, we may choose not to seek patentprotection for certain innovations; however, such patent protection could later prove to be important to our business.4Table of ContentsWe also rely on several registered and unregistered trademarks to protect our brand. We own registrations for the trademarks Guidewire, GuidewirePolicyCenter, Guidewire ClaimCenter and Guidewire BillingCenter in the United States and Canada. We also own a U.S. trademark registration, anInternational Registration (with protection extended to Australia and the European Community) and a Canada registration for the Gosu trademark.Additionally, we own an Australia trademark registration, a Hong Kong trademark registration, and a Japan trademark registration for the Guidewiretrademark. We have also registered the trademark Guidewire Software in the European Community. Finally, we own international registrations, designatingChina, the European Community and Russia, for the Guidewire trademark, all of which are pending.The software industry is characterized by the existence of a large number of patents and frequent claims and related litigation regarding patent and otherintellectual property rights. In particular, leading companies in the software industry have extensive patent portfolios. From time-to-time, third parties,including certain of these leading companies, may assert patent, copyright, trademark or other intellectual property claims against us or our customers. In thisregard, we were previously sued by Accenture, a competitor, in the U.S. District Court for the District of Delaware. Our patent litigation with Accenture hasbeen settled and is further described in “Legal Proceedings” in Item 3 of Part I of this Annual Report on Form 10-K.EmployeesAs of July 31, 2013, we had 1,149 employees, including 177 in sales and marketing, 528 in services and support, 330 in research and developmentand 114 in a general and administrative capacity. As of July 31, 2013, we had 787 employees in the United States and 362 employees internationally. None ofour employees is represented by a labor union with respect to his or her employment with us. We have not experienced any work stoppages and we considerour relations with our employees to be good.Information about Segment and Geographic RevenueInformation about segment and geographic revenue is set forth in Note 9 of the Notes to Consolidated Financial Statements under Item 8 of this AnnualReport on Form 10-K.SeasonalityWe sign a significantly higher percentage of software license orders in the second and fourth quarters of each fiscal year. We generally see increasedorders in our second fiscal quarter, which is the quarter ended January 31, due to customer buying patterns. We also see increased orders in our fourth fiscalquarter due to efforts by our sales team to achieve annual incentives. As a result, a significantly higher percentage of our annual license revenues havehistorically been recognized during those quarters. Since a substantial majority of our license revenues recur annually under our multi-year contracts, weexpect to continue to experience this seasonality effect in subsequent years. Our maintenance and services revenues are not as impacted by this seasonal trend.Executive Officers of the RegistrantOur current executive officers, and their ages and positions as of September 15, 2013, are set forth below:Name Age Position(s)Marcus S. Ryu 40 President, Chief Executive Officer, Co-Founder and DirectorKaren Blasing 57 Chief Financial OfficerJeremy Henrickson 39 Vice President, Product DevelopmentAlexander C. Naddaff 58 Vice President, Professional ServicesPriscilla Hung 46 Senior Vice President, Operations & Corporate DevelopmentJ. Winston King 41 Vice President, General Counsel and SecretaryMarcus S. Ryu co-founded Guidewire and has served as our President and Chief Executive Officer since 2010 and as a member of our board ofdirectors since 2001. He served as our Vice President of Products from 2008 to 2010 and our Vice President of Strategy from 2001 to 2008. Prior to foundingGuidewire, from 2000 to 2001, Mr. Ryu was Vice President of Strategy at Ariba, Inc., a software-as-a-service provider of collaborative business commercesolutions for buying and selling goods and services. Mr. Ryu also worked as an Associate and Engagement Manager at McKinsey & Company from 1998until 2000. Mr. Ryu holds an A.B. from Princeton University and a B.Phil. from New College, Oxford University.Karen Blasing has served as our Chief Financial Officer since 2009. Prior to joining Guidewire, from 2006 to 2009, Ms. Blasing was Chief FinancialOfficer at Force10 Networks, Inc., a network solutions provider recently acquired by Dell Inc. From 2002 to 2005, Ms. Blasing was Chief Financial Officerat Nuance Communications, Inc., a speech and imaging software5Table of Contentsdeveloper. Ms. Blasing holds a B.A. in Economics and a B.A. in Business Administration, Finance from the University of Montana and an M.B.A. from theUniversity of Washington.Jeremy Henrickson has served as our Vice President of Product Development since 2008. Prior to that, he served as our Director of ProductManagement and Program Manager from 2006 to 2008 and our Senior Product Manager from 2003 to 2005. He was also a founding member of our Europeansales team. Prior to joining Guidewire, Mr. Henrickson was Director of Technology Services at Reactivity, Inc., a developer of XML processing applications.Mr. Henrickson holds a B.S. and an M.S. in Computer Science from Stanford University.Alexander C. Naddaff has served as our Vice President of Professional Services since 2002. Prior to joining Guidewire, from 1998 to 2002,Mr. Naddaff worked as Vice President of Claims Technology at The Hartford Insurance Company. Mr. Naddaff holds a B.S. in Accounting from WagnerCollege.Priscilla Hung has served as our Senior Vice President of Operations & Corporate Development since September 2012, Vice President of Operationssince 2010, and Vice President of Corporate Development & Alliances from 2005 to 2010. Prior to joining Guidewire in 2005, from 2000 to 2005 Ms. Hungheld several management positions at Ariba Inc., including the Director of Operations and Director of Global Channels and Alliances, and prior to that heldseveral channel, business development, and product marketing positions at Sun Microsystems, Uniface/Compuware, Pyramid/Siemens Nixdorf, and OracleCorporation. Ms. Hung holds an M.Eng Industrial Engineering and Operations Research degree from Cornell University.J. Winston King has served as our Vice President, General Counsel and Secretary since January 2013. Before joining Guidewire, Mr. King worked atInfogroup, Inc., a multinational data, marketing services and research firm, from 2007 to 2012, where he most recently was EVP, General Counsel andSecretary. Prior to that, Mr. King practiced with the WilmerHale law firm, in their Washington, DC office. Mr. King holds a A.B. in economics from DukeUniversity and a J.D. from Vanderbilt University School of Law.WHERE YOU CAN FIND MORE INFORMATIONThe following filings are available through our investor relations website after we file them with the Securities and Exchange Commission (“SEC”):Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and our Proxy Statement for our annual meeting ofstockholders. These filings are also available for download free of charge on our investor relations website. Our website is located at www.guidewire.com, andour investor relations website is located at http://ir.guidewire.com/. We also provide a link to the section of the SEC’s website at www.sec.gov that has all of ourpublic filings, including periodic reports, proxy statements and other information. Further, a copy of this Annual Report on Form 10-K is located at the SEC’sPublic Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by callingthe SEC at 1-800-SEC-0330.We webcast our earnings calls and certain events we participate in or host with members of the investment community on our investor relations website.Additionally, we provide notifications of news or announcements regarding our financial performance, including SEC filings, investor events, press andearnings releases, and blogs as part of our investor relations website. Investors and others can receive notifications of new information posted on our investorrelations website in real time by signing up for email alerts and RSS feeds. Further corporate governance information, including our governance guidelines andcode of business conduct and ethics, is also available on our investor relations website under the heading “Corporate Governance.” The contents of ourwebsites are not intended to be incorporated by reference into this Annual Report on Form 10-K or in any other report or document we file with the SEC, andany references to our websites are intended to be inactive textual references only.6Table of ContentsItem 1A.Risk FactorsA description of the risks and uncertainties associated with our business is set forth below. You should carefully consider such risks anduncertainties, together with the other information contained in this report, and in our other public filings. If any of such risks and uncertainties actuallyoccurs, our business, financial condition or operating results could differ materially from the plans, projections and other forward-looking statementsincluded in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this reportand in our other public filings. In addition, if any of the following risks and uncertainties, or if any other risks and uncertainties, actually occurs, ourbusiness, financial condition or operating results could be harmed substantially, which could cause the market price of our stock to decline, perhapssignificantly.We may experience significant quarterly and annual fluctuations in our results of operations due to a number of factors.Our quarterly and annual results of operations may fluctuate significantly due to a variety of factors, many of which are outside of our control. Thisvariability may lead to volatility in our stock price as research analysts and investors respond to quarterly fluctuations. In addition, comparing our results ofoperations on a period-to-period basis, particularly on a sequential quarterly basis, may not be meaningful. You should not rely on our past results as anindication of our future performance.Factors that may affect our results of operations include:•structure of our licensing contracts, including fluctuations in perpetual licenses from period to period;•the timing of new orders and revenue recognition for new and prior year orders;•seasonal buying patterns of our customers;•our ability to increase sales to and renew agreements with our existing customers, particularly larger customers, at comparable prices;•our ability to renew existing contracts for multiple year terms versus annual automatic renewals;•our ability to attract new customers, particularly larger customers, in both domestic and international markets;•our ability to enter into contracts on favorable terms, including terms related to price, payment timing and product delivery;•volatility in the sales of our products and timing of the execution of new and renewal agreements within such periods;•commissions expense related to large transactions;•bonus expense based on the bonus attainment rate;•the lengthy and variable nature of our product implementation cycles;•reductions in our customers’ budgets for information technology purchases and delays in their purchasing cycles, particularly in light of recentadverse global economic conditions;•our ability to control costs, including our operating expenses;•any significant change in our facilities-related costs;•the timing and cost of hiring personnel and of large expenses such as those for trade shows and third-party professional services;•the timing and amount of an additional litigation settlement payment, if any;•stock-based compensation expenses and related payroll taxes, which vary along with changes to our stock price;•general domestic and international economic conditions, in the insurance industry in particular;•fluctuations in foreign currency exchange rates;•future accounting pronouncements or changes in our accounting policies; and•the impact of a recession or any other adverse global economic conditions on our business, including uncertainties that may cause a delay inentering into or a failure to enter into significant customer agreements.In addition, our revenue may fluctuate if our customers make an early payment of their annual fees.The foregoing factors are difficult to forecast, and these, as well as other factors, could materially adversely affect our quarterly and annual results ofoperations. Any failure to adjust spending quickly enough to compensate for a revenues shortfall could magnify the adverse impact of such revenues shortfallon our results of operations. Failure to achieve our quarterly forecasts or to meet or exceed the expectations of research analysts or investors will cause our stockprice to decline.7Table of ContentsSeasonal sales patterns and other variations related to our revenue recognition may cause significant fluctuations in our results of operationsand cash flows and may prevent us from achieving our quarterly or annual forecasts, which may cause our stock price to decline.We sign a significantly higher percentage of software license orders in the second and fourth quarters of each fiscal year. We generally see increasedorders in our second fiscal quarter, which is the quarter ended January 31, due to customer buying patterns. We also see increased orders in our fourth fiscalquarter due to efforts by our sales team to achieve annual incentives. As a result, a significantly higher percentage of our annual license revenues havehistorically been recognized during those quarters. Since a substantial majority of our license revenues recur annually under our multi-year contracts, weexpect to continue to experience this seasonality effect in subsequent years.Notwithstanding the fact that we generally see increased licensing orders in our second and fourth fiscal quarters, we expect to see additional quarterlyrevenue fluctuations that may, in some cases, mask the impact of these expected seasonal variations. Our quarterly growth in license revenues also may notmatch up to new orders we receive in a given quarter. This mismatch is primarily due to the following reasons:•for the initial year of a multi-year term license, we generally recognize revenues when payment is due and payment may not be due until asubsequent fiscal quarter;•we may enter into license agreements with specified terms for product upgrades or functionality, which may require us to delay revenuerecognition for the initial period; and•we may enter into license agreements with other contractual terms that may affect the timing of revenue recognition.Our revenues may fluctuate versus comparable prior periods or prior quarters within the same fiscal year based on when new orders are executed in thequarter and the payment terms of each order. Additionally, our revenues may fluctuate if our customers make an early payment of their annual fees. Ourability to renew existing contracts for multiple year terms versus annual automatic renewals may also impact revenue recognition.We generally charge annual software license fees for our multi-year term licenses and price our licenses based on the amount of direct written premiums(“DWP”) that will be managed by our solutions. However, in certain circumstances, our customers desire the ability to purchase our products on a perpetuallicense basis, resulting in an acceleration of revenue recognition. Milestone payments in a perpetual license order also cause seasonal variations. Our perpetuallicense revenues are not consistent from period to period. In addition, a few of our multi-year term licenses provide the customer with the option to purchase aperpetual license at the end of the initial contract term, which we refer to as a perpetual buyout right. The mix of our contract terms for our licenses and theexercise of perpetual buyout rights at the end of the initial contract term by our customers may lead to variability in our results of operations. Increases inperpetual license sales and exercises of perpetual buyout rights by our customers may affect our ability to show consistent growth in license revenues insubsequent periods. Reductions in perpetual licenses in future periods could cause adverse period-to-period comparisons of our financial results.In addition, because we price our products based on the amount of DWP that will be managed by our solutions, license revenues from each customermay fluctuate up or down based upon insurance policies sold by the customer in the preceding year. If we enter into a new territory, our revenue recognitionpattern may change, depending on the contractual terms and local laws and regulations. Seasonal and other variations related to our revenue recognition maycause significant fluctuations in our results of operations and cash flows, may make it challenging for an investor to predict our performance on a quarterlybasis and may prevent us from achieving our quarterly or annual forecasts or meeting or exceeding the expectations of research analysts or investors, whichmay cause our stock price to decline.We have relied and expect to continue to rely on orders from a relatively small number of customers in the P&C insurance industry for asubstantial portion of our revenues, and the loss of any of these customers would significantly harm our business, results of operations andfinancial condition.Our revenues are dependent on orders from customers in the P&C insurance industry, which may be adversely affected by economic, environmentaland world political conditions. A relatively small number of customers have historically accounted for a majority of our revenues. In fiscal years 2013, 2012and 2011, our ten largest customers accounted for 33%, 35% and 41% of our revenues, respectively. While we expect this reliance to decrease over time, weexpect that we will continue to depend upon a relatively small number of customers for a significant portion of our revenues for the foreseeable future. As aresult, if we fail to successfully sell our products and services to one or more anticipated customers in any particular period or fail to identify additionalpotential customers or an anticipated customer purchases fewer of our products or services, defers or cancels orders, or terminates its relationship with us, ourbusiness, results of operations and financial condition would be harmed. Some of our orders are realized at the end of the quarter or are subject to delayedpayment terms. As a result of this concentration and8Table of Contentstiming, if we are unable to complete one or more substantial sales or achieve any required performance or acceptance criteria in any given quarter, our quarterlyresults of operations may fluctuate significantly.Our services revenues produce lower gross margins than our license or maintenance revenues, and an increase in services revenues as apercentage of total revenues could adversely affect our overall gross margins and profitability.Our services revenues were 46%, 45% and 45% of total revenues for each of fiscal years 2013, 2012 and 2011, respectively. Our services revenuesproduce lower gross margins than our license revenues. The gross margin of our services revenues was 12%, 19% and 18% for fiscal years 2013, 2012 and2011, respectively, while the gross margin for license revenues was 99%, 99% and 98% for the respective periods. An increase in the percentage of totalrevenues represented by services revenues could reduce our overall gross margins.The volume and profitability of our services offerings depend in large part upon:•price charged to our customers;•the utilization rate of our services personnel;•the complexity of our customers’ information technology environments;•our ability to accurately forecast the time and resources required for each implementation project;•the resources directed by our customers to their implementation projects;•our ability to hire, train and retain qualified services personnel;•unexpected difficulty in projects which may require additional efforts on our part without commensurate compensation;•our ability to manage fixed fee arrangements;•the extent to which system integrators provide services directly to customers; and•our ability to adequately predict customer demand and scale our professional services staff accordingly.Any erosion in our services margins or any significant increase in services revenues as a percentage of total revenues would adversely affect our resultsof operations.Assertions by third parties of infringement or other violation by us of their intellectual property rights could result in significant costs andsubstantially harm our business and results of operations.The software industry is characterized by the existence of a large number of patents and frequent claims and related litigation regarding patents and otherintellectual property rights. In particular, leading companies in the software industry own large numbers of patents, copyrights, trademarks and trade secrets,which they may use to assert claims against us. From time to time, third parties, including certain of these leading companies, may assert patent, copyright,trademark or other intellectual property claims against us, our customers and partners, and those from whom we license technology and intellectual property.Although we believe that our products and services do not infringe upon the intellectual property rights of third parties, we cannot assure that thirdparties will not assert infringement or misappropriation claims against us with respect to current or future products or services, or that any such assertionswill not require us to enter into royalty arrangements or result in costly litigation, or result in us being unable to use certain intellectual property. We cannotassure that we are not infringing or otherwise violating any third party intellectual property rights. Infringement assertions from third parties may involvepatent holding companies or other patent owners who have no relevant product revenues, and therefore our own issued and pending patents may provide littleor no deterrence to these patent owners in bringing intellectual property rights claims against us.Any intellectual property infringement or misappropriation claim or assertion against us, our customers or partners, and those from whom we licensetechnology and intellectual property could have a material adverse effect on our business, financial condition, reputation and competitive position regardless ofthe validity or outcome. If we are forced to defend against any infringement or misappropriation claims, whether they are with or without merit, are settled outof court, or are determined in our favor, we may be required to expend significant time and financial resources on the defense of such claims. Furthermore, anadverse outcome of a dispute may require us to pay damages, potentially including treble damages and attorneys’ fees, if we are found to have willfullyinfringed a party’s intellectual property; cease making, licensing or using our products or services that are alleged to infringe or misappropriate the intellectualproperty of others; expend additional development resources to redesign our products or services; enter into potentially unfavorable royalty or licenseagreements in order to obtain the right to use necessary technologies or works; and to indemnify our partners, customers, and other third parties. Royalty orlicensing agreements, if required or desirable, may be unavailable on terms acceptable to us, or at all, and may require significant royalty payments and otherexpenditures. Any of these events could seriously harm our business, results of operations and financial9Table of Contentscondition. In addition, any lawsuits regarding intellectual property rights, regardless of their success, could be expensive to resolve and divert the time andattention of our management and technical personnel.We may incur additional future expenses in connection with the settlement of our litigation with Accenture.In December 2007, we were sued by Accenture, a competitor, in the U.S. District Court for the District of Delaware (the "Delaware Court") over ouralleged infringement of certain of their intellectual property rights and related state law claims. Over time, both parties asserted additional claims against eachother. In October 2011, we agreed with Accenture to resolve all outstanding litigation. In connection with the settlement, we paid $10.0 million to Accenture witha potential additional payment based on the final outcome of Accenture’s pending appeal of the Delaware Court’s ruling of invalidity on one of Accenture'spatents. In September 2013, the United States Court of Appeals for the Federal Circuit (the "Federal Circuit") ruled in our favor, affirming the judgment of theDelaware Court and finding Accenture's patent invalid. Accenture may still request United States Supreme Court review or rehearing by the full FederalCircuit sitting en banc, and, if Accenture is allowed to appeal and is ultimately successful, then we have agreed to pay Accenture an additional $20.0 million.Otherwise, no further payments would be due in connection with the settlement. Our patent litigation with Accenture and the terms of the settlement are furtherdescribed in “Legal Proceedings” in Item 3 of Part I of this Annual Report on Form 10-K.We may expand through acquisitions of or partnerships with other companies, which may divert our management’s attention and result inunexpected operating and technology integration difficulties, increased costs and dilution to our stockholders.In May 2013, we acquired Millbrook, Inc., a complementary business, and in September 2013, we announced a strategic alliance with Mitchell, Inc., abusiness which also services the P&C industry. In the future, our business strategy may include additional acquisitions of complementary software,technologies or businesses or alliances with businesses offering the same. Acquisitions and alliances may result in unforeseen operating difficulties andexpenditures. In particular, we may encounter difficulties in assimilating or integrating the businesses, technologies, services, products, personnel oroperations of the acquired companies, especially if the key personnel of the acquired company choose not to work for us, and we may have difficulty retainingthe existing customers or signing new customers of any acquired business. Acquisitions and alliances may also disrupt our ongoing business, divert ourresources and require significant management attention that would otherwise be available for ongoing development of our current business. We also may berequired to use a substantial amount of our cash or issue equity securities to complete an acquisition or realize the potential of an alliance, which could depleteour cash reserves and dilute our existing stockholders. Following an acquisition or the establishment of an alliance offering new products, we may be requiredto defer the recognition of revenues that we receive from the sale of products that we acquired or that result from the alliance, or from the sale of a bundle ofproducts that includes such new products, if we have not established vendor-specific objective evidence ("VSOE") for the undelivered elements in thearrangement. A delay in the recognition of revenues from sales of acquired or alliance products, or bundles that include the same, may cause fluctuations inour quarterly financial results and may adversely affect our operating margins.Additionally, competition within the software industry for acquisitions of businesses, technologies and assets has been, and may in the future continueto be, intense. As such, even if we are able to identify an acquisition that we would like to consummate, the target may be acquired by another strategic buyeror financial buyer such as a private equity firm, or we may otherwise not be able to complete the acquisition on commercially reasonable terms, if at all.Moreover, the anticipated benefits of any acquisition, including our revenues or return on investment assumptions, may not be realized or we may be exposedto unknown liabilities as a result of such acquisition.We face intense competition in our market, which could negatively impact our business, results of operations and financial condition and causeour market share to decline.The market for our core insurance system software is intensely competitive. Our implementation cycle is lengthy, variable and requires the investment ofsignificant time and expense by our customers. We compete with legacy systems, many of which have been in operation for decades. Maintaining these legacysystems may be so time consuming and costly for our customers that they do not have adequate resources to devote to the purchase and implementation of ourproducts. We also compete against technology consulting firms that offer software and systems or develop custom, proprietary products for the P&Cinsurance industry. These consulting firms generally have greater name recognition, larger sales and marketing budgets and greater resources than we do andmay have pre-existing relationships with our potential customers, including relationships with, and access to, key decision makers within these organizations.We also encounter competition from small independent firms that compete on the basis of price, custom developments or unique product features or functionsand from vendors of software products that may be customized to address the needs of P&C insurance carriers.10Table of ContentsWe expect the intensity of competition to remain high in the future as new companies enter our markets and existing competitors develop strongercapabilities. Such intense competition could result in increased pricing pressure, reduced profit margins, increased sales and marketing expenses, and failureto increase, or the loss of, market share, any of which could harm our business, results of operations and financial condition. Our competitors may be able todevote greater resources to the development, promotion and sale of their products than we can to ours, which could allow them to respond more quickly thanwe can to new technologies and changes in customer needs and achieve wider market acceptance. We may not be able to compete effectively and competitivepressures may prevent us from acquiring and maintaining the customer base necessary for us to increase our revenues and profitability.Our current and potential competitors may also establish cooperative relationships among themselves or with third parties that may further enhance theirresources. Current or potential competitors may be acquired by third parties with greater available resources, such as Accenture’s acquisition of Duck CreekTechnologies, Inc. in July 2011. As a result of such acquisitions, our current or potential competitors might be able to adapt more quickly to new technologiesand customer needs, devote greater resources to the promotion or sale of their products and services, initiate or withstand substantial price competition, takeadvantage of other opportunities more readily or develop and expand their product and service offerings more quickly than we do. Additionally, they may holdlarger portfolios of patents and other intellectual property rights as a result of such acquisitions. If we are unable to compete effectively for a share of ourmarket, our business, results of operations and financial condition could be materially and adversely affected.Certain of our software products may be deployed through cloud-based implementations, and if such implementations are compromised by datasecurity breaches or other disruptions, our reputation could be harmed, and we could lose customers or be subject to significant liabilities.Although our software products typically are deployed on our customers’ premises, some of our products are deployed in cloud-based environments wemaintain and some of our products may be deployed in our customers’ cloud-based environments, in which our products and associated services are madeavailable using an Internet-based infrastructure. In cloud deployments, our infrastructure and the infrastructure of third-party service providers used by bothourselves and our customers may be vulnerable to hacking incidents, other security breaches, computer viruses, telecommunications failures, power loss,other system failures and similar disruptions.Any of these occurrences, whether intentional or accidental, could lead to interruptions, delays or cessation of operation of our servers or the servers ofthird-party service providers’ used by our customers, and to the unauthorized use or access of our software and proprietary information and sensitive orconfidential data stored or transmitted by our products. The inability of service providers used by our customers, or our own inability, to provide continuousaccess to hosted services, and to secure hosted services and associated customer information from unauthorized use, access or disclosure, could cause usreputational harm, loss of customers and could expose us to significant liability, all of which could harm our business, financial condition and results ofoperations.If our products experience data security breaches, and there is unauthorized access to our customers’ data, we may lose current or futurecustomers and our reputation and business may be harmed.Our products are used by our customers to manage and store proprietary information and sensitive or confidential data relating to their businesses.Although we maintain security features in our products, our security measures may not detect or prevent hacker interceptions, break-ins, security breaches,the introduction of viruses or malicious code, and other disruptions that may jeopardize the security of information stored in and transmitted by our products.A party that is able to circumvent our security measures in our products could misappropriate our or our customers’ proprietary or confidential information,cause interruption in operations, damage or misuse of computer systems, and misuse any information misappropriated.If any compromise of the security of our products were to occur, we may lose customers and our reputation, business, financial condition and results ofoperations could be harmed. In addition, if there is any perception that we cannot protect our customers’ proprietary and confidential information, we may losethe ability to retain existing customers and attract new customers and our revenues could decline.Weakened global economic conditions may adversely affect the P&C insurance industry, including the rate of information technology spending,which could cause our customers to defer or forego purchases of our products or services.Our business depends on the overall demand for information technology from, and on the economic health of, our current and prospective customers. Inaddition, the purchase of our products is discretionary and involves a significant commitment of capital and other resources. The United States and worldeconomies currently face a number of economic challenges, including threatened sovereign defaults, credit downgrades, restricted credit for businesses andconsumers and potentially falling demand for a variety of products and services. Our customers may suffer from reduced operating budgets, which couldcause them to11Table of Contentsdefer or forego purchases of our products or services. Challenging global economic conditions, or a reduction in information technology spending even ifeconomic conditions improve, could adversely impact our business, results of operations and financial condition in a number of ways, including longer salescycles, lower prices for our products and services, material default rates among our customers, reduced sales of our products and services and lower or nogrowth.Our sales cycle is lengthy and variable, depends upon many factors outside our control, and could cause us to expend significant time andresources prior to earning associated revenues.The typical sales cycle for our products and services is lengthy and unpredictable, requires pre-purchase evaluation by a significant number ofemployees in our customers’ organizations, and often involves a significant operational decision by our customers. Our sales efforts involve educating ourcustomers about the use and benefits of our products, including the technical capabilities of our products and the potential cost savings achievable byorganizations deploying our products. Customers typically undertake a significant evaluation process, which frequently involves not only our products, butalso those of our competitors and can result in a lengthy sales cycle. Moreover, a purchase decision by a potential customer typically requires the approval ofseveral senior decision makers, including the board of directors of our customers. Our sales cycle for new customers is typically one to two years and canextend even longer in some cases. We spend substantial time, effort and money in our sales efforts without any assurance that our efforts will produce anysales. In addition, we sometimes commit to include specific functions in our base product offering at the request of a customer or group of customers and areunable to recognize license revenues until the specific functions have been added to our products. Providing this additional functionality may be timeconsuming and may involve factors that are outside of our control. The lengthy and variable sales cycle may also have a negative impact on the timing of ourrevenues, causing our revenues and results of operations to vary significantly from period to period.If we are unable to continue the successful development of our direct sales force and the expansion of our relationships with our strategicpartners, sales of our products and services will suffer and our growth could be slower than we project.We believe that our future growth will depend on the continued development of our direct sales force and their ability to obtain new customers,particularly large P&C insurance carriers, and to manage our existing customer base. Our ability to achieve significant growth in revenues in the future willdepend, in large part, on our success in recruiting, training and retaining a sufficient number of direct sales personnel. New hires require significant trainingand may, in some cases, take more than a year before becoming productive, if at all. If we are unable to hire and develop sufficient numbers of productivedirect sales personnel, sales of our products and services will suffer and our growth will be impeded.We believe our future growth also will depend on the expansion of successful relationships with system integrators. Our system integrators as channelpartners help us reach additional customers. Our growth in revenues, particularly in international markets, will be influenced by the development andmaintenance of this indirect sales channel. Although we have established relationships with some of the leading system integrators, our products and servicescompete directly against the products and services of other leading system integrators, including Accenture. We are unable to control the resources that oursystem integrator partners commit to implementing our products or the quality of such implementation. If they do not commit sufficient resources to theseactivities, our business and results of operations could fail to grow in line with our projections.Our large customers have substantial negotiating leverage, which may require that we agree to terms and conditions that result in increased costof sales, decreased revenues and lower average selling prices and gross margins, all of which could harm our operating results.Some of our customers are large P&C insurance carriers with significant bargaining power in negotiations with us. In fiscal years 2013, 2012 and2011, our top 10 customers accounted for 33%, 35% and 41% of our revenues, respectively. These customers have and may continue to seek advantageouspricing and other commercial terms and may require us to develop additional features in the products we sell to them. We have and may continue to be requiredto reduce the average selling price, or increase the average cost, of our products in response to these pressures. If we are unable to offset any reductions in ouraverage selling prices or increases in our average costs with increased sales volumes and reduced costs, our results of operations could be harmed.12Table of ContentsOur limited operating history and the evolving nature of the industry in which we operate may make it difficult to evaluate our business.We were incorporated in 2001, and since that time have been developing products to meet the evolving demands of customers in the markets in which weoperate. We sold the initial versions of ClaimCenter in 2003, PolicyCenter in 2004 and BillingCenter in 2006. This limited operating history makes financialforecasting and evaluation of our business difficult. Furthermore, because we depend in part on the market’s acceptance of our products, it is difficult toevaluate trends that may affect our business. We have limited historical financial data, and we operate in an evolving industry, and, as such, any predictionsabout our future revenues and expenses may not be as accurate as they would be if we had a longer operating history or operated in a more predictable industry.We have a history of significant net losses and may not be profitable in future periods.Although we have been profitable the past four fiscal years, we have incurred significant losses in prior years, including a net loss of $11.0 million infiscal year 2009 and a net loss of $16.9 million in fiscal year 2008. We expect that our expenses will increase in future periods as we implement initiativesdesigned to grow our business, including, among other things, improvement of our current products, development and marketing of new services andproducts, stock-based compensation expense, international expansion, investment in our infrastructure, and increased general and administrative functions. Ifour revenues do not sufficiently increase to offset these expected increases in operating expenses, we will incur significant losses and will not be profitable. Wemay choose to increase expenses in future periods to further invest in future growth, which may cause us to become unprofitable in certain periods. Ourgrowth in revenues in recent periods should not be considered indicative of our future performance. Any failure to continue profitability may harm ourbusiness, results of operations and financial condition.Because we derive substantially all of our revenues and cash flows from our ClaimCenter, PolicyCenter, BillingCenter and InsuranceSuiteproducts and related services, failure of any of these products or services to satisfy customer demands or to achieve increased market acceptancewould harm our business, results of operations, financial condition and growth prospects.We derive substantially all of our revenues and cash flows from our ClaimCenter, PolicyCenter, BillingCenter and InsuranceSuite products and relatedservices. We expect to continue to derive a substantial portion of our revenues from these products and related services. As such, increased market acceptanceof these products is critical to our continued growth and success. Demand for our products is affected by a number of factors beyond our control, includingthe timing of development and release of new products by us and our competitors, technological change, and growth or contraction in the worldwide market fortechnological solutions for the P&C insurance industry. If we are unable to continue to meet customer demands or to achieve more widespread marketacceptance of our products, our business, results of operations, financial condition and growth prospects will be materially and adversely affected.Our business depends on customers renewing and expanding their license and maintenance contracts for our products. A decline in ourcustomer renewals and expansions could harm our future results of operations.Our customers have no obligation to renew their term licenses after their license period expires, and these licenses may not be renewed on the same ormore favorable terms. Moreover, under certain circumstances, our customers have the right to cancel their license agreements before they expire. We havelimited historical data with respect to rates of customer license renewals, upgrades and expansions so we may not accurately predict future trends in customerrenewals. In addition, our term and perpetual license customers have no obligation to renew their maintenance arrangements after the expiration of the initialcontractual period, which is typically one to three years. Our customers’ renewal rates may fluctuate or decline because of several factors, including theirsatisfaction or dissatisfaction with our products and services, the prices of our products and services, the prices of products and services offered by ourcompetitors or reductions in our customers’ spending levels due to the macroeconomic environment or other factors. In addition, in some cases, our customershave a right to exercise a perpetual buyout of their term licenses at the end of the initial contract term. If our customers do not renew their term licenses for oursolutions or renew on less favorable terms, our revenues may decline or grow more slowly than expected and our profitability may be harmed.Our implementation cycle is lengthy and variable, depends upon factors outside our control, and could cause us to expend significant time andresources prior to earning associated revenues.The implementation and testing of our products by our customers lasts 6 to 24 months or longer and unexpected implementation delays and difficultiescan occur. Implementing our products typically involves integration with our customers’ systems, as well as adding their data to our platform. This can becomplex, time-consuming and expensive for our customers and can result in delays in the implementation and deployment of our products. Depending uponthe nature and complexity of13Table of Contentsour customers’ systems and the time and resources that our customers are willing to devote to implementation of our products, the implementation and testingof our products may take significantly longer than 24 months. Historically, under the zero gross margin method, until the implementation project wascompleted, we recognized revenues in connection with implementing our products up to the corresponding costs of revenues and operating expenses. Thelengthy and variable implementation cycle may also have a negative impact on the timing of our revenues, causing our revenues and results of operations tovary significantly from period to period.Our product development cycles are lengthy, and we may incur significant expenses before we generate revenues, if any, from new products.Because our products are complex and require rigorous testing, development cycles can be lengthy, taking us multiple years to develop and introducenew products or provide updates to our existing products. Additionally, market conditions may dictate that we change the technology platform underlying ourexisting products or that new products be developed on different technology platforms, potentially adding material expense and time to our development cycles.Moreover, development projects can be technically challenging and expensive. The nature of these development cycles may cause us to experience delaysbetween the time we incur expenses associated with research and development and the time we generate revenues, if any, from such expenses. If we expend asignificant amount of resources on research and development and our efforts do not lead to the successful introduction or improvement of products that arecompetitive in the marketplace, this could materially and adversely affect our business and results of operations. Additionally, anticipated customer demandfor a product we are developing could decrease or not materialize after the development cycle has commenced. Such lower customer demand may cause us tofall short of our sales targets, and we may nonetheless be unable to avoid substantial costs associated with the product’s development. If we are unable tocomplete product development cycles successfully and in a timely fashion and generate revenues from such future products, the growth of our business maybe harmed.Failure to meet customer expectations on the implementation of our products could result in negative publicity and reduced sales, both of whichwould significantly harm our business, results of operations, financial condition and growth prospects.We provide our customers with upfront estimates regarding the duration, budget and costs associated with the implementation of our products. Failing tomeet these upfront estimates and the expectations of our customers for the implementation of our products could result in a loss of customers and negativepublicity regarding us and our products and services, which could adversely affect our ability to attract new customers and sell additional products andservices to existing customers. Such failure could result from our product capabilities or service engagements by us, our system integrator partners or ourcustomers’ IT employees. The consequences could include, and have included: monetary credits for current or future service engagements, reduced fees foradditional product sales, and a customer’s refusal to pay their contractually-obligated license, maintenance or service fees. In addition, time-consumingimplementations may also increase the amount of services personnel we must allocate to each customer, thereby increasing our costs and adversely affectingour business, results of operations and financial condition.If we are unable to maintain vendor specific objective evidence of fair value for any undelivered element of a software order from a customer, offercertain contractual provisions to our customers, such as delivery of specified functionality, or combine multiple arrangements signed in differentperiods, our revenues relating to the entire software order will be deferred and recognized over future periods, reducing the revenues werecognize on a significant portion of such order in a particular quarter.In the course of our selling efforts, we typically enter into sales arrangements pursuant to which we license our software applications and providemaintenance support and professional services. We refer to each individual product or service as an “element” of the overall sales arrangement. Thesearrangements typically require us to deliver particular elements in a future period. We apply software revenue recognition rules and allocate the total revenuesamong elements based on the objective and reliable evidence of fair value, or VSOE of fair value of each element. As we discuss further in Note 1 of Notes toConsolidated Financial Statements, if we are unable to determine the VSOE of fair value of any undelivered elements, offer certain contractual provisions toour customers, such as delivery of specified functionality, or combine multiple arrangements signed in different periods, then we may be required under U.S.generally accepted accounting principles ("U.S. GAAP") to defer additional revenues to future periods. If we are required to defer additional revenues to futureperiods for a significant portion of our sales, our revenues for that quarter could fall below our expectations or those of securities analysts and investors,resulting in a decline in our stock price.Failure to protect our intellectual property could substantially harm our business and results of operations.Our success depends in part on our ability to enforce and defend our intellectual property rights. We rely upon a combination of trademark, trade secret,copyright, patent and unfair competition laws, as well as license agreements and other contractual provisions, to do so.14Table of ContentsWe have filed, and may in the future file, patent applications related to certain of our innovations. We do not know whether any of our patentapplications will result in the issuance of a patent or whether the examination process will require us to narrow our claims. In addition, we may not receivecompetitive advantages from the rights granted under our patents and other intellectual property. Our existing patents, and any patents granted to us or that weotherwise acquire in the future, may be contested, circumvented or invalidated, and we may not be able to prevent third parties from infringing these patents.Therefore, the exact effect of the protection of these patents cannot be predicted with certainty. In addition, given the costs, effort, risks and downside ofobtaining patent protection, including the requirement to ultimately disclose the invention to the public, we may choose not to seek patent protection for certaininnovations; however, such patent protection could later prove to be important to our business.We also rely on several registered and unregistered trademarks to protect our brand. We have registered the trademarks Guidewire, GuidewirePolicyCenter, Guidewire ClaimCenter and Guidewire BillingCenter in the United States and Canada. We also own a U.S. trademark registration, anInternational Registration (with protection extended to Australia and the European Community) and a Canada trademark for the Gosu trademark. Additionally,we own an Australia trademark registration, a Hong Kong trademark registration, and a Japan trademark registration for the Guidewire trademark. We havealso registered the trademark Guidewire Software in the European Community. Finally, we own international registrations, designating China, the EuropeanCommunity and Russia, for the Guidewire trademark, all of which are pending. Nevertheless, competitors may adopt service names similar to ours, orpurchase our trademarks and confusingly similar terms as keywords in Internet search engine advertising programs, thereby impeding our ability to buildbrand identity and possibly leading to confusion in the marketplace. In addition, there could be potential trade name or trademark infringement claims broughtby owners of other registered trademarks or trademarks that incorporate variations of our trademarks. Any claims or customer confusion related to ourtrademarks could damage our reputation and brand and substantially harm our business and results of operations.In addition, we attempt to protect our intellectual property, technology, and confidential information by generally requiring our employees andconsultants to enter into confidentiality and assignment of inventions agreements and third parties to enter into nondisclosure agreements, all of which offeronly limited protection. These agreements may not effectively prevent unauthorized use or disclosure of our confidential information, intellectual property ortechnology and may not provide an adequate remedy in the event of unauthorized use or disclosure of our confidential information, intellectual property ortechnology. Despite our efforts to protect our confidential information, intellectual property, and technology, unauthorized third parties may gain access to ourconfidential proprietary information, develop and market products or services similar to ours, or use trademarks similar to ours, any of which couldmaterially harm our business and results of operations. In addition, others may independently discover our trade secrets and confidential information, and insuch cases, we could not assert any trade secret rights against such parties. Existing U.S. federal, state and international intellectual property laws offer onlylimited protection. The laws of some foreign countries do not protect our intellectual property rights to as great an extent as the laws of the United States, andmany foreign countries do not enforce these laws as diligently as governmental agencies and private parties in the United States. Moreover, policing ourintellectual property rights is difficult, costly and may not always be effective.From time to time, legal action by us may be necessary to enforce our patents and other intellectual property rights, to protect our trade secrets, todetermine the validity and scope of the intellectual property rights of others or to defend against claims of infringement or invalidity. Such litigation couldresult in substantial costs and diversion of resources and could negatively affect our business, reputation, results of operations and financial condition. If weare unable to protect our technology and to adequately maintain and protect our intellectual property rights, we may find ourselves at a competitivedisadvantage to others who need not incur the additional expense, time and effort required to create the innovative products that have enabled us to besuccessful to date.We and our customers rely on technology and intellectual property of third parties, the loss of which could limit the functionality of our productsand disrupt our business.We use technology and intellectual property licensed from unaffiliated third parties in certain of our products, and we may license additional third-partytechnology and intellectual property in the future. Any errors or defects in this third-party technology and intellectual property could result in errors that couldharm our brand and business. In addition, licensed technology and intellectual property may not continue to be available on commercially reasonable terms, orat all. The loss of the right to license and distribute this third party technology could limit the functionality of our products and might require us to redesignour products.Further, although we believe that there are currently adequate replacements for the third-party technology and intellectual property we presently use anddistribute, the loss of our right to use any of this technology and intellectual property could result in delays in producing or delivering affected products untilequivalent technology or intellectual property is identified, licensed or otherwise procured, and integrated. Our business would be disrupted if any technologyand intellectual property we license15Table of Contentsfrom others or functional equivalents of this software were either no longer available to us or no longer offered to us on commercially reasonable terms. In eithercase, we would be required either to attempt to redesign our products to function with technology and intellectual property available from other parties or todevelop these components ourselves, which would result in increased costs and could result in delays in product sales and the release of new productofferings. Alternatively, we might be forced to limit the features available in affected products. Any of these results could harm our business and impact ourresults of operations.Catastrophes may adversely impact the P&C insurance industry, preventing us from expanding or maintaining our existing customer base andincreasing our revenues.Our customers are P&C insurance carriers which have experienced, and will likely experience in the future, catastrophe losses that adversely impacttheir businesses. Catastrophes can be caused by various events, including, amongst others, hurricanes, tsunamis, floods, windstorms, earthquakes, hail,tornados, explosions, severe weather and fires. Global warming trends are contributing to an increase in erratic weather patterns globally and intensifying theimpact of certain types of catastrophes. Moreover, acts of terrorism or war could cause disruptions in our or our customers’ businesses or the economy as awhole. The risks associated with natural disasters and catastrophes are inherently unpredictable, and it is difficult to predict the timing of such events orestimate the amount of loss they will generate. In the event a future catastrophe adversely impacts our current or potential customers, we may be prevented frommaintaining and expanding our customer base and from increasing our revenues because such events may cause customers to postpone purchases of newproducts and professional service engagements or discontinue projects.There may be consolidation in the P&C insurance industry, which could reduce the use of our products and services and adversely affect ourrevenues.Mergers or consolidations among our customers could reduce the number of our customers and potential customers. This could adversely affect ourrevenues even if these events do not reduce the aggregate number of customers or the activities of the consolidated entities. If our customers merge with or areacquired by other entities that are not our customers, or that use fewer of our products and services, they may discontinue or reduce their use of our productsand services. Any of these developments could materially and adversely affect our results of operations and cash flows.Some of our services and technologies may use “open source” software, which may restrict how we use or distribute our services or require thatwe release the source code of certain products subject to those licenses.Some of our services and technologies may incorporate software licensed under so-called “open source” licenses, including, but not limited to, the GNUGeneral Public License and the GNU Lesser General Public License. In addition to risks related to license requirements, usage of open source software can leadto greater risks than use of third-party commercial software, as open source licensors generally do not provide warranties or controls on origin of the software.Additionally, open source licenses typically require that source code subject to the license be made available to the public and that any modifications orderivative works to open source software continue to be licensed under open source licenses. These open source licenses typically mandate that proprietarysoftware, when combined in specific ways with open source software, become subject to the open source license. If we combine our proprietary software insuch ways with open source software, we could be required to release the source code of our proprietary software.We take steps to ensure that our proprietary software is not combined with, and does not incorporate, open source software in ways that would requireour proprietary software to be subject to an open source license. However, few courts have interpreted open source licenses, and the manner in which theselicenses may be interpreted and enforced is therefore subject to some uncertainty. Additionally, we rely on multiple software programmers to design ourproprietary technologies, and although we take steps to prevent our programmers from including open source software in the technologies and software codethat they design, write and modify, we do not exercise complete control over the development efforts of our programmers and we cannot be certain that ourprogrammers have not incorporated open source software into our proprietary products and technologies or that they will not do so in the future. In the eventthat portions of our proprietary technology are determined to be subject to an open source license, we could be required to publicly release the affected portionsof our source code, re-engineer all or a portion of our technologies, or otherwise be limited in the licensing of our technologies, each of which could reduce oreliminate the value of our services and technologies and materially and adversely affect our business, results of operations and prospects.16Table of ContentsReal or perceived errors or failures in our products, or unsatisfactory performance of our products or services could adversely affect ourreputation and the market acceptance of our products, and cause us to lose customers or subject us to liability for breach of warranty claims.Because we offer complex products, undetected errors or failures may exist or occur, especially when products are first introduced or when new versionsare released. Our products are often installed and used in large-scale computing environments with different operating systems, system management softwareand equipment and networking configurations, which may cause errors or failures in our products or may expose undetected errors, failures or bugs in ourproducts. Despite testing by us, we may not identify all errors, failures or bugs in new products or releases until after commencement of commercial sales orinstallation. In the past, we have discovered software errors, failures and bugs in some of our product offerings after their introduction.Product errors will affect the performance of our products and could delay the development or release of new products or new versions of products,adversely affect our reputation and our customers’ willingness to buy products from us, and adversely affect market acceptance or perception of our products.In addition, because our software is used to manage functions that are critical to our customers, the licensing and support of our products may involve therisk of product liability claims. We also may face liability for breaches of our product warranties, product failures or damages caused by faulty installation ofour products. Provisions in our contracts relating to warranty disclaimers and liability limitations may be unenforceable or otherwise ineffective.Any errors or delays in releasing new products or new versions of products or allegations of unsatisfactory performance of our products or servicescould cause us to lose revenues or market share, increase our service costs, cause us to incur substantial costs in redesigning the products, cause us to losesignificant customers, harm our reputation, subject us to liability for breach of warranty claims or damages and divert our resources from other tasks, anyone of which could materially and adversely affect our business, results of operations and financial condition.We may be obligated to disclose our proprietary source code to our customers, which may limit our ability to protect our intellectual property andcould reduce the renewals of our support and maintenance services.Our software license agreements typically contain provisions permitting the customer to become a party to, or a beneficiary of, a source code escrowagreement under which we place the proprietary source code for our products in escrow with a third party. Under these escrow agreements, the source code tothe applicable product may be released to the customer, typically for its use to maintain, modify and enhance the product, upon the occurrence of specifiedevents, such as our filing for bankruptcy, discontinuance of our maintenance services and breaching our representations, warranties or covenants of ouragreements with our customers. Additionally, in some cases, customers have the right to request access to our source code upon demand. Some of ourcustomers have obtained the source code for our products by exercising this right, and others may do so in the future.Disclosing the content of our source code may limit the intellectual property protection we can obtain or maintain for that source code or the productscontaining that source code and may facilitate intellectual property infringement claims against us. It also could permit a customer to which a product’s sourcecode is disclosed to support and maintain that software product without being required to purchase our support or maintenance services. Each of these couldharm our business, results of operations and financial condition.Incorrect or improper use of our products or our failure to properly train customers on how to implement or utilize our products could result incustomer dissatisfaction and negatively affect our business, results of operations, financial condition and growth prospects.Our products are complex and are deployed in a wide variety of network environments. The proper use of our products requires training of the customer.If our products are not used correctly or as intended, inadequate performance may result. Additionally, our customers or third-party partners may incorrectlyimplement or use our products. Our products may also be intentionally misused or abused by customers or their employees or third parties who are able toaccess or use our products. Similarly, our products are sometimes installed or maintained by customers or third parties with smaller or less qualified ITdepartments, potentially resulting in sub-optimal installation and, consequently, performance that is less than the level anticipated by the customer. Becauseour customers rely on our products, services and maintenance support to manage a wide range of operations, the incorrect or improper use of our products,our failure to properly train customers on how to efficiently and effectively use our products, or our failure to properly provide implementation or maintenanceservices to our customers may result in negative publicity or legal claims against us. Also, as we continue to expand our customer base, any failure by us toproperly provide these services will likely result in lost opportunities for follow-on sales of our products and services.17Table of ContentsIn addition, if there is substantial turnover of customer personnel responsible for implementation and use of our products, or if customer personnel arenot well trained in the use of our products, customers may defer the deployment of our products, may deploy them in a more limited manner than originallyanticipated or may not deploy them at all. Further, if there is substantial turnover of the customer personnel responsible for implementation and use of ourproducts, our ability to make additional sales may be substantially limited.Our ability to sell our products is highly dependent on the quality of our professional services and technical support services and the support ofour partners, and the failure of us or our partners to offer high-quality professional services or technical support services could damage ourreputation and adversely affect our ability to sell our products and services to new customers and renew our licenses to existing customers.If we or our system integration providers do not effectively assist our customers in deploying our products, succeed in helping our customers quicklyresolve post-deployment issues, and provide effective ongoing support, our ability to sell additional products and services to existing customers would beadversely affected and our reputation with potential customers could be damaged. Once our products are deployed and integrated with our customers’ existinginformation technology investments and data, our customers may depend on our technical support services and/or the support of system integrators or internalresources to resolve any issues relating to our products. High-quality support is critical for the continued successful marketing and sale of our products. Inaddition, as we continue to expand our operations internationally, our support organization will face additional challenges, including those associated withdelivering support, training and documentation in languages other than English. Many enterprise customers require higher levels of support than smallercustomers. If we fail to meet the requirements of our larger customers, it may be more difficult to increase our penetration with larger customers, which is keyto the growth of our revenues and profitability. As we rely more on system integrators to provide deployment and on-going support, our ability to ensure a highlevel of quality in addressing customer issues is diminished. Our failure to maintain high-quality implementation and support services, or to ensure thatsystem integrators provide the same, could have a material adverse effect on our business, results of operations, financial condition and growth prospects.If we are unable to develop, introduce and market new and enhanced versions of our products, we may be put at a competitive disadvantage.Our success depends on our continued ability to develop, introduce and market new and enhanced versions of our products to meet evolving customerrequirements. However, we cannot assure that this process can be maintained. If we fail to develop new products or enhancements to our existing products, ourbusiness could be adversely affected, especially if our competitors are able to introduce products with enhanced functionality. We plan to continue ourinvestment in product development in future periods. It is critical to our success for us to anticipate changes in technology, industry standards and customerrequirements and to successfully introduce new, enhanced and competitive products to meet our customers’ and prospective customers’ needs on a timelybasis. However, we cannot assure that revenues will be sufficient to support the future product development that is required for us to be competitive. Althoughwe may be able to release new products in addition to enhancements to existing products, we cannot assure that our new or upgraded products will be acceptedby the market, will not be delayed or canceled, will not contain errors or “bugs” that could affect the performance of the products or cause damage to users’data, or will not be rendered obsolete by the introduction of new products or technological developments by others. If we fail to develop products that arecompetitive in technology and price and fail to meet customer needs, our market share will decline and our business and results of operations could be harmed.We may be subject to significant liability claims if our core system software fails and the limitation of liability provided in our license agreementsmay not protect us, which may adversely impact our financial condition.The license and support of our core system software creates the risk of significant liability claims against us. Our license agreements with our customerscontain provisions designed to limit our exposure to potential liability claims. It is possible, however, that the limitation of liability provisions contained insuch license agreements may not be enforced as a result of international, federal, state and local laws or ordinances or unfavorable judicial decisions. Breachof warranty or damage liability or injunctive relief resulting from such claims could have a material and adverse impact on our results of operations andfinancial condition.If we are unable to retain our personnel and hire and integrate additional skilled personnel, we may be unable to achieve our goals and ourbusiness will suffer.Our future success depends upon our ability to continue to attract, train, integrate and retain highly skilled employees, particularly our managementteam, sales and marketing personnel, professional services personnel and software engineers. Each of our executive officers and other key employees couldterminate his or her relationship with us at any time. The loss of any member of our senior management team might significantly delay or prevent theachievement of our business or18Table of Contentsdevelopment objectives and could materially harm our business. In addition, many of our senior management personnel are substantially vested in their stockoption grants or other equity compensation. While we periodically grant additional equity awards to management personnel and other key employees to provideadditional incentives to remain employed by us, employees may be more likely to leave us if a significant portion of their equity compensation is fully vested,especially if the shares underlying the equity awards have significantly appreciated in value. Our inability to attract and retain qualified personnel, or delaysin hiring required personnel, may seriously harm our business, results of operations and financial condition.We face intense competition for qualified individuals from numerous software and other technology companies. In addition, competition for qualifiedpersonnel is particularly intense in the San Francisco Bay Area, where our headquarters are located. Often, significant amounts of time and resources arerequired to train technical, sales and other personnel. We have a limited number of sales people. The loss of some of these sales people in a short period of timecould have a negative impact on our sales efforts. Further, qualified individuals are in high demand. We may incur significant costs to attract and retain them,and we may lose new employees to our competitors or other technology companies before we realize the benefit of our investment in recruiting and trainingthem. We may be unable to attract and retain suitably qualified individuals who are capable of meeting our growing technical, operational and managerialrequirements, on a timely basis or at all, and we may be required to pay increased compensation in order to do so. Because of the technical nature of ourproducts and services and the dynamic market in which we compete, any failure to attract, integrate and retain qualified direct sales, professional services andproduct development personnel, as well as our contract workers, could have a material adverse effect on our ability to generate sales or successfully developnew products, customer and consulting services and enhancements of existing products. Also, to the extent we hire personnel from competitors, we may besubject to allegations that they have been improperly solicited or divulged proprietary or other confidential information.Our ability to effectively use equity compensation to help attract and retain qualified personnel may be limited by our stockholders, and equitycompensation arrangements may negatively impact our results of operations.We intend to continue to issue stock options and restricted stock units as key components of our overall compensation and employee attraction andretention efforts. We may face pressure from stockholders, who must approve extraordinary increases in our equity compensation pool, to limit the use ofequity-based compensation so as to minimize its dilutive effect on stockholders. In addition, we are required under GAAP to recognize compensation expensein our results of operations for employee share-based equity compensation under our equity grants, which may negatively impact our results of operations andmay increase the pressure to limit equity-based compensation. These factors may make it more difficult or unlikely for us to continue granting attractiveequity-based compensation packages to our employees, which could adversely impact our ability to attract and retain key employees. If we lose any seniorexecutive or other key employee, our business and results of operations could be materially and adversely affected.Failure to manage our rapid growth effectively could harm our business.We have recently experienced rapid growth, and expect to continue to experience growth, in our number of employees and in our international operationsthat has placed, and will continue to place, a significant strain on our operational and financial resources and our personnel. To manage our anticipated futuregrowth effectively, we must continue to maintain and may need to enhance our information technology infrastructure, financial and accounting systems andcontrols and manage expanded operations and employees in geographically distributed locations. We also must attract, train and retain a significant number ofadditional qualified sales and marketing personnel, professional services personnel, software engineers, technical personnel and management personnel. Ourfailure to manage our growth effectively could have a material adverse effect on our business, results of operations and financial condition. Our growth couldrequire significant capital expenditures and may divert financial resources from other projects, such as the development of new services or productenhancements. For example, since it may take as long as six months to hire and train a new member of our professional services staff, we make decisionsregarding the size of our professional services staff based upon our expectations with respect to customer demand for our products and services. If theseexpectations are incorrect, and we increase the size of our professional services organization without experiencing an increase in sales of our products andservices, we will experience reductions in our gross and operating margins and net income. If we are unable to effectively manage our growth, our expensesmay increase more than expected, our revenues could decline or grow more slowly than expected and we may be unable to implement our business strategy. Wealso intend to continue to expand into additional international markets which, if not technologically or commercially successful, could harm our financialcondition and prospects.19Table of ContentsOur international sales and operations subject us to additional risks that can adversely affect our business, results of operations and financialcondition.We sell our products and services to customers located outside the United States and Canada, and we are continuing to expand our internationaloperations as part of our growth strategy. In fiscal years 2013, 2012 and 2011, 28%, 30% and 34% of our revenues, respectively, were derived from outside ofthe United States and Canada. Our current international operations and our plans to expand our international operations subject us to a variety of risks,including:•increased management, travel, infrastructure and legal compliance costs associated with having multiple international operations;•unique terms and conditions in contract negotiations imposed by customers in foreign countries;•longer payment cycles and difficulties in enforcing contracts and collecting accounts receivable;•the need to localize our products and licensing programs for international customers;•lack of familiarity with and unexpected changes in foreign regulatory requirements;•increased exposure to fluctuations in currency exchange rates;•the burdens of complying with a wide variety of foreign laws and legal standards;•compliance with the U.S. Foreign Corrupt Practices Act of 1977, as amended (“FCPA”), the U.K. Bribery Act and other anti-corruptionregulations, particularly in emerging market countries;•import and export license requirements, tariffs, taxes and other trade barriers;•increased financial accounting and reporting burdens and complexities;•weaker protection of intellectual property rights in some countries;•multiple and possibly overlapping tax regimes; and•political, social and economic instability abroad, terrorist attacks and security concerns in general.As we continue to expand our business globally, our success will depend, in large part, on our ability to anticipate and effectively manage these andother risks associated with our international operations. Any of these risks could harm our international operations and reduce our international sales,adversely affecting our business, results of operations, financial condition and growth prospects.If our estimates or judgments relating to our critical accounting policies are based on assumptions that change or prove to be incorrect, ourresults of operations could fall below expectations of securities analysts and investors, resulting in a decline in our stock price.The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect theamounts reported in the consolidated financial statements. We base our estimates on historical experience and on various other assumptions that we believe tobe reasonable under the circumstances, as provided in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of Item 7of Part II of this Annual Report on Form 10-K and Note 1 of Notes to Consolidated Financial Statements, the results of which form the basis for makingjudgments about the carrying values of assets, liabilities, equity, revenues and expenses that are not readily apparent from other sources. Because our customercontracts are highly negotiated, they often include unique terms and conditions that require judgment with respect to revenue recognition. Our results ofoperations may be adversely affected if our assumptions change or if actual circumstances differ from those in our assumptions, which could cause ourresults of operations to fall below the expectations of securities analysts and investors, resulting in a decline in our stock price.We incur increased costs as a result of operating as a public company, and our management is required to devote substantial time to complianceinitiatives.As a public company, we incur legal, accounting and other expenses that we did not incur as a private company. In addition, the Dodd-Frank WallStreet Reform and Consumer Protection Act, the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley Act"), as well as rules subsequently implemented by theSecurities and Exchange Commission (“SEC”) and the New York Stock Exchange, impose additional requirements on public companies, including specificcorporate governance practices. During fiscal year 2013, we were required to comply with Section 404 of the Sarbanes-Oxley Act and incurred costs toimplement additional internal controls as well as to obtain an independent auditors report on our internal control over financial reporting. Additionally, thelisting requirements of the New York Stock Exchange require that we satisfy numerous corporate governance requirements. Our management and otherpersonnel will continue to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations increase our legal,accounting and financial compliance costs and make some activities more time-consuming and costly. These rules and regulations could also make it moredifficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as executive officers.20Table of ContentsWe may not be able to obtain capital when desired on favorable terms, if at all, or without dilution to our stockholders.We may need additional financing to execute on our current or future business strategies, including to:•hire additional personnel;•develop new or enhance existing products and services;•enhance our operating infrastructure;•acquire businesses or technologies; or•otherwise respond to competitive pressures.If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders could besignificantly diluted, and these newly-issued securities may have rights, preferences or privileges senior to those of existing stockholders. If we incuradditional funds through debt financing, a substantial portion of our operating cash flow may be dedicated to the payment of principal and interest on suchindebtedness, thus limiting funds available for our business activities. We cannot assure you that additional financing will be available on terms favorable tous, or at all. If adequate funds are not available or are not available on acceptable terms, when we desire them, our ability to fund our operations, takeadvantage of unanticipated opportunities, develop or enhance our products and services, or otherwise respond to competitive pressures would be significantlylimited. Any of these factors could harm our results of operations.If we fail to maintain effective internal control over financial reporting in the future, the accuracy and timing of our financial reporting may beadversely affected.Preparing our consolidated financial statements involves a number of complex manual and automated processes, which are dependent upon individualdata input or review and require significant management judgment. One or more of these elements may result in errors that may not be detected and could resultin a material misstatement of our consolidated financial statements. The Sarbanes-Oxley Act requires, among other things, that as a publicly-traded companywe disclose whether our internal control over financial reporting and disclosure controls and procedures are effective.If a material misstatement occurs in the future, we may fail to meet our future reporting obligations, we may need to restate our financial results and theprice of our common stock may decline. Any failure of our internal controls could also adversely affect the results of the periodic management evaluations andannual independent registered public accounting firm attestation reports regarding the effectiveness of our internal control over financial reporting that arerequired under Section 404 of the Sarbanes-Oxley Act, which became applicable to us beginning with the filing of this Annual Report on Form 10-K for thefiscal year ended July 31, 2013. Effective internal controls are necessary for us to produce reliable financial reports and are important to helping preventfinancial fraud. Furthermore, any potential transition in enterprise resource planning or other major operational system could impact the timely generation ofour financial statements. If we cannot provide reliable financial reports or prevent fraud, our business and results of operations could be harmed, investorscould lose confidence in our reported financial information, and the trading price of our stock could drop significantly.If tax laws change or we experience adverse outcomes resulting from examination of our income tax returns, it could adversely affect our resultsof operations.We are subject to federal, state and local income taxes in the United States and in foreign jurisdictions. Our future effective tax rates and the value of ourdeferred tax assets could be adversely affected by changes in tax laws. In addition, we are subject to the examination of our income tax returns by the InternalRevenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from such examinations to determine the adequacyof our provision for income taxes. Significant judgment is required in determining our worldwide provision for income taxes. Although we believe we havemade appropriate provisions for taxes in the jurisdictions in which we operate, changes in the tax laws or challenges from tax authorities under existing taxlaws could adversely affect our business, financial condition and results of operations.Our business is subject to the risks of earthquakes, fire, floods and other natural catastrophic events, and to interruption by manmade problemssuch as computer viruses or terrorism.Our corporate headquarters and the majority of our operations are located in the San Francisco Bay Area, a region known for seismic activity. Asignificant natural disaster, such as an earthquake, tsunami, fire or a flood, could have a material adverse impact on our business, results of operations andfinancial condition. In addition, our servers are vulnerable to computer viruses, break-ins and similar disruptions from unauthorized tampering with ourcomputer systems. Acts of terrorism could cause disruptions in our or our customers’ business or the economy as a whole. To the extent that such disruptionsresult in delays or cancellations of customer orders, or the deployment of our products, our business, results of operations and financial condition would beadversely affected.21Table of ContentsOur stock price may be volatile, which could result in securities class action litigation against us.The market price of our common stock could be subject to wide fluctuations in response to, among other things, the risk factors described in thisreport, and other factors beyond our control, such as fluctuations in the valuation of companies perceived by investors to be comparable to us.Furthermore, the stock markets have experienced price and volume fluctuations that have affected and continue to affect the market prices of equitysecurities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broadmarket and industry fluctuations, as well as general economic, political and market conditions, such as recessions, interest rate changes or internationalcurrency fluctuations, may negatively affect the market price of our common stock.In the past, many companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. Wemay become the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and divert our management’sattention from other business concerns, which could seriously harm our business.If research analysts do not publish research about our business or if they issue unfavorable commentary or downgrade our common stock, ourstock price and trading volume could decline.The trading market for our common stock depends in part on the research and reports that research analysts publish about us and our business. If wedo not maintain adequate research coverage, or if one or more analysts who covers us downgrades our stock or publishes inaccurate or unfavorable researchabout our business, the price of our common stock could decline. If one or more of the research analysts ceases coverage of our company or fails to publishreports on us regularly, demand for our common stock could decrease, which could cause our stock price or trading volume to decline.We currently do not intend to pay dividends on our common stock and, consequently, your only opportunity to achieve a return on yourinvestment is if the price of our common stock appreciates.We currently do not plan to declare dividends on shares of our common stock in the foreseeable future. Consequently, the only opportunity to achieve areturn on investment in our company will be if the market price of our common stock appreciates and shares are sold at a profit.Certain provisions of our certificate of incorporation and bylaws and of Delaware law could prevent a takeover that stockholders considerfavorable and could also reduce the market price of our stock.Our amended and restated certificate of incorporation and our amended and restated bylaws contain provisions that could delay or prevent a merger,acquisition or other change in control that stockholders may consider favorable, including transactions in which stockholders might otherwise receive apremium for their shares. These provisions may also prevent or delay attempts by stockholders to replace or remove our current management or members ofour board of directors. These provisions include:•providing for a classified board of directors with staggered three-year terms, which could delay the ability of stockholders to change themembership of a majority of our board of directors;•not providing for cumulative voting in the election of directors, which limits the ability of minority stockholders to elect director candidates;•authorizing our board of directors to issue, without stockholder approval, preferred stock rights senior to those of common stock, which couldbe used to significantly dilute the ownership of a hostile acquirer;•prohibiting stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of ourstockholders;•limiting the persons who may call special meetings of stockholders, which could delay the ability of our stockholders to force consideration of aproposal or to take action, including the removal of directors; and•requiring advance notification of stockholder nominations and proposals, which may discourage or deter a potential acquirer from conducting asolicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of us.The affirmative vote of the holders of at least 66 2/3% of our shares of capital stock entitled to vote is generally necessary to amend or repeal the aboveprovisions that are contained in our amended and restated certificate of incorporation. Also, absent approval of our board of directors, our amended andrestated bylaws may only be amended or repealed by the affirmative vote of the holders of at least 50% of our shares of capital stock entitled to vote.22Table of ContentsIn addition, we are subject to the provisions of Section 203 of the Delaware General Corporation Law. These provisions may prohibit large stockholders,in particular those owning 15% or more of our outstanding common stock, from engaging in certain business combinations without approval of substantiallyall of our stockholders for a certain period of time.These and other provisions in our amended and restated certificate of incorporation, our amended and restated bylaws and under Delaware law coulddiscourage potential takeover attempts, reduce the price that investors might be willing to pay for shares of our common stock in the future and result in themarket price being lower than it would be without these provisions.Item 1B.Unresolved Staff CommentsNot applicable.Item 2.PropertiesOur corporate headquarters are located in Foster City, California, where we currently have a seven year lease for approximately 97,674 square feet ofspace that commenced on August 1, 2012. We also lease facilities for our distributed sales and international operations in Exton, Pennsylvania; Dublin,Ireland; Edina, Minnesota; London, United Kingdom; Mississauga, Ontario, Canada; Munich, Germany; Paris, France; Sydney, Australia; Tokyo, Japan;and Warsaw, Poland.We believe that our facilities are suitable to meet our current needs. We intend to expand our facilities or add new facilities as we add employees and enternew geographic markets, and we believe that suitable additional or alternative space will be available as needed to accommodate any such growth. However, weexpect to incur additional expenses in connection with such new or expanded facilities, including our corporate headquarters.Item 3.Legal ProceedingsIn December 2007, Accenture Global Services GmbH and Accenture LLP (collectively, “Accenture”), a competitor, filed a lawsuit against the Companyin the U.S. District Court for the District of Delaware (the “Delaware Court") (Accenture Global Services GmbH and Accenture LLP v. Guidewire Software,Inc., Case No 07-826-SLR). Accenture alleged infringement of U.S. Patent No. 7,013,284 (the “ '284 patent”), among others, by our products; trade-secretmisappropriation; and tortious interference with business relations. Accenture sought damages and an injunction. The Company denied Accenture's claims,and asserted counterclaims seeking a declaration that our products do not infringe the patents, that the patents are invalid and that the '284 patent isunenforceable. We also asserted counterclaims against Accenture for breach of contract and trade secret misappropriation. On May 31, 2011, the DelawareCourt granted the Company's motion for summary judgment finding that Accenture's '284 patent is invalid. In July 2011, Accenture filed an appeal to theUnited States Court of Appeals for the Federal Circuit (the “Appeals Court”) of the Delaware Court's judgment of invalidity of the '284 patent.In October 2011, the Company agreed with Accenture to resolve all outstanding litigation concerning our respective insurance claims managementsoftware. As part of the settlement, the parties agreed to a royalty free cross license of all then-current patents and patent applications. In connection with thesettlement, the Company has paid $10.0 million to Accenture with a potential additional payment based on the final outcome of Accenture's appeal regardingthe validity of its '284 patent. On September 5, 2013, the Appeals Court ruled in the Company's favor, affirming the decision of the District Court andholding the '284 patent invalid. Accenture may still request United States Supreme Court review or rehearing by the full Federal Circuit sitting en banc, and, ifAccenture is allowed to appeal and is ultimately successful, then we have agreed to pay Accenture an additional $20.0 million. Otherwise, no further paymentswould be due in connection with the settlement. The Company will continue to vigorously defend the decision of the District Court and the affirmation of theAppeals Court, by opposing any requests for rehearing or further review, as well as defending any such appeal if allowed.In addition to the matters described above, from time-to-time, we are involved in various other legal proceedings arising from the normal course ofbusiness activities. Item 4.Mine Safety DisclosuresNot applicable.23Table of ContentsPART II Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of EquitySecuritiesOur common stock has been listed on the New York Stock Exchange (“NYSE”) under the symbol “GWRE” since January 25, 2012. Prior to that date,there was no public trading market for our common stock. The following table sets forth the high and low sales price per share of our common stock asreported on the NYSE for the periods indicated: Fiscal Year 2013 Fiscal Year 2012 (1) High Low High LowFirst Quarter$33.15 $24.00 $— $—Second Quarter$34.54 $25.46 $18.50 $16.45Third Quarter$41.20 $30.25 $38.13 $18.00Fourth Quarter$45.73 $37.31 $29.50 $22.40(1) Fiscal year 2012 stock prices shown reflect prices subsequent to our IPO on January 25, 2012.On July 31, 2013, the last reported sale price of our common stock on the New York Stock Exchange was $43.76 per share. As of July 31, 2013, wehad 132 holders of record of our common stock. The actual number of stockholders is greater than this number of record holders, and includes stockholderswho are beneficial owners, but whose shares are held in street name by brokers and other nominees. This number of holders of record also does not includestockholders whose shares may be held in trust by other entities.We have never declared or paid, and do not anticipate declaring or paying, any cash dividends on our capital stock. Any future determination as to thedeclaration and payment of dividends, if any, will be at the discretion of our board of directors and will depend on then existing conditions, including ourfinancial condition, operating results, contractual restrictions, capital requirements, business prospects and other factors our board of directors may deemrelevant.Performance GraphThis performance graph shall not be deemed “soliciting material” or to be “filed” with the Securities and Exchange Commission for purposes ofSection 18 of the Securities Exchange Act of 1934, as amended (“the Exchange Act”) or otherwise subject to the liabilities under that Section, and shall not bedeemed to be incorporated by reference into any filing of the company under the Securities Act of 1933, as amended (the “Securities Act”) or the Exchange Act.The following graph shows a comparison from January 25, 2012 (the date our common stock commenced trading on the NYSE) through July 31, 2013of the cumulative total return for our common stock, the NASDAQ Composite Total Returns Index and the Zacks Computer Software Services Total ReturnIndex. Such returns are based on historical results and are not intended to suggest future performance. Data for the NASDAQ Composite Index and the ZacksComputer Software Services Total Return Index assume reinvestment of dividends. 24Table of ContentsUnregistered Sales of Equity Securities and Use of ProceedsIssuer Purchases of Equity SecuritiesThere were no repurchases of shares of our common stock made during the three months ended July 31, 2013.Item 6.Selected Financial DataSELECTED CONSOLIDATED FINANCIAL DATAThe selected consolidated statements of operations data for the years ended July 31, 2013, 2012 and 2011 and the consolidated balance sheet data as ofJuly 31, 2013 and 2012 are derived from our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The selectedconsolidated statements of operations for the years ended July 31, 2010 and 2009 and the consolidated balance sheet data as of July 31, 2011, 2010 and 2009are derived from our audited consolidated financial statements which are not included in this Annual Report on Form 10-K. Our historical results are notnecessarily indicative of the results that may be expected in any future annual or interim period. You should read the following selected consolidated historicalfinancial data below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidatedfinancial statements and related notes included elsewhere in this Annual Report on Form 10-K. 25Table of Contents Fiscal years ended July 31, 2013 2012 2011 2010 2009 (in thousands, except per share data)Total revenues$300,649 $232,061 $172,472 $144,691 $84,745Total cost of revenues (1)131,743 91,410 68,344 55,471 41,656Total gross profit168,906 140,651 104,128 89,220 43,089Operating expenses: Research and development (1)66,346 50,462 34,773 28,273 22,356Sales and marketing (1)53,301 38,254 28,950 26,741 21,559General and administrative (1)32,414 28,336 23,534 16,192 9,646Litigation provision— — 10,000 — —Total operating expenses152,061 117,052 97,257 71,206 53,561Income (loss) from operations16,845 23,599 6,871 18,014 (10,472)Interest income, net498 308 156 95 27Other income (expenses), net(131) (728) 1,269 (391) (123)Income (loss) before provision for income taxes17,212 23,179 8,296 17,718 (10,568)Provision for (benefit from) income taxes1,829 7,979 (27,262) 2,199 398Net income (loss)15,383 15,200 35,558 15,519 (10,966)Earnings per share: Basic$0.27 $0.29 $0.83 $0.32 $(0.83)Diluted$0.25 $0.25 $0.76 $0.30 $(0.83)Shares used in computing earnings per share: (2) Basic56,331,018 34,774,983 14,064,055 13,535,736 13,284,938Diluted61,943,087 41,509,185 17,763,859 15,933,374 13,284,938(1)Includes stock-based compensation as follows: Fiscal years ended July 31, 2013 2012 2011 2010 2009 (in thousands)Cost of maintenance revenue$1,217 $379 $120 $46 $44Cost of services revenue12,493 3,741 1,264 879 736Research and development9,131 3,759 1,372 769 688Sales and marketing5,970 2,936 903 755 857General and administrative9,588 7,443 3,021 905 464Total stock-based compensation expenses$38,399 $18,258 $6,680 $3,354 $2,789 (2)See Note 4 to our consolidated financial statements for an explanation of the calculations of our actual basic and diluted earnings per share attributable tocommon stockholders. July 31, 2013 July 31, 2012 July 31, 2011 July 31, 2010 July 31, 2009 (in thousands)Cash and cash equivalents$79,767 $205,718 $59,625 $37,411 $27,585Working capital (deficit)135,309 169,278 12,541 (5,382) (13,523)Short-term and long-term investments127,972 — — — —Total assets312,270 284,247 126,540 60,055 54,741Total stockholders’ equity (deficit)228,429 183,962 18,152 (25,145) (44,648)Adjusted EBITDAWe believe Adjusted EBITDA, a non-GAAP financial measure, is useful in evaluating our operating performance compared to that of other companies inour industry, as this metric generally eliminates the effects of certain items that may vary for different companies for reasons unrelated to overall operatingperformance. We believe that:26Table of Contents•Adjusted EBITDA provides investors and other users of our financial information consistency and comparability with our past financialperformance, facilitates period-to-period comparisons of operations and facilitates comparisons with other companies, many of which usesimilar non-GAAP financial measures to supplement their GAAP results; and•it is useful to exclude non-cash charges, such as depreciation and amortization, stock-based compensation and one-time charges such as ourlitigation provision from Adjusted EBITDA because the amount of such expense in any specific period may not directly correlate to theunderlying performance of our business operations and these expenses can vary significantly between periods.We use Adjusted EBITDA in conjunction with traditional GAAP measures as part of our overall assessment of our performance, including thepreparation of our annual operating budget and quarterly forecasts, to evaluate the effectiveness of our business strategies and to communicate with our boardof directors concerning our financial performance.Adjusted EBITDA should not be considered as a substitute for other measures of financial performance reported in accordance with GAAP. There arelimitations to using non-GAAP financial measures, including that other companies may calculate these measures differently than we do. We compensate forthe inherent limitations associated with using Adjusted EBITDA through disclosure of these limitations, presentation of our financial statements in accordancewith GAAP and reconciliation of Adjusted EBITDA to the most directly comparable GAAP measure, net income (loss).The following provides a reconciliation of net income (loss) to Adjusted EBITDA: Fiscal years ended July 31, 2013 2012 2011 2010 2009 (unaudited, in thousands)Net income (loss)$15,383 $15,200 $35,558 $15,519 $(10,966)Non-GAAP adjustments: Provision for (benefit from) income taxes1,829 7,979 (27,262) 2,199 398Other (income) expense, net131 728 (1,269) 391 123Interest income, net(498) (308) (156) (95) (27)Litigation provision— — 10,000 — —Depreciation and amortization4,821 2,917 2,226 1,376 1,306Stock-based compensation38,399 18,258 6,680 3,354 2,789Adjusted EBITDA$60,065 $44,774 $25,777 $22,744 $(6,377)27Table of ContentsItem 7.Management’s Discussion and Analysis of Financial Condition and Results of OperationsThe following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes theretoincluded in Item 8 and the Risk Factors included in Item 1A of Part I of this Annual Report on Form 10-K. All information presented herein is based onour fiscal calendar. Unless otherwise stated, references in this report to particular years or quarters refer to our fiscal years ended in July and theassociated quarters of those fiscal years. We assume no obligation to revise or update any forward-looking statements for any reason, except asrequired by law.OverviewWe are a leading provider of core system software to the global P&C insurance industry. Our solutions serve as the transactional systems-of-record for,and enable the key functions of, a P&C insurance carrier’s business: underwriting and policy administration, claims management and billing. Since ourinception, our mission has been to empower P&C insurance carriers to transform and improve their businesses by replacing their legacy core systems withour software platform.We derive our revenues from licensing our software applications, providing maintenance support and providing professional services to the extentrequested by our customers. Our license revenues are primarily generated through annual license fees that recur during the term of our multi-year contracts.These multi-year contracts have an average term of approximately five years and are renewed on an annual or multi-year basis. In certain cases, when requiredby a customer, we license our software on a perpetual license basis. In addition, certain of our multi-year term licenses provide the customer with the option topurchase a perpetual license at the end of the initial contract term. We generally price our licenses based on the amount of direct written premiums (“DWP”)that will be managed by our solutions. We typically invoice our customers annually in advance and quarterly in certain cases for both term license andmaintenance fees, and we invoice our perpetual license customers either in full at contract signing or on an installment basis and invoice related maintenancefees annually, in advance.To extend our technology leadership position in our market, we intend to continue to focus on product innovation through research and development andaggressively pursue new customers and up-sell additional products within our existing customer base. This will require us to make continued investment inour research and development and sales and marketing functions to capitalize on opportunities for growth. We expect research and development, sales andmarketing and general and administrative expenses to continue to increase in absolute dollars for the foreseeable future to support this strategy. Research anddevelopment and sales and marketing expenses are also expected to increase as a percentage of revenues in future periods as we focus on expanding ourtechnological leadership.We face a number of risks in the execution of our strategy, including reliance on sales to a relatively small number of large customers, variances in themix amongst our components of revenues, which could result in lower gross margin from services revenues as compared to license and maintenance revenues,and the overall impact of weakening economic conditions on the insurance industry. We believe that our focus on continued product innovation and customerwins and renewals will support the expansion of our license sales and reduce the impact from weakened economic conditions.We sell our core system software primarily through our direct sales force. Our sales cycle for new customers is typically 12 to 24 months. Productimplementations, the primary driver of our services revenues, typically last 6 to 24 months and may take longer.Opportunities, Challenges & RisksSince August 2010, our license revenues from new orders and subsequent annual and, in some cases, quarterly payments have generally beenrecognized when payment is due from our customers. Historically, and to a lesser extent during fiscal years 2013, 2012 and 2011, our license revenues fromexisting orders have been recognized under three methods: under the residual method when payment is due and payable from our customers, under thepercentage-of-completion method as we complete customer implementations of our software, or under the zero-gross-margin method as we complete customerimplementations of our software. Our license revenues accounted for 41%, 42% and 43% of our total revenues during the fiscal years ended July 31, 2013,2012 and 2011, respectively.Our maintenance revenues are generally recognized annually over the committed maintenance term. Our maintenance fees are typically priced as a fixedpercentage of the associated license fees and generate lower gross margins than our license revenues. Our maintenance revenues accounted for 13%, 13% and12% of our total revenues during the fiscal years ended July 31, 2013, 2012 and 2011, respectively.28Table of ContentsWe generally charge services fees on a time and materials basis and revenues are typically recognized upon delivery of our services. In certain offeringssold as fixed fee arrangements, we recognize services revenues on a proportional performance basis as performance obligations are completed by using the ratioof labor hours to date as an input measure compared to total estimated labor hours for the consulting services. We derive our services revenues primarily fromimplementation services performed for our customers, revenues related to reimbursable travel expenses and training fees. Our services revenues generate lowergross margins than our license and maintenance revenues and accounted for 46%, 45% and 45% of our total revenues during the fiscal years ended July 31,2013, 2012 and 2011, respectively.We enter into multi-year renewable contracts to license our software. Regardless of contract length, we typically invoice our customers for annualamounts at the beginning of the corresponding period. Our deferred revenues consist only of amounts that have been invoiced, but not yet recognized asrevenues. As a result, deferred revenues and change in deferred revenues are incomplete measures of the strength of our business and are not necessarilyindicative of our future performance. Further, we expect to recognize our current deferred services revenue into income but do not expect significant deferrals ofservices revenue in future periods. Deferred license and service revenues related to projects under contract accounting as of July 31, 2013 were $2.2 millionand $2.0 million, respectively, while deferred license and service revenues related to projects under contract accounting as of July 31, 2012 were $10.2 millionand $5.6 million, respectively. Such deferral is in accordance with our Revenue Recognition policy as described under Critical Accounting Policies andEstimates.We have historically experienced seasonal variations in our revenues as a result of increased customer orders in our second and fourth fiscal quartersand subsequent annual renewal fees. We generally see increased orders in our second fiscal quarter, which is the quarter ended January 31, due to customerbuying patterns. We also see increased orders in our fourth fiscal quarter due to efforts by our sales team to achieve annual incentives. As a result, asignificantly higher percentage of our annual license fees are invoiced and recognized as revenues during those quarters at contract inception or in thesubsequent quarter when the annual license payment is due and in subsequent years upon the anniversary of the contract date. We generally expect theseseasonal trends to continue in the future, which may cause quarterly fluctuations in our results of operations and certain financial metrics.Our quarterly growth in revenues may not match up to new orders we receive in a given quarter. This mismatch is primarily due to the followingreasons:•for the initial year of a multi-year term license, we generally recognize revenues when payment is due and payment may not be due until asubsequent fiscal quarter;•we may enter into license agreements with specified terms for product upgrades or functionality, which may require us to delay revenuerecognition until the period in which the upgrade or functionality is delivered; and•we may enter into license agreements with other contractual terms that may affect the timing of revenue recognition.Our revenue seasonality may fluctuate versus comparable prior periods or prior quarters within the same fiscal year based on when new orders areexecuted in the quarter and the payment terms of each order. Additionally, our revenue may fluctuate if our customers make an early payment of their annualfees. Our ability to renew existing contracts for multiple year terms versus annual automatic renewals may impact revenue recognition.We generally charge annual software license fees for our multi-year term licenses and price our licenses based on the amount of direct written premiums(“DWP”) that will be managed by our solutions. However, in rare circumstances, our customers desire the ability to purchase our products on a perpetuallicense basis, resulting in an acceleration of revenue recognition. Milestone payments in a perpetual license order also cause seasonal variations. Our perpetuallicense revenues are not consistent from period to period. In addition, a few of our multi-year term licenses provide the customer with the option to purchase aperpetual license at the end of the initial contract term, which we refer to as a perpetual buyout right. The mix of our contract terms for our licenses and theexercise of perpetual buyout rights at the end of the initial contract term by our customers may lead to variability in our results of operations. Increases inperpetual license sales and exercises of perpetual buyout rights by our customers may affect our ability to show consistent growth in license revenues insubsequent periods. Reductions in perpetual licenses in future periods could cause adverse period-to-period comparisons of our financial results.In addition, because we price our products based on the amount of DWP that will be managed by our solutions, license revenues from each customermay fluctuate up or down based upon insurance policies sold by the customer in the preceding year. If we enter into a new territory, our revenue recognitionpattern may change depending on the contractual terms and local laws and regulations.We generated revenues of $300.6 million, $232.1 million and $172.5 million in the years ended July 31, 2013, 2012 and 2011, respectively. Wegenerate the majority of our revenues in the United States and Canada. Our revenues from outside the29Table of ContentsUnited States and Canada as a percentage of total revenues were 28%, 30% and 34% in the years ended July 31, 2013, 2012 and 2011, respectively. Wegenerated net income of $15.4 million, $15.2 million and $35.6 million in the years ended July 31, 2013, 2012 and 2011, respectively. No customeraccounted for 10% or more of our revenues for the years ended July 31, 2013, 2012 and 2011. Our ten largest customers accounted for 33%, 35% and 41% ofour total revenues for the years ended July 31, 2013, 2012 and 2011, respectively, and we expect this percentage to continue to decrease over time. We count ascustomers distinct buying entities, which may include multiple national or regional subsidiaries of large, global P&C insurance carriers.Key Business MetricsWe use certain key metrics to evaluate and manage our business, including rolling four-quarter recurring revenues from term licenses and totalmaintenance. In addition, we present select GAAP and non-GAAP financial metrics that we use internally to manage the business and that we believe areuseful for investors. These metrics include Adjusted EBITDA and operating cash flow.Four-Quarter Recurring RevenuesWe measure four-quarter recurring revenues by adding the total term license revenues and total maintenance revenues recognized in the preceding fourquarters ended in the stated period and excluding perpetual license revenues, revenues from perpetual buyout rights and services revenues. This metric allowsus to better understand the trends in our recurring revenues because it typically reduces the variations in any particular quarter caused by seasonality, theeffects of the annual invoicing of our term licenses and certain effects of contractual provisions that may accelerate or delay revenue recognition in some cases.Our four-quarter recurring revenues for each of the nine periods presented were: Four quarters ended July 31,2013 April 30,2013 January 31,2013 October 31,2012 July 31,2012 April 30,2012 January 31,2012 October 31,2011 July 31,2011 (in thousands)Term license revenues$112,863 $95,303 $92,792 $83,114 $74,869 $70,165 $70,871 $64,174 $60,541Total maintenance revenues37,561 35,548 34,207 31,802 29,538 27,581 25,412 23,818 21,321Total four-quarter recurringrevenues$150,424 $130,851 $126,999 $114,916 $104,407 $97,746 $96,283 $87,992 $81,862Adjusted EBITDAWe believe Adjusted EBITDA, a non-GAAP measure, is useful, in addition to other financial measures presented in accordance with GAAP, inevaluating our operating performance compared to that of other companies in our industry, as this metric generally eliminates the effects of certain items thatmay vary for different companies for reasons unrelated to overall operating performance. Please refer to Item 6, Selected Financial Data, for further details onwhy we use this metric and why we believe this metric is useful to our stockholders.The following table provides a reconciliation of net income to Adjusted EBITDA: Fiscal years ended July 31, 2013 2012 2011 (unaudited, in thousands)Net income$15,383 $15,200 $35,558Non-GAAP Adjustments: Provision for (benefit from) income taxes1,829 7,979 (27,262)Other (income) expense, net131 728 (1,269)Interest income, net(498) (308) (156)Litigation provision— — 10,000Depreciation and amortization4,821 2,917 2,226Stock-based compensation38,399 18,258 6,680Adjusted EBITDA$60,065 $44,774 $25,77730Table of ContentsOperating Cash FlowsWe monitor our cash flows from operating activities, or operating cash flows, as a key measure of our overall business performance, which enables usto analyze our financial performance without the effects of certain non-cash items such as depreciation and amortization and stock-based compensationexpenses. Additionally, operating cash flows takes into account the impact of changes in deferred revenues, which reflects the receipt of cash payment forproducts before they are recognized as revenues. Our operating cash flows are significantly impacted by changes in deferred revenues, timing of bonuspayments and collections of accounts receivable. They were also impacted by the payment of a litigation settlement during the three months ended October 31,2011. As a result, our operating cash flows fluctuate significantly on a quarterly basis. Operating cash flows were $32.5 million, $17.1 million and $27.7million for fiscal years 2013, 2012 and 2011, respectively. For a further discussion of our operating cash flows, see “Liquidity and Capital Resources—CashFlows from Operating Activities.”Critical Accounting Policies and EstimatesOur consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States and includeour accounts and the accounts of our wholly-owned subsidiaries. The preparation of our consolidated financial statements requires our management to makeestimates, assumptions and judgments that affect the reported amounts of assets and liabilities and disclosures for contingent assets and liabilities as of thedate of the financial statements, and the reported amounts of revenues and expenses during the applicable periods. Management bases its estimates,assumptions and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. Differentassumptions and judgments would change the estimates used in the preparation of our consolidated financial statements which, in turn, could change theresults from those reported. Our management evaluates its estimates, assumptions and judgments on an ongoing basis. The critical accounting policiesrequiring estimates, assumptions and judgments that we believe have the most significant impact on our consolidated financial statements are described below.Revenue RecognitionWe enter into arrangements to deliver multiple products or services (multiple-elements). We apply software revenue recognition rules and allocate the totalrevenues among elements based on vendor-specific objective evidence (“VSOE”) of fair value of each element. We recognize revenue on a net basis excludingtaxes collected from customers and remitted to government authorities.Revenues are derived from three sources:(i)License fees, related to term (or time-based) and perpetual software license revenue;(ii)Maintenance fees, related to email and phone support, bug fixes and unspecified software updates and upgrades released when, and if availableduring the maintenance term; and(iii)Services fees, related to professional services related to implementation of our software, reimbursable travel and training.Revenues are recognized when all of the following criteria are met:•Persuasive evidence of an arrangement exists. Evidence of an arrangement consists of a written contract signed by both the customer andmanagement prior to the end of the period.•Delivery or performance has occurred. Our software is delivered electronically to the customer. Delivery is considered to have occurred whenwe provide the customer access to the software along with login credentials.•Fees are fixed or determinable. Arrangements where a significant portion of the fee is due beyond 90 days from delivery are not considered tobe fixed or determinable. Revenues from such arrangements are recognized as payments become due, assuming all other revenue recognitioncriteria have been met. Fees from term licenses are generally due in annual or, in certain cases, quarterly installments over the term of theagreement beginning on the effective date of the license. Accordingly, fees from term licenses are not considered to be fixed or determinable untilthey become due.•Collectability is probable. Collectability is assessed on a customer-by-customer basis, based primarily on creditworthiness as determined bycredit checks and analysis, as well as customer payment history. Payment terms generally range from 30 to 90 days from invoice date. If it isdetermined prior to revenue recognition that collection of an arrangement fee is not probable, revenues are deferred until collection becomesprobable or cash is collected, assuming all other revenue recognition criteria are satisfied.VSOE of fair value does not exist for our software licenses; therefore, for all arrangements that do not include services that are essential to thefunctionality of the software, we allocate revenues to software licenses using the residual method.31Table of ContentsUnder the residual method, the amount recognized for license fees is the difference between the total fixed and determinable fees and the VSOE of fair value forthe undelivered elements under the arrangement.The VSOE of fair value for elements of an arrangement is based upon the normal pricing and discounting practices for those elements when soldseparately. VSOE of fair value for maintenance is established using the stated maintenance renewal rate in the customer’s contract. We generally enter into termlicenses ranging from 3 to 7 years. For term licenses with duration of one year or less, no VSOE of fair value for maintenance exists. We began using statedmaintenance renewal rates in customers’ contracts during fiscal year 2008. Prior to that, customers’ contracts did not have stated maintenance renewal ratesand we were unable to establish VSOE of maintenance. VSOE of fair value for services is established if a substantial majority of historical stand-alone sellingprices for a service fall within a reasonably narrow price range.If VSOE of fair value for one or more undelivered elements does not exist, the total arrangement fee is not recognized until delivery of those elementsoccurs or when VSOE of fair value is established.If the undelivered elements are all service elements and VSOE of fair value does not exist for one or more service element, the total arrangement fee isrecognized ratably over the longest service period starting at software delivery, assuming all the related services have been made available to the customer.When implementation services are sold with a license arrangement, we evaluate whether those services are essential to the functionality of the software.Prior to fiscal year 2008, implementation services were determined to be essential to the software because the implementation services were generally notavailable from other third party vendors. By the beginning of fiscal year 2008, third party vendors were providing implementation services for ClaimCenterand it was concluded that implementation services generally were not essential to the functionality of the ClaimCenter software. By the beginning of fiscal year2011, third party vendors were providing implementation services for PolicyCenter and BillingCenter and it was concluded that implementation services weregenerally no longer essential to the functionality of the PolicyCenter and BillingCenter software. In certain offerings sold as fixed fee arrangements, we recognizeservices revenues on a proportional performance basis as performance obligations are completed by using the ratio of labor hours to date as an input measurecompared to total estimated labor hours for the consulting services.In cases where professional services are deemed to be essential to the functionality of the software, the arrangement is accounted for using contractaccounting until the essential services are complete. If reliable estimates of total project costs and the extent of progress toward completion can be made, weapply the percentage-of-completion method in recognizing the arrangement fee. The percentage toward completion is measured by using the ratio of servicebillings to date compared to total estimated service billings for the consulting services. Service billings approximate labor hours as an input measure since theyare billed monthly on a time and material basis. For term licenses with license fees due in equal installments over the term, the license revenues subject topercentage-of-completion recognition includes only those payments that are due and payable within the reporting period. The fees related to the maintenance arerecognized over the period the maintenance is provided.When VSOE for maintenance has not been established and the arrangement includes implementation services which are deemed essential to thefunctionality of the software and it is reasonably assured that no loss will be incurred under the arrangement, revenues are recognized pursuant to the zerogross margin method. Under this method, revenues recognized are limited to the costs incurred for the implementation services. As a result, billed license andmaintenance fees and the profit margin on the professional services are generally deferred until the essential services are completed and then recognized over theremaining term of the maintenance period.If we cannot make reliable estimates of total project implementation and it is reasonably assured that no loss will be incurred under such arrangements,the zero profit margin method is applied whereby an amount of revenues equal to the incurred costs of the project is recognized as well as the incurred costs,producing a zero margin until project estimates become reliable. The percentage-of-completion method is applied when project estimates become reliable,resulting in a cumulative effect adjustment for deferred license revenues to the extent of progress toward completion, and the related deferred professionalservice margin is recognized in full as revenues. Such cumulative effect adjustment for license revenues was $3.2 million, $0.9 million and $0.4 million forthe fiscal years ended July 31, 2013, 2012 and 2011, respectively, and for service revenues was $1.7 million, $0.9 million and $0.3 million for the fiscalyears ended July 31, 2013, 2012 and 2011, respectively.Stock-Based CompensationWe recognize compensation expense related to stock options and restricted stock units (“RSUs”) granted to employees based on the estimated fair valueof the awards on the date of grant, net of estimated forfeitures. The RSUs are subject to time-based vesting, which generally occurs over a period of four years,and for those RSU awards granted prior to our IPO, a performance-based condition, which was satisfied 180 days after the completion of our IPO. If anemployee terminates employment from us prior to the occurrence of the performance-based condition, the employee does not forfeit the RSUs to the32Table of Contentsextent the time-based vesting requirements were satisfied prior to termination. The awards expire 10 years from the grant date. We estimate the grant date fairvalue, and the resulting stock-based compensation expense, of our stock options using the Black-Scholes option-pricing model. The grant date fair value of thestock-based awards is generally recognized using the accelerated multiple option approach over the requisite service period, which is generally the vestingperiod of the respective awards. Compensation cost for RSUs is generally recognized over the time-based vesting period regardless of the occurrence of theperformance-based condition noted above for awards granted prior to our IPO, since this condition was not subject to employment.Income TaxesIncome taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequencesattributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating lossand tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in whichthose temporary differences are expected to be recovered or settled. Deferred tax assets related to excess tax benefits are recorded when utilized. The effect ondeferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We record a valuation allowanceto reduce deferred tax assets to an amount of which realization is more likely than not.Accounting guidance related to accounting for uncertainties in income taxes provides that a tax benefit from an uncertain tax position may be recognizedwhen it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, basedon the technical merits of the position. This interpretation also provides guidance on measurement, derecognition, classification, interest and penalties,accounting in interim periods, disclosure and transition.We record interest and penalties related to unrecognized tax benefits as income tax expense in our consolidated statement of income.Recent Accounting PronouncementPresentation of Unrecognized Tax BenefitsIn July 2013, the Financial Accounting Standards Board ("FASB") issued authoritative guidance that requires an entity to present an unrecognized taxbenefit ("UTB"), or a portion of a UTB, in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar taxloss, or a tax credit carryforward, except as follows. To the extent that a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is notavailable at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of atax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for suchpurpose, the UTB should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The guidance is effectiveprospectively for fiscal years and interim reporting periods within those years, beginning after December 15, 2013. We do not expect this guidance to have amaterial impact on our consolidated financial statements.Results of OperationsThe following tables set forth our results of operations for the periods presented. The data has been derived from the Consolidated Financial Statementscontained in this Annual Report on Form 10-K which, in the opinion of our management, reflect all adjustments, consisting only of normal recurringadjustments, necessary to present fairly the financial position and results of operations for the interim periods presented. The operating results for any periodshould not be considered indicative of results for any future period. 33Table of Contents Fiscal years ended July 31, 2013 2012 2011Revenues:(in thousands)License$123,560 $97,136 $73,883Maintenance37,561 29,538 21,321Services139,528 105,387 77,268Total revenues300,649 232,061 172,472Cost of revenues: License920 762 1,264Maintenance7,613 5,288 4,063Services123,210 85,360 63,017Total cost of revenues131,743 91,410 68,344Gross profit: License122,640 96,374 72,619Maintenance29,948 24,250 17,258Services16,318 20,027 14,251Total gross profit168,906 140,651 104,128Operating expenses: Research and development66,346 50,462 34,773Sales and marketing53,301 38,254 28,950General and administrative32,414 28,336 23,534Litigation provision— — 10,000Total operating expenses152,061 117,052 97,257Income from operations16,845 23,599 6,871Interest income, net498 308 156Other income (expenses), net(131) (728) 1,269Income before provision for (benefit from) income taxes17,212 23,179 8,296Provision for (benefit from) income taxes1,829 7,979 (27,262)Net income$15,383 $15,200 $35,558 Revenues: License41% 42% 43%Maintenance13 13 12Services46 45 45Total revenues100 100 100Total cost of revenues44 39 40Total gross profit56 61 60Operating expenses: Research and development22 22 20Sales and marketing17 16 17General and administrative11 12 13Litigation provision— — 6Total operating expenses50 50 56Income from operations6 11 4Interest income, net— — —Other income (expenses), net— (1) 1Income before provision for (benefit from) income taxes6 10 5Provision for (benefit from) income taxes1 3 (16)Net Income5% 7% 21%34Table of ContentsComparison of the Fiscal Years Ended July 31, 2013 and 2012RevenuesPlease refer to Note 1 of Notes to Consolidated Financial Statements for a description of our accounting policy related to revenue recognition. Fiscal years ended July 31, 2013 2012 % of total % of total Change Amount revenues Amount revenues ($) (%) (in thousands, except percentages)Revenues: License$123,560 41% $97,136 42% $26,424 27%Maintenance37,561 13 29,538 13 8,023 27Services139,528 46 105,387 45 34,141 32Total revenues$300,649 100% $232,061 100% $68,588 30%License RevenuesThe $26.4 million increase in license revenues during fiscal year 2013 was primarily driven by continued adoption of our PolicyCenter software,increased adoption of our BillingCenter and Suite software, and increased sales and marketing efforts in North America and Europe. Fiscal years ended July 31, 2013 2012 % of license % of license Change Amount revenues Amount revenues ($) (%) (In thousands, except percentages)License revenues: Term$112,863 91% $74,869 77% $37,994 51%Perpetual10,697 9 22,267 23 (11,570) (52)Total license revenues$123,560 100% $97,136 100% $26,424 27%The $38.0 million increase in term license revenues during fiscal year 2013 was driven by $32.0 million of additional revenues recognized during fiscalyear 2013 from new orders, $5.8 million of additional revenues recognized upon attainment of the required revenue recognition criteria related to prior yearorders during fiscal year 2013, and $2.7 million of revenues recognized due to timing of invoicing and corresponding due dates. In addition, there were $0.9million of additional revenues recognized when VSOE of fair value of maintenance was established for one customer during fiscal year 2013. These increaseswere partially offset by a decrease of $2.5 million of revenues recognized due to completion of project implementations in prior periods, and a decrease of $1.1million of revenues recognized for one customer that exercised a perpetual buyout option in the prior period.The $11.6 million decrease in perpetual license revenues during fiscal year 2013 was primarily driven by new customers increasingly signing termlicense agreements in the current period. This decrease was net of a $3.0 million increase in revenues related to new orders, and $2.5 million of revenuesrecognized for one customer from milestone billing upon completion of a project.Our perpetual license revenues are not consistent from period to period.Maintenance RevenuesThe $8.0 million increase in maintenance revenues was primarily driven by $6.8 million of additional revenues recognized from new and existingorders, and $1.1 million of revenues recognized upon attainment of the required revenue recognition criteria related to prior year orders during the period.Services RevenuesThe $34.1 million increase in service revenues was primarily driven by an additional $29.4 million of revenues related to implementation of oursoftware. Included in this increase is $1.7 million of revenues recognized when reliable estimates were35Table of Contentsobtained for one customer during the prior period, $4.0 million of revenues recognized upon completion of implementation projects continued from prior fiscalyears, and $0.7 million of revenues recognized when VSOE of fair value of maintenance established for one customer during fiscal year 2013. In addition, anincrease of $2.5 million was recognized related to training and an increase of $2.2 million in revenues were recognized related to reimbursable travel expenses.Deferred Revenues As of July 31, 2013 2012 Change Amount Amount ($) (%) (In thousands, except percentages)Deferred revenues: Deferred license revenues$14,435 $25,766 $(11,331) (44)%Deferred maintenance revenues22,017 21,536 481 2Deferred services revenues4,744 8,214 (3,470) (42)Total deferred revenues$41,196 $55,516 $(14,320) (26)%The $11.3 million decrease in deferred license revenues was primarily driven by $5.8 million of revenues recognized from existing orders entered into inprior fiscal years where we attained the required revenue recognition criteria during fiscal year 2013, of which $3.2 million was due to obtainment of reliableestimates for one customer. In addition, $5.2 million of revenues were recognized during fiscal year 2013 related to implementation projects completed in priorfiscal years and for which revenue is recognized over the related maintenance term due to lack of VSOE, $1.4 million of revenues recognized from prior fiscalyear orders and $0.9 million of revenues recognized when VSOE of fair value of maintenance was established for one customer during fiscal year 2013. Thisdecrease was partially offset by $2.0 million of deferred license billings for new deals during fiscal year 2013, including $0.9 million deferred due to lack ofattainment of revenue recognition criteria as of July 31, 2013.The $0.5 million increase in deferred maintenance revenues during fiscal year 2013 was primarily driven by $1.6 million of revenues deferred forbillings of new and existing orders during fiscal year 2013, partially offset by $1.1 million of revenues recognized upon attainment of revenue recognitioncriteria during fiscal year 2013.The $3.5 million decrease in deferred services revenues was primarily driven by $4.0 million of revenues recognized related to an implementation projectcompleted in prior fiscal years and for which revenue is recognized over the related maintenance term due to lack of VSOE. Further, $1.7 million of revenueswere recognized upon obtainment of reliable estimates for one customer during fiscal year 2013 and $0.7 million of revenues were recognized when VSOE offair value of maintenance was established for one customer during fiscal year 2013. This decrease was partially offset by $1.2 million of services revenuesdeferred during fiscal year 2013 due to lack of attainment of revenue recognition and $2.0 million of services revenues deferred for contracts where revenue isrecognized based on completion of a services performance obligation during the period.Included in our deferred revenues as of July 31, 2013 is $1.8 million of deferred revenue for one customer that is subject to refund in the event ofnonperformance of certain project implementation milestones. Our deferred revenues consist only of amounts that have been invoiced, but not yet recognized asrevenues. As a result, deferred revenues and change in deferred revenues are incomplete measures of the strength of our business and are not necessarilyindicative of our future performance.36Table of ContentsCost of Revenues and Gross Profit Fiscal years ended July 31, 2013 2012 Change Amount Amount ($) (%) (In thousands, except percentages)Cost of revenues: License$920 $762 $158 21%Maintenance7,613 5,288 2,325 44Services123,210 85,360 37,850 44Total cost of revenues$131,743 $91,410 $40,333 44%Includes stock-based compensation of: Cost of maintenance revenues$1,217 $379 $838 Cost of services revenues12,493 3,741 8,752 Total$13,710 $4,120 $9,590 The $40.3 million increase in cost of revenues was primarily due to a 30% increase in revenues for fiscal year 2013. The increased costs were primarilydriven by an increase of $16.8 million in personnel-related expenses as a result of 146 additional employees hired during fiscal year 2013 primarily to provideimplementation services to our customers, a $9.6 million increase in stock-based compensation expenses, $8.4 million increase in billable expenses and third-party consultant costs and a $5.6 million increase in non-billable travel related expenses, professional services and administrative expenses.We expect our cost of revenues to increase in absolute dollars in future periods to provide additional implementation services to our growing customerbase. Fiscal years ended July 31, 2013 2012 Change Amount margin % Amount margin % ($) (%) (In thousands, except percentages)Gross profit: License$122,640 99% $96,374 99% $26,266 27%Maintenance29,948 80 24,250 82 5,698 23Services16,318 12 20,027 19 (3,709) (19)Total gross profit$168,906 56% $140,651 61% $28,255 20%Gross profit increased by $28.3 million primarily due to increased license revenues during fiscal year 2013. Gross margin decreased to 56% for fiscalyear 2013 from 61% for fiscal year 2012, primarily due to the increase in lower gross margin services revenues as a percentage of total revenues. The decreasein services margin in the current fiscal year is due to the increases in personnel-related expenses and stock-based compensation expenses discussed above,which outpaced the increase in revenues.We expect our quarterly gross margin to vary in percentage terms in future periods as we experience changes in the mix between higher gross marginlicense revenues and lower gross margin service revenues.37Table of ContentsOperating Expenses Fiscal years ended July 31, 2013 2012 % of total % of total Change Amount revenues Amount revenues ($) (%) (In thousands, except percentages)Operating expenses: Research and development$66,346 22% $50,462 22% $15,884 31%Sales and marketing53,301 17 38,254 16 15,047 39General and administrative32,414 11 28,336 12 4,078 14Total operating expenses$152,061 50% $117,052 50% $35,009 30%Includes stock-based compensation of: Research and development$9,131 $3,759 $5,372 Sales and marketing5,970 2,936 3,034 General and administrative9,588 7,443 2,145 Total$24,689 $14,138 $10,551 The $35.0 million increase in operating expenses was primarily driven by increased personnel-related and operational expenses, including higher stock-based compensation, travel-related costs and marketing programs, professional services costs including consulting and other professional service costs, as aresult of hiring 166 additional employees during fiscal year 2013 in these functional areas.We expect all of our operating expense line items to increase in absolute dollars in future periods to support our future growth strategy.Research and DevelopmentThe $15.9 million increase in research and development expenses was primarily due to an increase of $6.8 million in personnel-related expenses as aresult of 75 additional employees during fiscal year 2013, a $5.4 million increase in stock-based compensation and a $3.7 million increase in operational andother professional services expenses.Sales and MarketingThe $15.0 million increase in sales and marketing expenses was primarily due to a $6.6 million increase in personnel-related expenses primarily as aresult of 55 additional employees during fiscal year 2013, a $3.0 million increase in stock-based compensation, a $2.7 million increase in employee travelcosts, marketing programs and professional services, and a $2.7 million increase in operational costs.General and AdministrativeThe $4.1 million increase in general and administrative expenses was primarily due to a $4.0 million increase in personnel-related expenses primarily asa result of 36 additional employees during fiscal year 2013, a $2.1 million increase in stock-based compensation, and a $1.6 million increase in professionalservices. These increases were offset by a $3.6 million decrease in operational expenses.Other Income (Expense) Fiscal years ended July 31, 2013 2012 Change Amount Amount ($) (%) (In thousands, except percentages)Interest income, net$498 $308 $190 *Other expense, net(131) (728) 597 *Total$367 $(420) $787 **Not meaningful38Table of ContentsInterest Income, NetInterest income increased by $0.2 million primarily due to higher interest income from the IPO proceeds and the investment of excess cash in fiscal year2013.Other Expense, NetOther expense decreased by $0.6 million primarily due to lower currency exchange losses resulting from the U.S. dollar strengthening against theAustralian dollar, Canadian dollar and British pound during fiscal year 2013 compared to fiscal year 2012.Provision for Income TaxesWe recognized an income tax provision of $1.8 million for fiscal year 2013 compared to $8.0 million for fiscal year 2012. Our effective income tax ratedecreased to 10.6% for fiscal year 2013 compared to 34.4% for fiscal year 2012, which was primarily due to the increase in tax credits.Comparison of the Fiscal Years Ended July 31, 2012 and 2011RevenuesPlease refer to Note 1 of Notes to Consolidated Financial Statements for a description of our accounting policy related to revenue recognition. Fiscal years ended July 31, 2012 2011 % of totalrevenues % of totalrevenues Change Amount Amount ($) (%) (in thousands, except percentages)Revenues: License$97,136 42% $73,883 43% $23,253 31%Maintenance29,538 13 21,321 12 8,217 39Services105,387 45 77,268 45 28,119 36Total revenues$232,061 100% $172,472 100% $59,589 35%License RevenuesThe $23.3 million increase in license revenues during fiscal year 2012 was primarily driven by continued adoption of our ClaimCenter software,increasing adoption of our PolicyCenter and Suite software, and increased sales and marketing efforts in North America and Europe. Fiscal years ended July 31, 2012 2011 % of licenserevenues % of licenserevenues Change Amount Amount ($) (%) (In thousands, except percentages)License revenues: Term$74,869 77% $60,541 82% $14,328 24%Perpetual22,267 23 13,342 18 8,925 67Total license revenues$97,136 100% $73,883 100% $23,253 31%The $14.3 million increase in term license revenues during fiscal year 2012 was driven by $10.4 million of revenues recognized during fiscal year 2012from new orders and $6.1 million of revenues recognized upon attainment of the required revenue recognition criteria related to prior year orders during fiscalyear 2012, which included $1.9 million of revenue recognized upon completion of project implementation for one customer, $1.9 million of revenuesrecognized upon attainment of reliable estimates, $1.7 million of revenues recognized upon delivery of specified upgrades and $0.6 million of revenuerecognized when VSOE of fair value of maintenance was established for one customer. These increases were partially offset by the timing of $2.1 million ofrevenue recognized upon the early payment of an annual fee from one customer in the prior comparable period and $0.6 million of revenues recognized uponattainment of the required revenue recognition criteria in the prior comparable period.39Table of ContentsThe $8.9 million increase in perpetual license revenues during fiscal year 2012 was driven by $9.6 million of revenues recognized upon attainment ofthe required revenue recognition criteria related to prior year orders during fiscal year 2012, $6.7 million of revenues recognized during fiscal year 2012 fromnew orders and $1.2 million of revenues recognized upon exercise of perpetual buyout option during fiscal year 2012. These increases were partially offset bythe recognition in the prior comparable period of $7.2 million of revenues for new perpetual orders and $1.3 million of revenues for existing orders under thepercentage-of-completion method.Maintenance RevenuesThe $8.2 million increase in maintenance revenues was primarily driven by $5.5 million of revenues recognized associated with new orders duringfiscal year 2012 and $2.7 million of revenues recognized upon attainment of the required revenue recognition criteria related to prior year orders during fiscalyear 2012.Services RevenuesThe $28.1 million increase in services revenues was primarily driven by an additional $25.0 million of revenues related to implementation of oursoftware. Included in this increase is $1.6 million of revenue recognized upon attainment of definitive arrangement, $1.1 million of revenue recognized whenVSOE of fair value of maintenance was established for one customer during fiscal year 2012, $1.0 million of revenue recognized upon completion of animplementation project for one of our customers and $0.6 million of revenues recognized upon attainment of reliable estimates during fiscal year 2012. Anadditional $2.8 million of revenues were recognized related to reimbursable travel expenses.Deferred Revenues As of July 31, 2012 2011 Change Amount Amount ($) (%) (In thousands, except percentages)Deferred revenues: Deferred license revenues$25,766 $41,248 $(15,482) (38)%Deferred maintenance revenues21,536 18,719 2,817 15Deferred services revenues8,214 13,828 (5,614) (41)Total deferred revenues$55,516 $73,795 $(18,279) (25)%The $15.5 million decrease in deferred license revenues was primarily driven by $15.2 million of revenues recognized from existing orders entered intoin prior fiscal years where we attained the required revenue recognition criteria during fiscal year 2012 and $7.3 million of revenues recognized uponcompletion of implementation projects in fiscal year 2012 or continued from prior fiscal years. These increases were partially offset by $4.3 million ofrevenues deferred for billings of new orders during fiscal year 2012 and $2.3 million of deferred revenues due to lack of attainment of revenue recognitioncriteria during fiscal year 2012.The $2.8 million increase in deferred maintenance revenues during fiscal year 2012 was primarily driven by $3.6 million of revenues deferred forbillings of new orders during fiscal year 2012, partially offset by $1.2 million of revenues recognized from existing orders entered into in prior periods uponattainment of the required revenue recognition criteria during fiscal year 2012.The $5.6 million decrease in deferred services revenues was primarily driven by $1.1 million of revenue recognized when VSOE of fair value ofmaintenance was established for one customer during fiscal year 2012, $0.6 million of revenue recognized upon attainment of reliable estimates for onecustomer during fiscal year 2012 and $3.9 million of revenues recognized upon completion of implementation projects during fiscal year 2012 or continuedfrom prior fiscal years.Our deferred revenues consist only of amounts that have been invoiced, but not yet recognized as revenues. As a result, deferred revenues and change indeferred revenues are incomplete measures of the strength of our business and are not necessarily indicative of our future performance.40Table of ContentsCost of Revenues and Gross Profit Fiscal years ended July 31, 2012 2011 Change Amount Amount ($) (%) (In thousands, except percentages)Cost of revenues: License$762 $1,264 $(502) (40)%Maintenance5,288 4,063 1,225 30Services85,360 63,017 22,343 35Total cost of revenues$91,410 $68,344 $23,066 34 %Includes stock-based compensation of: Cost of maintenance revenues$379 $120 $259 Cost of services revenues3,741 1,264 2,477 Total$4,120 $1,384 $2,736 The $23.1 million increase in cost of revenues was primarily due to a 35% increase in revenues for fiscal year 2012. The increased costs were primarilydriven by an increase of $11.8 million in personnel-related expenses as a result of 104 additional employees hired during fiscal year 2012 primarily to provideimplementation services to our customers, a $5.4 million increase in billable expenses and third-party consultant costs, a $3.1 million increase in non-billabletravel-related expenses, professional services and administrative expenses and a $2.7 million increase in stock-based compensation expenses. Fiscal years ended July 31, 2012 2011 Change Amount margin % Amount margin % ($) (%) (In thousands, except percentages)Gross profit: License$96,374 99% $72,619 98% $23,755 33%Maintenance24,250 82 17,258 81 6,992 41Services20,027 19 14,251 18 5,776 41Total gross profit$140,651 61% $104,128 60% $36,523 35%Gross profit increased by $36.5 million primarily due to increased license revenues during fiscal year 2012. Gross margin improved to 61% for fiscalyear 2012 from 60% for fiscal year 2011, primarily due to the increase in higher gross margin license revenues as a percentage of total revenues.41Table of ContentsOperating Expenses Fiscal years ended July 31, 2012 2011 % of total % of total Change Amount revenues Amount revenues ($) (%) (In thousands, except percentages)Operating expenses: Research and development$50,462 22% $34,773 20% $15,689 45%Sales and marketing38,254 16 28,950 17 9,304 32General and administrative28,336 12 23,534 13 4,802 20 Litigation provision— — 10,000 6 (10,000) *Total operating expenses$117,052 50% $97,257 56% $19,795 20%Includes stock-based compensation of: Research and development$3,759 $1,372 $2,387 Sales and marketing2,936 903 2,033 General and administrative7,443 3,021 4,422 Total$14,138 $5,296 $8,842 * Not meaningfulThe $19.8 million increase in operating expenses was primarily driven by increased personnel-related and operational expenses, including higher stock-based compensation, professional services costs including consulting and other professional service cost, travel-related costs and marketing programs, as aresult of hiring 85 additional employees during fiscal year 2012 in these functional areas. This increase was partially offset by the one-time charge of $10.0million recognized during fiscal year 2011 related to litigation provision, as described in Note 5 to the Notes to Consolidated Financial Statements.Research and DevelopmentThe $15.7 million increase in research and development expenses was primarily due to an increase of $9.0 million in personnel-related expenses as aresult of 45 additional employees during fiscal year 2012, a $4.3 million increase in administrative and other professional services expenses and a $2.4million increase in stock-based compensation.Sales and MarketingThe $9.3 million increase in sales and marketing expenses was primarily due to a $4.7 million increase in personnel-related expenses primarily as aresult of 25 additional employees during fiscal year 2012, an increase of $2.6 million in employee travel costs, marketing programs and other expenses and a$2.0 million increase in stock-based compensation.General and AdministrativeThe $4.8 million increase in general and administrative expenses was primarily due to a $4.4 million increase in stock-based compensation, of which$1.2 million expense was related to a performance grant triggered upon the completion of our IPO and a $3.4 million increase in personnel-related expensesprimarily as a result of 15 additional employees during fiscal year 2012. These increases were offset by a $3.0 million decrease in administrative expenses andprofessional services costs including legal and consultant expenses.Other Income (Expense) Fiscal years ended July 31, 2012 2011 Change Amount Amount ($) (%) (In thousands, except percentages)Interest income, net$308 $156 $152 *Other income (expense), net(728) 1,269 (1,997) *Total$(420) $1,425 $(1,845) ** Not meaningful42Table of ContentsInterest Income, NetInterest income increased by $0.2 million primarily due to higher interest income from the IPO proceeds.Other Income (Expense), NetOther income (expense) net decreased by $2.0 million primarily due to higher currency exchange losses resulting from the U.S. dollar strengtheningagainst the Canadian dollar, British Pound and Euro during fiscal year 2012 compared to fiscal year 2011.Provision for (Benefit from) Income TaxesWe recognized an income tax provision of $8.0 million for fiscal year 2012 compared to an income tax benefit of $27.3 million for fiscal year 2011. Oureffective income tax rate of 34.4% for fiscal year 2012 increased compared to the income tax benefit for fiscal year 2011, which was primarily due to the releaseof a significant portion of the tax valuation allowance in fiscal year 2011. In addition, the increase in our profitability resulted in additional foreign and U.S.federal and state income taxes during fiscal year 2012.Quarterly Results of OperationsThe following table sets forth our unaudited quarterly consolidated statements of operations data for each of the eight quarters ended July 31, 2013. Inmanagement’s opinion, the data below have been prepared on the same basis as the audited consolidated financial statements included elsewhere in thisprospectus, and reflect all necessary adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of this data. The results ofhistorical periods are not necessarily indicative of the results to be expected for a full year or any future period. The following two tables present our unauditedquarterly consolidated statements of operations data first in dollars and then as a percentage of total revenues for the periods presented. 43Table of Contents Fiscal quarters ended July 31,2013 April 30,2013 January 31,2013 October 31,2012 July 31,2012 April 30,2012 January 31,2012 October 31,2011 (unaudited)(in thousands)Revenues: License$49,078 $22,918 $30,752 $20,812 $28,930 $21,662 $25,729 $20,815Maintenance9,871 9,110 9,210 9,370 7,858 7,769 6,805 7,106Services37,961 36,222 32,226 33,119 30,801 27,564 22,563 24,459Total revenues96,910 68,250 72,188 63,301 67,589 56,995 55,097 52,380Cost of revenues: License484 139 130 167 79 150 234 299Maintenance2,183 2,079 1,787 1,564 1,515 1,310 1,197 1,266Services34,139 33,774 29,471 25,826 25,612 22,513 19,310 17,925Total cost of revenues (1)36,806 35,992 31,388 27,557 27,206 23,973 20,741 19,490Gross profit: License48,594 22,779 30,622 20,645 28,851 21,512 25,495 20,516Maintenance7,688 7,031 7,423 7,806 6,343 6,459 5,608 5,840Services3,822 2,448 2,755 7,293 5,189 5,051 3,253 6,534Total gross profit60,104 32,258 40,800 35,744 40,383 33,022 34,356 32,890Operating expenses: Research and development (1)18,843 16,854 15,885 14,764 14,355 12,986 12,162 10,959Sales and marketing (1)16,621 11,915 12,389 12,376 13,286 8,409 9,198 7,361General and administrative (1)8,452 7,851 7,445 8,666 7,474 6,785 7,639 6,438Total operating expenses43,916 36,620 35,719 35,806 35,115 28,180 28,999 24,758Income (loss) from operations16,188 (4,362) 5,081 (62) 5,268 4,842 5,357 8,132Interest income, net139 137 132 90 88 107 73 40Other income (expenses), net(27) (268) 23 141 (257) 164 (319) (316)Income (loss) before provision for(benefit from) income taxes16,300 (4,493) 5,236 169 5,099 5,113 5,111 7,856Provision for (benefit from) incometaxes4,195 (1,823) (265) (278) 1,551 1,964 1,420 3,044Net income (loss)$12,105 $(2,670) $5,501 $447 $3,548 $3,149 $3,691 $4,812(1)Includes stock-based compensation as follows: Fiscal quarters ended July 31,2013 April 30,2013 January 31,2013 October 31,2012 July 31,2012 April 30,2012 January 31,2012 October 31,2011 (unaudited)(in thousands)Stock based compensation expenses: Cost of maintenance revenues$303 $313 $340 $261 $108 $86 $113 $72Cost of services revenues3,288 3,150 3,439 2,616 1,093 907 1,055 686Research and development2,587 2,056 2,446 2,042 820 836 1,258 845Marketing and sales1,701 676 1,942 1,651 1,007 905 527 497General and administrative2,090 2,077 2,207 3,214 1,352 1,540 3,339 1,212Total stock-based compensationexpenses$9,969 $8,272 $10,374 $9,784 $4,380 $4,274 $6,292 $3,31244Table of Contents Fiscal quarters ended July 31,2013 April 30,2013 January 31,2013 October 31,2012 July 31,2012 April 30,2012 January 31,2012 October 31,2011 (unaudited) (percentage of total revenues)Revenues: License51% 34 % 42% 33% 43% 38% 47% 40%Maintenance10 13 13 15 12 13 12 14Services39 53 45 52 45 49 41 46Total revenues100 100 100 100 100 100 100 100Total cost of revenues38 52 44 44 40 42 38 37Total gross profit (1)62 48 56 56 60 58 62 63Operating expenses: Research anddevelopment19 25 22 23 21 23 22 21Sales and marketing17 17 17 20 20 15 17 14General and administrative9 12 10 13 11 12 15 12Total operatingexpenses45 54 49 56 52 50 53 47Income (loss) from operations17 (6) 7 — 8 8 10 16Interest income, net— — — — — — — —Other income (expenses), net— (1) — — (1) — — (1)Income (loss) before provision for(benefit from) income taxes17 (7) 7 — 7 8 10 15Provision for (benefit from)income taxes5 (3) (1) (1) 2 3 3 6Net income (loss)12% (4)% 8% 1% 5% 5% 7% 9%(1)The table below shows gross profit as a percentage of each component of revenues, referred to as gross margin: Fiscal quarters ended July 31,2013 April 30,2013 January 31,2013 October 31,2012 July 31,2012 April 30,2012 January 31,2012 October 31,2011 (unaudited)(gross margin by component of revenues)Gross margin License99% 99% 100% 99% 100% 99% 99% 99%Maintenance78 77 81 83 81 83 82 82Services10 7 9 22 17 18 14 27Total gross margin62% 48% 56% 56% 60% 58% 62% 63%Quarterly TrendsIn general, our year-over-year quarterly revenues have increased as a result of an increase in the number of customers licensed to use our products aswell as purchases of additional licenses by our existing customers. We have historically experienced seasonal variations in our revenues as a result of increasedcustomer orders in our second and fourth fiscal quarters and subsequent annual fees and as a result of attainment of revenue recognition criteria related toorders from prior periods. We generally see increased orders in our second fiscal quarter, which is the quarter ended January 31, due to customer buyingpatterns. We also see increased orders in our fourth fiscal quarter due to efforts by our sales team to achieve annual incentives. Notwithstanding the fact thatwe generally see increased orders in our second and fourth fiscal quarters, we expect to see additional quarterly revenue fluctuations that may, in some cases,mask these expected seasonal variations. Our quarterly growth in revenues may not match up to new orders we receive in a given quarter. This mismatch isprimarily due to the following reasons:•for the initial year of a multi-year term license, we generally recognize revenues when payment is due and payment may not be due until asubsequent fiscal quarter;•we may enter into license agreements with specified terms for product upgrades or functionality, which may require us to delay revenuerecognition for the initial period; and45Table of Contents•we may enter into license agreements with other contractual terms that may affect the timing of revenue recognition.Our revenue seasonality may fluctuate versus comparable prior periods or prior quarters within the same fiscal year based on when new orders areexecuted in the quarter and the payment terms of each order. Additionally, our revenue may fluctuate if our customers make an early payment of their annualfees. Our ability to renew existing contracts for multiple year terms versus annual automatic renewals may impact revenue recognition.We generally charge annual software license fees for our multi-year term licenses and price our licenses based on the amount of direct written premiums(“DWP”) that will be managed by our solutions. However, in rare circumstances, our customers desire the ability to purchase our products on a perpetuallicense basis, resulting in an acceleration of revenue recognition. Milestone payments in a perpetual license order also cause seasonal variations. Our perpetuallicense revenues are not consistent from period to period. In addition, a few of our multi-year term licenses provide the customer with the option to purchase aperpetual license at the end of the initial contract term, which we refer to as a perpetual buyout right. The mix of our contract terms for our licenses and theexercise of perpetual buyout rights at the end of the initial contract term by our customers may lead to variability in our results of operations. Increases inperpetual license sales and exercises of perpetual buyout rights by our customers may affect our ability to show consistent growth in license revenues insubsequent periods. Reductions in perpetual licenses in future periods could cause adverse period-to-period comparisons of our financial results.In addition, because we price our products based on the amount of DWP that will be managed by our solutions, license revenues from each customermay fluctuate up or down based upon insurance policies sold by the customer in the preceding year. If we enter into a new territory, our revenue recognitionpattern may change, depending on the contractual terms and local laws and regulations.Our services revenues are also subject to seasonal fluctuations, though to a lesser degree than our license revenues. Our services revenues are impactedby the number of professional days in a given fiscal quarter. The quarter ended January 31 usually has fewer professional days due to the impact of theThanksgiving, Christmas and New Year’s holidays. Because we pay our services professionals the same amounts throughout the year, our gross margins onour services revenues are lower in the quarter ended January 31.Our gross profit in absolute dollars varied from quarter to quarter in the quarters presented. Our cost to maintain our infrastructure is generally fixedwithin a given quarter. Therefore, when applied against our generally fixed costs, higher revenues in a quarter result in higher overall gross profits.In most of the quarters presented, our operating expenses increased as a result of an increase in the number of total employees. From July 31, 2011 toJuly 31, 2013, we have added 501 additional employees in order to drive our sales efforts and increase our technical support, services, research anddevelopment and administrative personnel to support our growth.Research and development expenses in absolute dollars increased sequentially in every quarter presented. Increases were primarily a result of increasingheadcount to maintain and improve the functionality of our software products. Research and development expenses varied as a percentage of revenuesthroughout the periods presented primarily due to the timing of revenues recognized but generally increased year-over-year as we continued to invest in oursoftware development. We expect to increase research and development expenses in absolute dollars and as a percentage of revenues on an annual basis as weexpect to increase our investment in our software development in our ongoing efforts to ensure we maintain our technology leadership position.Sales and marketing expenses in absolute dollars varied from quarter-to-quarter in the quarters presented. Increases were primarily a result of increasingheadcount in our direct sales teams, as well as increased marketing programs and events and timing of the programs. Sales and marketing expenses as apercentage of revenues varied from quarter-to-quarter primarily due to the timing of revenues recognized, marketing programs and commissions earned andexpensed, but generally stayed stable year-over-year as sales and marketing expenses grew along with our revenues.General and administrative expenses in absolute dollars increased sequentially in every quarter presented except for the quarters ended April 30, 2012and January 31, 2013. Increases were primarily a result of increasing headcount to support the growth of our business. General and administrative expensesvaried as a percentage of revenues due to the timing of revenues recognized and the timing of professional service fees.During the first three quarters of fiscal 2013, we recorded an income tax benefit primarily resulting from the reinstatement of federal research anddevelopment credits, the benefit from incentive stock option (ISO) tax deductions, and permanent differences related to stock-based compensation.46Table of ContentsOur quarterly results of operations may fluctuate significantly due to a variety of factors, many of which are outside of our control, making our resultsof operations variable and difficult to predict. Such factors include those discussed above and those set forth in “Risk Factors—We may experience quarterlyand annual fluctuations in our results of operations due to a number of factors” and “Seasonal and other variations related to our revenue recognition maycause significant fluctuations in our results of operations and cash flows” in item 1A of Part I of this Annual Report on Form 10-K. One or more of thesefactors may cause our results of operations to vary widely. As such, we believe that our quarterly results of operations may vary significantly in the future andthat sequential quarterly comparisons of our results of operations may not be meaningful and should not be relied upon as an indication of future performance.Liquidity and Capital ResourcesCash flows provided by operating activities were $32.5 million, $17.1 million and $27.7 million during the years ended July 31, 2013, 2012 and2011, respectively. The year ended July 31, 2012 included the payment by us of a $10.0 million litigation settlement payment. We had capital expenditures of$9.2 million, $5.6 million and $2.8 million for the years ended July 31, 2013, 2012 and 2011, respectively. Our capital expenditures consisted of purchasesof property and equipment, primarily consisting of computer hardware, software and leasehold improvements. As of July 31, 2013, 2012 and 2011, we had$79.8 million, $205.7 million and $59.6 million of cash and cash equivalents, respectively, and working capital of $135.3 million, $169.3 million and$12.5 million, respectively.We experienced positive cash flows from operations during fiscal years 2013, 2012 and 2011. Our cash flows from operations are significantlyimpacted by timing of revenues, bonus payments and collections of accounts receivable, as well as by changes in deferred taxes. We expect that we willcontinue to generate positive cash flows from operations on an annual basis, although this may fluctuate significantly on a quarterly basis. In particular, wetypically 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 duringthat period and pay seasonally higher sales commissions from increased orders in our fourth fiscal quarter. As such, we believe that our existing cash andcash equivalents and sources of liquidity will be sufficient to fund our operations for at least the next 12 months. Our future capital requirements will dependon many factors, including our rate of revenues growth, the expansion of our sales and marketing activities and the timing and extent of our spending tosupport our research and development efforts and expansion into other markets. We may also seek to invest in, or acquire complementary businesses,applications or technologies. To the extent that existing cash and cash equivalents and cash from operations are insufficient to fund our future activities, wemay need to raise additional funds through public or private equity or debt financing. Additional funds may not be available on terms favorable to us or at all.Cash FlowsThe following summary of cash flows for the periods indicated has been derived from our consolidated financial statements included elsewhere in thisAnnual Report on Form 10-K: Fiscal years ended July 31, 2013 2012 2011 (in thousands)Net cash provided by operating activities$32,547 $17,094 $27,686Net cash used in investing activities(148,913) (3,296) (8,310)Net cash provided by (used in) financing activities(8,621) 133,007 931Cash Flows from Operating ActivitiesNet cash provided by operating activities increased in fiscal year 2013 from fiscal year 2012 primarily due to net income that remained flat and a $20.1million increase in stock-based compensation expenses, as well as a $10.0 million litigation settlement payment in fiscal year 2012 which did not recur. Theseincreases were partially offset by increases in deferred tax assets in fiscal year 2013, whereas deferred tax assets were being utilized in fiscal year 2012.Additionally, excess tax benefits increased by $2.1 million in fiscal year 2013 compared to fiscal year 2012.Net cash provided by operating activities decreased in fiscal year 2012 from fiscal year 2011 primarily due to a $20.4 million decrease in net income,which was partially offset by an increase of $11.6 million in stock-based compensation expenses. Fiscal year 2011 also included the release of a deferred taxvaluation allowance, which did not recur in fiscal year 2012, and large revenue deferrals. Fiscal year 2012 saw the release of significant deferred revenues dueto the attainment of revenue recognition criteria.47Table of ContentsCash Flows from Investing ActivitiesOur investing activities consist primarily of purchase and sales of short-term and long-term investments, capital expenditures to purchase property andequipment, and changes in our restricted cash. In the future, we expect we will continue to invest in capital expenditures to support our expanding operations.Net cash used in investing activities increased in fiscal year 2013 from fiscal year 2012 primarily due to the investment of excess cash after our IPO.Net purchases of available-for-sale securities were $128.5 million. Additionally, fiscal year 2013 included the acquisition of Millbrook, Inc. for $14.7million, and an increase in capital expenditures driven by the final payments related to our headquarters move which were accrued as of July 31, 2012.Net cash used in investing activities decreased in fiscal year 2012 from fiscal year 2011 primarily due to the release of restricted cash during fiscal year2012 compared to the receipt of restricted cash in fiscal year 2011. This was partially offset by increased capital expenditures related to our new headquarters.Cash Flows from Financing ActivitiesOur financing activities consist primarily of cash receipts from the exercise of stock options, payments of taxes withheld from vesting of RSUs andexcess tax benefits realized on the exercise or release of each of these items. In fiscal year 2012, we received net inflows of cash from financing activities relatedto public offerings, which we do not expect to recur.Net cash from financing activities decreased from cash provided by financing activities to net cash used in financing activities. This was primarily dueto the receipt of $143.4 million of proceeds from our IPO and follow-on public offering in fiscal year 2012, which was partially offset by $3.5 million of costspaid in connection with these offerings. In addition, fiscal year 2013 payments of taxes related to RSUs vesting increased by $7.9 million. These decreases ofcash were partially offset by $4.1 million of increased proceeds from option exercises, and $2.1 million of excess tax benefits recognized related to our stock-based compensation transactions.Net cash from financing activities increased in fiscal year 2012 from fiscal year 2011 primarily due to our IPO and follow-on public offerings of $143.4million, partially offset by the $3.5 million of costs associated with the offerings. Additionally, proceeds from exercise of stock options increased by $4.1million, partially offset by $12.4 million in taxes related to RSU vesting.Anticipated Cash FlowsWe expect to incur significant operating costs, particularly related to services delivery costs, sales and marketing, research and development, for theforeseeable future in order to execute our business plan. We anticipate that such operating costs, as well as planned capital expenditures, will constitute amaterial use of our cash resources. As a result, our net cash flows will depend heavily on the level of future sales and our ability to manage infrastructurecosts.We believe our existing cash, cash equivalents and investment balances, together with anticipated cash flows from operations, should be sufficient tomeet our working capital and operating resource requirements for at least the next twelve months. After the next twelve months, we may find it necessary toobtain additional funds. In the event additional funds are required, we may not be able to obtain additional financing on favorable terms or at all. Contractual ObligationsThe following summarizes our contractual obligations as of July 31, 2013: Payments due by period Less than1 year 1 to 3years 3 to 5years More than5 years Total (in thousands)Operating lease obligations (1)$4,967 $9,590 $9,459 $4,828 $28,844Royalty obligations (2)429 519 — — 948Purchase commitments (3)296 183 — — 479Total$5,692 $10,292 $9,459 $4,828 $30,271(1)Operating lease agreements primarily represent our obligations to make payments under our non-cancelable lease agreements for our corporate headquarters and officesthrough 2019.(2)Royalty obligations primarily represent our obligations under our non-cancelable agreements related to certain revenue-generating agreements.48Table of Contents(3)Purchase commitments consist of agreements to purchase services, entered into in the ordinary course of business. These represent non-cancelable commitments for which apenalty would be imposed if the agreement was canceled for any reason other than an event of default as described by the agreement.As of July 31, 2013, we had unrecognized tax benefits of $6.7 million associated with our U.S. federal and California research and development taxcredits. We are unable to estimate when any cash settlement with a taxing authority might occur.Off-Balance Sheet ArrangementsThrough July 31, 2013, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to asstructured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or othercontractually narrow or limited purposes.Item 7A. Quantitative and Qualitative Disclosures about Market RiskWe are exposed to market risks in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial positiondue to adverse changes in financial market prices and rates. Our market risk exposure is primarily a result of fluctuations in interest rates and foreigncurrency exchange rates. We do not hold or issue financial instruments for trading purposes.Interest Rate SensitivityOur exposure to market risk for changes in interest rates relates primarily to our cash, cash equivalents, short-term and long-term investments as ofJuly 31, 2013 and cash, cash equivalents and restricted cash as of July 31, 2012. Our cash and cash equivalents, restricted cash and investments as ofJuly 31, 2013 and 2012 were $207.9 million and $209.4 million, respectively, and consisted primarily of cash, corporate bonds, agency debt securities,commercial paper, money market funds, and municipal debt securities with maturities of up to two years from the date of purchase as of July 31, 2013, andconsisted primarily of cash, money market funds, and certificates of deposit with maturities of up to two years from the date of purchase as of July 31, 2012.Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of the interest rates in the United States.However, because of the short-term nature of our interest-bearing securities, a ten percent change in market interest rates would not be expected to have amaterial impact on our consolidated financial condition or results of operations.Foreign Currency Exchange RiskOur results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in theCanadian dollar, Australian dollar, Euro, British pound and Japanese yen. The volatility of exchange rates depends on many factors that we cannot forecastwith reliable accuracy. We believe our operating activities act as a natural hedge for a substantial portion of our foreign currency exposure because we typicallycollect revenues and incur costs in the currency in the location in which we provide our application. Although we have experienced and will continue toexperience fluctuations in our net income (loss) as a result of transaction gains (losses) related to transactions denominated in currencies other than the U.S.dollar, we believe that a 10% change in foreign exchange rates would not have a material impact on our results of operations. To date, we have entered into oneforeign currency hedging contract, but may consider entering into more such contracts in the future. As our international operations grow, we will continue toreassess our approach to manage our risk relating to fluctuations in currency rates.49Table of ContentsItem 8.Financial Statements and Supplemental DataGUIDEWIRE SOFTWARE, INC. AND SUBSIDIARIESINDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm51Consolidated Balance Sheets52Consolidated Statements of Income53Consolidated Statements of Comprehensive Income54Consolidated Statements of Stockholders’ Equity (Deficit)55Consolidated Statements of Cash Flows56Notes to Consolidated Financial Statements57The supplementary financial information required by this Item 8 is included in Item 7 under the caption “Quarterly Results of Operations.”50Table of ContentsReport of Independent Registered Public Accounting FirmThe Board of Directors and StockholdersGuidewire Software, Inc.:We have audited the accompanying consolidated balance sheets of Guidewire Software, Inc. and subsidiaries (the Company) as of July 31, 2013 and 2012,and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year periodended July 31, 2013. We also have audited the Company's internal control over financial reporting as of July 31, 2013, based on criteria established inInternal Control - Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). TheCompany's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and forits assessment of the effectiveness of internal control over financial reporting, included in Item 9A. Our responsibility is to express an opinion on theseconsolidated financial statements and an opinion on the Company's internal control over financial reporting based on our audits.We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require thatwe plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effectiveinternal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on atest basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimatesmade by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining anunderstanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design andoperating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessaryin the circumstances. We believe that our audits provide a reasonable basis for our opinions.A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting andthe preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control overfinancial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflectthe transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are beingmade only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Guidewire Software, Inc.and subsidiaries as of July 31, 2013 and 2012, and the results of their operations and their cash flows for each of the years in the three-year period endedJuly 31, 2013, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects,effective internal control over financial reporting as of July 31, 2013, based on criteria established in Internal Control - Integrated Framework (1992)issued by COSO./s/ KPMG LLPSanta Clara, CaliforniaSeptember 26, 201351Table of ContentsGUIDEWIRE SOFTWARE, INC. AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(in thousands) July 31, 2013 July 31, 2012ASSETS CURRENT ASSETS: Cash and cash equivalents$79,767 $205,718Short-term investments76,932 —Restricted cash, current167 3,726Accounts receivable40,885 32,313Deferred tax assets, current2,897 13,442Prepaid expenses and other current assets9,445 7,266Total current assets210,093 262,465Long-term investments51,040 —Property and equipment, net12,914 11,924Intangible assets, net6,879 —Deferred tax assets, noncurrent21,091 9,313Goodwill9,048 —Other assets1,205 545TOTAL ASSETS$312,270 $284,247LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES: Accounts payable$6,517 $9,781Accrued employee compensation26,302 26,502Deferred revenues, current37,351 52,947Other current liabilities4,614 3,957Total current liabilities74,784 93,187Deferred revenues, noncurrent3,845 2,569Other liabilities5,212 4,529Total liabilities83,841 100,285Commitments and contingencies (Note 5) STOCKHOLDERS’ EQUITY: Common stock, par value $0.0001 per share—500,000,000 shares authorized as of July 31, 2013 and 2012,respectively; 57,909,277 and 53,956,608 shares issued and outstanding as of July 31, 2013 and 2012,respectively6 5Additional paid-in capital237,769 207,624Accumulated other comprehensive loss(1,558) (496)Accumulated deficit(7,788) (23,171)Total stockholders’ equity228,429 183,962TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY$312,270 $284,247See accompanying Notes to Consolidated Financial Statements.52Table of ContentsGUIDEWIRE SOFTWARE, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME(in thousands, except share and per share amounts) Fiscal years ended July 31, 2013 2012 2011Revenues: License$123,560 $97,136 $73,883Maintenance37,561 29,538 21,321Services139,528 105,387 77,268Total revenues300,649 232,061 172,472Cost of revenues: License920 762 1,264Maintenance7,613 5,288 4,063Services123,210 85,360 63,017Total cost of revenues131,743 91,410 68,344Gross profit: License122,640 96,374 72,619Maintenance29,948 24,250 17,258Services16,318 20,027 14,251Total gross profit168,906 140,651 104,128Operating expenses: Research and development66,346 50,462 34,773Sales and marketing53,301 38,254 28,950General and administrative32,414 28,336 23,534Litigation provision— — 10,000Total operating expenses152,061 117,052 97,257Income from operations16,845 23,599 6,871Interest income, net498 308 156Other income (expenses), net(131) (728) 1,269Income before provision for (benefit from) income taxes17,212 23,179 8,296Provision for (benefit from) income taxes1,829 7,979 (27,262)Net income$15,383 $15,200 $35,558Earnings per share: Basic0.27 0.29 0.83Diluted0.25 0.25 0.76Shares used in computing earnings per share: Basic56,331,018 34,774,983 14,064,055Diluted61,943,087 41,509,185 17,763,859See accompanying Notes to Consolidated Financial Statements.53Table of ContentsGUIDEWIRE SOFTWARE, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME(in thousands) Fiscal years ending July 31, 2013 2012 2011Net income$15,383 $15,200 $35,558Other comprehensive income (loss): Foreign currency translation adjustments(1,086) (287) 128 Unrealized gains on available-for-sale securities24 — —Other comprehensive income (loss)(1,062) (287) 128Comprehensive income14,321 14,913 35,686See accompanying Notes to Consolidated Financial Statements.54Table of ContentsGUIDEWIRE SOFTWARE, INC. AND SUBSIDIARIESConsolidated Statements of Stockholders’ Equity (Deficit)(in thousands, except share amounts) Convertiblepreferred stock Common stock Additionalpaid-incapital Accumulatedothercomprehensiveincome (loss) Accumulateddeficit Totalstockholders’equity (deficit) Shares Amount Shares Amount Balance as of July 31, 201025,357,721 $36,500 13,772,656 $1 $12,620 $(337) $(73,929) $(25,145)Issuance of common stock upon exercise ofstock options— — 649,901 — 931 — — 931Stock-based compensation— — — — 6,680 — — 6,680Net income— — — — — 35,558 35,558Foreign currency translation adjustment— — — — — 128 — 128Balance as of July 31, 201125,357,721 36,500 14,422,557 1 20,231 (209) (38,371) 18,152Proceeds from issuance of common stock inconnection with public offerings, net ofunderwriting discounts and commission— — 10,927,500 1 143,385 — — 143,386Costs incurred in connection with publicofferings— — — — (3,502) — — (3,502)Conversion of preferred stock to commonstock(25,357,721) (36,500) 25,357,721 3 36,497 — — —Issuance of common stock upon exercise ofstock options— — 2,211,967 — 5,067 — — 5,067Issuance of common stock upon RSUrelease, net of shares withheld for taxes— — 1,018,228 — (12,798) — — (12,798)Repurchase of unvested common stock— — (3,005) — — — — —Conversion of warrants to common stock— — 21,640 — — — — —Stock-based compensation— — — — 18,258 — — 18,258Tax benefit from the exercise of stockoptions and vesting of RSUs— — — — 486 — — 486Net income— — — — — — 15,200 15,200Foreign currency translation adjustment— — — — — (287) — (287)Balance as of July 31, 2012— — 53,956,608 5 207,624 (496) (23,171) 183,962Issuance of common stock upon exercise ofstock options— — 2,904,248 1 9,123 — — 9,124Issuance of common stock upon RSUrelease, net of shares withheld for taxes— — 1,048,421 — (19,963) — — (19,963)Stock-based compensation— — — — 38,399 — — 38,399Tax benefit from the exercise of stockoptions and vesting of RSUs— — — — 2,586 — — 2,586Net income— — — — — — 15,383 15,383Foreign currency translation adjustment— — — — — (1,086) — (1,086)Unrealized gains on available-for-salesecurities— — — — — 24 — 24Balance as of July 31, 2013— $— 57,909,277 $6 $237,769 $(1,558) $(7,788) $228,429See accompanying Notes to Consolidated Financial Statements.55Table of ContentsGUIDEWIRE SOFTWARE, INC. AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS(in thousands) Fiscal years ended July 31, 2013 2012 2011CASH FLOWS FROM OPERATING ACTIVITIES: Net income$15,383 $15,200 $35,558Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization4,821 2,917 2,226Stock-based compensation38,399 18,258 6,680Excess tax benefit from exercise of stock options and vesting of RSUs(2,586) (486) —Deferred tax assets(3,901) 5,362 (28,117)Other noncash items affecting net income554 — —Changes in operating assets and liabilities: Accounts receivable(8,478) (9,325) (6,284)Prepaid expenses and other assets(2,690) (2,442) (2,674)Accounts payable355 1,059 577Accrued employee compensation164 8,246 413Other liabilities4,574 (3,907) 7,537Deferred revenues(14,048) (17,788) 11,770Net cash provided by operating activities32,547 17,094 27,686CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of available-for-sale securities(212,035) — —Sales and maturities of available-for-sale securities83,567 — —Acquisition, net of cash acquired(14,749) — —Purchase of property and equipment(9,228) (5,619) (2,776)Decrease (increase) in restricted cash3,532 2,323 (5,534)Net cash used in investing activities(148,913) (3,296) (8,310)CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock upon exercise of stock options9,123 5,067 931Taxes remitted on RSU awards vested(20,330) (12,430) —Proceeds from issuance of common stock in connection with stock offerings, net of underwritingdiscounts and commission— 143,386 —Costs paid in connection with stock offerings— (3,502) —Excess tax benefit from exercise of stock options and vesting of RSUs2,586 486 —Net cash provided by (used in) financing activities(8,621) 133,007 931Effect of foreign exchange rate changes on cash and cash equivalents(964) (712) 1,907NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS(125,951) 146,093 22,214CASH AND CASH EQUIVALENTS—BEGINNING OF YEAR205,718 59,625 37,411CASH AND CASH EQUIVALENTS—END OF YEAR$79,767 $205,718 $59,625SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest$— $7 $53Cash paid for income taxes$2,266 $2,058 $2,207SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING ACTIVITIES: Conversion of convertible preferred stock and warrants into common stock upon initial publicoffering$— $36,506 $—Accruals for purchase of property & equipment$693 $4,387 $—See accompanying Notes to Consolidated Financial Statements.56Table of ContentsGUIDEWIRE SOFTWARE, INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTS1. The Company and Summary of Significant Accounting Policies and EstimatesBusinessGuidewire Software, Inc., a Delaware corporation, was incorporated on September 20, 2001. The Company together with its subsidiaries (the“Company”) provides Internet-based software platforms for core insurance operations, including underwriting and policy administration, claim managementand billing. The Company’s customers include insurance carriers for property and casualty and workers’ compensation insurance. The Company haswholly-owned subsidiaries in Australia, Canada, China, France, Germany, Hong Kong, Ireland, Italy, Japan, Poland and the United Kingdom.The Company offers a suite of applications to enable core property and casualty (“P&C”) insurance operations comprised of the following products:PolicyCenter, ClaimCenter and BillingCenter, as well as other newer product initiatives. The Company also provides maintenance support and providesprofessional services to the extent requested by its customers.Public OfferingsOn January 30, 2012, the Company closed its initial public offering (“IPO”) whereby 10,177,500 shares of common stock were sold to the public,including the underwriters’ full exercise of their overallotment option of 1,327,500 shares of common stock, at a price of $13.00 per share. The Companyreceived aggregate proceeds of approximately $123.0 million from the IPO, including the exercise of the underwriters’ overallotment option, net of underwriters’discounts and commissions, but before deduction of offering costs of approximately $3.5 million, including $2.8 million of capitalized costs. Upon theclosing of the IPO, all shares of the Company’s outstanding convertible preferred stock automatically converted into 25,357,721 shares of common stock.Outstanding warrants to purchase 69,529 shares of convertible preferred stock at $5.03 per share were contractually adjusted to purchase 69,529 shares ofcommon stock at $5.03 per share. Subsequent to the Company’s IPO and during April 2012 all eligible warrants were converted for 21,640 shares of theCompany’s common stock and the remainder were canceled.On April 24, 2012, the Company closed its follow-on public offering of 9,200,000 shares of its common stock, which included 750,000 shares ofcommon stock sold by the Company and 8,450,000 shares of common stock sold by selling stockholders, including the underwriters’ full exercise of theiroverallotment option from the Company and selling stockholders. The public offering price of the shares sold in the offering was $28.25 per share. TheCompany received aggregate proceeds of approximately $20.4 million from the follow-on offering, net of underwriters’ discounts and commissions applicableto the sale of shares by the Company, but before deduction of offering costs of approximately $1.0 million payable by the Company, including $0.7 million ofcapitalized costs. The Company did not receive any proceeds from the sale of shares by the selling stockholders.Basis of PresentationThe consolidated financial statements include the Company and its wholly-owned subsidiaries, and reflect all adjustments (all of which are normal andrecurring in nature) that, in the opinion of management, are necessary for a fair presentation of the periods presented. All intercompany balances andtransactions have been eliminated in consolidation.Use of EstimatesThe preparation of the accompanying consolidated financial statements in conformity with U.S. GAAP requires management to make estimates andassumptions about future events that affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reportedamounts of revenues and expenses. Significant items subject to such estimates include revenue recognition, the useful lives of property and equipment,allowance for doubtful accounts, valuation allowance for deferred tax assets, stock-based compensation, annual bonus attainment, income tax uncertainties,valuation of intangible assets, and contingencies. These estimates and assumptions are based on management’s best estimates and judgment. Managementregularly evaluates its estimates and assumptions using historical experience and other factors; however, actual results could differ significantly from theseestimates.Foreign Currency TranslationThe functional currency of the Company’s foreign subsidiaries is their respective local currency. The Company translates all assets and liabilities offoreign subsidiaries to U.S. dollars at the current exchange rate as of the applicable consolidated balance sheet date. Revenues and expenses are translated at theaverage exchange rate prevailing during the period. The effects of foreign currency translations are recorded in accumulated other comprehensive loss as aseparate component of stockholders’57Table of Contentsdeficit in the accompanying consolidated statement of stockholders’ equity (deficit). Realized gains and losses from foreign currency transactions are recordedas other income (expense) in the consolidated statements of operations.Cash, Cash Equivalents, Investments and Restricted CashCash 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 are comprised of short-term investments with an investment rating of either of the following: Moody's of A3 or higher, or by Standard &Poor's of A- or higher. The Company is exposed to credit risk in the event of default by the financial institutions or the issuers of these investments to the extentthe amounts recorded on the balance sheet are in excess of amounts that are insured by the Federal Deposit Insurance Corporation (“FDIC”). Restricted cash isheld in certificates of deposit pursuant to lease agreements, and, in prior periods, pursuant to secured letter of credit agreements as well. The Companyclassifies investments as short-term when they have remaining contractual maturities of less than one year from the balance sheet date, and as long-term whenthe investments have remaining contractual maturities of more than one year from the balance sheet date.The Company's investment policy is consistent with the definition of available-for-sale securities. From time to time, the Company may sell certainsecurities but the objectives are generally not to generate profits on short-term differences in price.Property and EquipmentProperty and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is calculated on a straight-line basis over theestimated useful lives of the assets. Leasehold improvements are amortized over the shorter of the lease term or the estimated useful lives of the related assets.Maintenance and repairs that do not extend the life or improve an asset are expensed in the period incurred.The estimated useful lives of property and equipment are as follows:Computer hardware 3 yearsSoftware 3 yearsFurniture and fixtures 3 yearsLeasehold improvements Shorter of the lease term or estimated useful lifeProduct Development CostsCertain software development costs incurred subsequent to the establishment of technological feasibility are subject to capitalization and amortized overthe estimated lives of the related products. Technological feasibility is established upon completion of a working model. Through July 31, 2013, costs incurredsubsequent to the establishment of technological feasibility have been immaterial, and therefore, all software development costs have been charged to researchand development expense in the accompanying consolidated statements of operations as incurred.Impairment of Long-Lived Assets, Intangible Assets and GoodwillThe Company evaluates its long-lived assets, consisting of property and equipment and intangible assets, for indicators of possible impairment whenevents or changes in circumstances indicate that the carrying amount of certain assets may not be recoverable. Impairment exists if the carrying amounts ofsuch assets exceed the estimates of future net undiscounted cash flows expected to be generated by such assets. Should impairment exist, the impairment losswould be measured based on the excess carrying value of the assets over the estimated fair value of the assets. The Company has not written down any of itslong-lived assets as a result of impairment during any of the periods presented.The Company tests goodwill for impairment annually during the third fiscal quarter and whenever events or changes in circumstances indicate that thecarrying amount may be impaired. Accounting Standards Update 2011-08 permits entities to first assess qualitative factors to determine whether it is morelikely than not (a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it isnecessary to perform the two-step goodwill impairment test.In performing the qualitative assessment, we would consider 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 incustomers, changes in the composition or carrying amount of a reporting unit's net assets and changes in the price of our common stock. If, after assessing thetotality of events or circumstances, we determine that it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, thenthe two-step goodwill impairment test is not performed.58Table of ContentsIf the two-step goodwill test is performed, we would evaluate and test our goodwill for impairment at a reporting-unit level using expected future cashflows to be generated by the reporting unit. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized for any excess ofthe carrying amount of the reporting unit's goodwill over the calculated fair value of the goodwill.We acquired goodwill during the fourth quarter of fiscal 2013. We did not recognize any goodwill impairment losses in fiscal 2013.Concentration of Credit RiskFinancial instruments that potentially subject the Company to concentrations of credit risk consist of cash, cash equivalents and accounts receivable.The Company maintains its cash and cash equivalents with high quality financial institutions with investment grade ratings.No customer accounted for 10% or more of the Company’s revenues for the years ended July 31, 2013, 2012 and 2011. The Company had onecustomer and no customers that accounted for 10% of total accounts receivable as of July 31, 2013 and 2012, respectively.Accounts Receivable and Allowance for Doubtful AccountsThe Company performs ongoing credit evaluations of its customers. Accounts receivable are recorded at invoiced amounts, net of the Company’sestimated allowances for doubtful accounts. The allowance for doubtful accounts is estimated based on an assessment of the Company’s ability to collect oncustomer accounts receivable. The Company regularly reviews the allowance by considering certain factors such as historical experience, industry data, creditquality, age of accounts receivable balances and current economic conditions that may affect a customer’s ability to pay. In cases where the Company is awareof circumstances that may impair a specific purchaser’s ability to meet their financial obligations, the Company records a specific allowance against amountsdue from the customer and thereby reduces the net recognized receivable to the amount the Company reasonably believes will be collected. There is judgmentinvolved with estimating the Company’s allowance for doubtful accounts and if the financial condition of its customers were to deteriorate, resulting in theirinability to make the required payments, the Company may be required to record additional allowances or charges against revenues. The Company writes-offaccounts receivable against the allowance when it determines a balance is uncollectible and no longer actively pursues collection of the receivable. TheCompany’s accounts receivable are not collateralized by any security. The Company has had no allowance for doubtful accounts or bad debt expense in theperiods presented in this Annual Report on Form 10-K.Revenue RecognitionThe Company enters into arrangements to deliver multiple products or services (multiple-elements). The Company applies software revenue recognitionrules and allocates the total revenues among elements based on vendor-specific objective evidence (“VSOE”) of fair value of each element. The Companyrecognizes revenue on a net basis excluding taxes collected from customers and remitted to government authorities.Revenues are derived from three sources:(i)License fees, related to term (or time-based) and perpetual software license revenue;(ii)Maintenance fees, related to email and phone support, bug fixes and unspecified software updates and upgrades released when, and if availableduring the maintenance term; and(iii)Services fees, related to professional services related to implementation of our software, reimbursable travel and training.Revenues are recognized when all of the following criteria are met:•Persuasive evidence of an arrangement exists. Evidence of an arrangement consists of a written contract signed by both the customer andmanagement prior to the end of the period.•Delivery or performance has occurred. The Company’s software is delivered electronically to the customer. Delivery is considered to haveoccurred when the Company provides the customer access to the software along with login credentials.•Fees are fixed or determinable. Arrangements where a significant portion of the fee is due beyond 90 days from delivery are not considered tobe fixed or determinable. Revenues from such arrangements is recognized as payments become due, assuming all other revenue recognitioncriteria have been met. Fees from term licenses are generally due in annual or, in certain cases, quarterly installments over the term of theagreement beginning on the effective date of the license. Accordingly, fees from term licenses are not considered to be fixed or determinable untilthey become due.59Table of Contents•Collectability is probable. Collectability is assessed on a customer-by-customer basis, based primarily on creditworthiness as determined bycredit checks and analysis, as well as customer payment history. Payment terms generally range from 30 to 90 days from invoice date. If it isdetermined prior to revenue recognition that collection of an arrangement fee is not probable, revenues are deferred until collection becomesprobable or cash is collected, assuming all other revenue recognition criteria are satisfied.VSOE of fair value does not exist for the Company’s software licenses; therefore, for all arrangements that do not include services that are essential tothe functionality of the software, the Company allocates revenues to software licenses using the residual method. Under the residual method, the amountrecognized for license fees is the difference between the total fixed and determinable fees and the VSOE of fair value for the undelivered elements under thearrangement.The VSOE of fair value for elements of an arrangement is based upon the normal pricing and discounting practices for those elements when soldseparately. VSOE of fair value for maintenance is established using the stated maintenance renewal rate in the customer’s contract. The Company generallyenters into term licenses ranging from 3 to 7 years. For term licenses with duration of one year or less, no VSOE of fair value for maintenance exists. TheCompany began using stated maintenance renewal rates in customers’ contracts during fiscal year 2008. Prior to that, customers’ contracts did not have statedmaintenance renewal rates and the Company was unable to establish VSOE of maintenance. VSOE of fair value for services is established if a substantialmajority of historical stand-alone selling prices for a service fall within a reasonably narrow price range.If VSOE of fair value for one or more undelivered elements does not exist, the total arrangement fee is not recognized until delivery of those elementsoccurs or when VSOE of fair value is established.If the undelivered elements are all service elements and VSOE of fair value does not exist for one or more service element, the total arrangement fee isrecognized ratably over the longest service period starting at software delivery, assuming all the related services have been made available to the customer.When implementation services are sold with a license arrangement, we evaluate whether those services are essential to the functionality of the software.Prior to fiscal year 2008, implementation services were determined to be essential to the software because the implementation services were generally notavailable from other third party vendors. By the beginning of fiscal year 2008, third party vendors were providing implementation services for ClaimCenterand it was concluded that implementation services generally were not essential to the functionality of the ClaimCenter software. By the beginning of fiscal year2011, third party vendors were providing implementation services for PolicyCenter and BillingCenter and it was concluded that implementation servicesgenerally were no longer essential to the functionality of the PolicyCenter and BillingCenter software. In certain offerings sold as fixed fee arrangements, theCompany recognizes services revenues on a proportional performance basis as performance obligations are completed by using the ratio of labor hours to dateas an input measure compared to total estimated labor hours for the consulting services.In cases where professional services are deemed to be essential to the functionality of the software, the arrangement is accounted for using contractaccounting until the essential services are complete. If reliable estimates of total project costs and the extent of progress toward completion can be made, theCompany applies the percentage-of-completion method in recognizing the arrangement fee. The percentage toward completion is measured by using the ratio ofservice billings to date compared to total estimated service billings for the consulting services. Service billings approximate labor hours as an input measuresince they are billed monthly on a time and material basis. For term licenses with license fees due in equal installments over the term, the license revenuessubject to percentage-of-completion recognition includes only those payments that are due and payable within the reporting period. The fees related to themaintenance are recognized over the period the maintenance is provided.When VSOE for maintenance has not been established and the arrangement includes implementation services which are deemed essential to thefunctionality of the software and it is reasonably assured that no loss will be incurred under the arrangement, revenues are recognized pursuant to the zerogross margin method. Under this method, revenues recognized are limited to the costs incurred for the implementation services. As a result, billed license andmaintenance fees and the profit margin on the professional services are generally deferred until the essential services are completed and then recognized over theremaining term of the maintenance period.If the Company cannot make reliable estimates of total project implementation and it is reasonably assured that no loss will be incurred under sucharrangements, the zero profit margin method is applied whereby an amount of revenues equal to the incurred costs of the project is recognized as well as theincurred costs, producing a zero margin until project estimates become reliable. The percentage-of-completion method is applied when project estimates becomereliable, resulting in a cumulative effect adjustment for deferred license revenues to the extent of progress toward completion, and the related deferred60Table of Contentsprofessional service margin is recognized in full as revenues. Such cumulative effect adjustment for license revenues was $3.2 million, $0.9 million and $0.4million for the years ended July 31, 2013, 2012 and 2011, respectively, and for service revenues was $1.7 million, $0.9 million and $0.3 million for theyears ended July 31, 2013, 2012 and 2011, respectively.Deferred RevenuesDeferred revenues represent amounts billed to or collected from customers for which the related revenues have not been recognized because one or more ofthe revenue recognition criteria have not been met. The current portion of deferred revenues represents the amount that is expected to be recognized as revenueswithin one year from the balance sheet date. The Company generally invoices fees for licenses and maintenance to its customers in annual or, in certain cases,quarterly installments payable in advance. Accordingly, the deferred revenues balance does not represent the total contract value of annual or multi-year, non-cancellable arrangements.Sales CommissionsSales commissions are recognized as an expense when earned by the sales representative, generally occurring at the time the customer order is signed.Substantially all of the effort by the sales force is expended through the time of closing the sale, with limited to no involvement thereafter.WarrantiesThe Company generally provides a warranty for its software products and services to its customers for periods ranging from 3 to 12 months. TheCompany’s software products are generally warranted to be free of defects in materials and workmanship under normal use and the products are also generallywarranted to substantially perform as described in published documentation. The Company’s services are generally warranted to be performed in aprofessional 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 orprovide a workaround or replacement product, then the customer’s remedy is generally limited to refund of the fees paid for the nonconforming product orservices. The Company has not incurred any warranty expenses since inception.Advertising CostsAdvertising costs are expensed as incurred and amounted to approximately $0.1 million, $0.1 million and $0.3 million during the years ended July 31,2013, 2012 and 2011, respectively.Stock-Based CompensationThe Company recognizes compensation expense related to stock options and restricted stock units (“RSUs”) granted to employees based on theestimated fair value of the awards on the date of grant, net of estimated forfeitures. The RSUs are subject to time-based vesting, which generally occurs over aperiod of four years, and for those RSU awards granted prior to our IPO, a performance-based condition, which was satisfied 180 days after our IPO. Theawards expire 10 years from the grant date. We estimate the grant date fair value, and the resulting stock-based compensation expense, of our stock optionsusing the Black-Scholes option-pricing model. The grant date fair value of the stock-based awards is generally recognized using the accelerated multiple optionapproach over the requisite service period, which is generally the vesting period of the respective awards. Compensation cost for RSUs is generally recognizedover the time-based vesting period regardless of the occurrence of the performance-based condition noted above for awards granted prior to IPO, since thiscondition is not subject to employment.Income TaxesIncome taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequencesattributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating lossand tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in whichthose temporary differences are expected to be recovered or settled. Deferred tax assets related to excess tax benefits are recorded when utilized. The effect ondeferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company records avaluation allowance to reduce deferred tax assets to an amount of which realization is more likely than not.61Table of ContentsAccounting guidance related to accounting for uncertainties in income taxes provides that a tax benefit from an uncertain tax position may be recognizedwhen it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, basedon the technical merits of the position. This interpretation also provides guidance on measurement, derecognition, classification, interest and penalties,accounting in interim periods, disclosure and transition.The Company records interest and penalties related to unrecognized tax benefits as income tax expense in its consolidated statement of income.Earnings per ShareFor the year ended July 31, 2013, the Company calculated basic earnings per share by dividing the net income by the weighted average number of sharesof common stock outstanding for the period. The diluted earnings per share is computed by giving effect to all potential dilutive common stock equivalentsoutstanding for the period. For purposes of this calculation, options to purchase common stock and restricted stock units are considered to be common stockequivalents.For the years ended July 31, 2012 and 2011, the Company’s basic and diluted earnings per share are presented in conformity with the two-classmethod, which is required because the Company issued securities other than common stock that participate in dividends with the common stock(“participating securities”), to compute the earnings per share attributable to common stockholders. The Company determined that it had participatingsecurities in the form of noncumulative convertible preferred stock for the periods up to their conversion immediately prior to the closing of the Company’sIPO on January 30, 2012 when all convertible preferred stock was converted to common stock.The two-class method requires that the Company calculate the earnings per share using net income attributable to the common stockholders, which willdiffer from the Company’s net income. Net income attributable to the common stockholders is generally equal to the net income less assumed periodicpreferred stock dividends with any remaining earnings, after deducting assumed dividends, to be allocated on a pro rata basis between the outstandingcommon and preferred stock as of the end of each period. The basic earnings per share attributable to common stockholders is calculated by dividing the netincome attributable to common stockholders by the weighted average number of shares of common stock outstanding for the period. The diluted net incomeper share attributable to common stockholders is computed by giving effect to all potential dilutive common stock equivalents outstanding for the period. Forpurposes of this calculation, convertible preferred stock, options to purchase common stock and restricted stock units are considered to be common stockequivalents.Recent Accounting PronouncementPresentation of Unrecognized Tax BenefitsIn July 2013, the Financial Accounting Standards Board ("FASB") issued authoritative guidance that requires an entity to present an unrecognized taxbenefit ("UTB"), or a portion of a UTB, in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar taxloss, or a tax credit carryforward, except as follows. To the extent that a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is notavailable at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of atax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for suchpurpose, the UTB should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The guidance is effectiveprospectively for fiscal years and interim reporting periods within those years, beginning after December 15, 2013. We do not expect this guidance to have amaterial impact on our consolidated financial statements.62Table of Contents2. Fair Value of Financial InstrumentsAvailable-for-sale investments within cash equivalents and investments consist of the following: July 31, 2013 Amortized Cost Unrealized Gains Unrealized Losses Estimated Fair Value (in thousands)U.S. agency securities$37,087 $21 $(4) $37,104Asset-backed securities4,522 — (1) 4,521Commercial paper35,777 11 (1) 35,787Corporate bonds63,281 23 (14) 63,290Foreign government bonds776 — (1) 775Money market funds33,216 — — 33,216Municipal debt securities9,105 4 (14) 9,095 Total$183,764 $59 $(35) $183,788 July 31, 2012 Amortized Cost Unrealized Gains Unrealized Losses Estimated Fair Value (in thousands)Money market funds$105,107 $— $— $105,107Certificates of deposit3,726 — — 3,726 Total$108,833 $— $— $108,833The following table shows the gross unrealized losses and fair value of the Company's investments with unrealized losses, aggregated by investmentcategory and length of time that individual securities have been in a continuous unrealized loss position: July 31, 2013 Less Than 12 Months 12 Months or Greater Total Fair Value Gross UnrealizedLosses Fair Value Gross UnrealizedLosses Fair Value Gross UnrealizedLosses (in thousands)U.S. government agencies$6,697 $(4) $— $— $6,697 $(4)Asset-backed securities768 (1) — — 768 (1)Commercial paper1,597 (1) — — 1,597 (1)Corporate bonds18,902 (14) — — 18,902 (14)Foreign government bonds775 (1) — — 775 (1)Municipal debt securities6,911 (14) — — 6,911 (14) Total$35,650 $(35) $— $— $35,650 $(35)As of July 31, 2013, the Company had 27 investments in an unrealized loss position. The unrealized losses on its available-for-sale securities wereprimarily a result of unfavorable changes in interest rates subsequent to the initial purchase of these securities. The Company does not intend to sell, norbelieve it will need to sell, these securities before recovering the associated unrealized losses. The Company does not consider any portion of the unrealizedlosses at July 31, 2013 to be an other-than-temporary impairment, nor are any unrealized losses considered to be credit losses. The Company has recorded thesecurities at fair market value in its condensed consolidated balance sheets, with unrealized gains and losses reported as a component of accumulated othercomprehensive income. Upon sale, amounts of gains and losses reclassified into earnings are63Table of Contentsdetermined based on specific identification of the securities sold. No gains or losses were realized from sales of securities in the periods presented.The following table summarizes the contractual maturities of the Company’s available-for-sale securities as of July 31, 2013: Expected maturities for the year ending July 31, 2014 2015 Thereafter Total (in thousands)U.S. agency securities$9,097 $28,007 $— $37,104Asset-backed securities2,421 2,100 — 4,521Commercial paper35,787 — — 35,787Corporate bonds49,575 13,715 — 63,290Foreign government bonds775 — — 775Money market funds33,216 — — 33,216Municipal debt securities1,877 7,218 — 9,095 Total$132,748 $51,040 $— $183,788Fair value is defined as the exchange price that would be received for an asset or an exit price paid to transfer a liability in the principal or mostadvantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used tomeasure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The current accounting guidance for fair valuemeasurements defines a three-level valuation hierarchy for disclosures as follows:Level 1-Unadjusted quoted prices in active markets for identical assets or liabilities;Level 2-Inputs other than quoted prices included within Level I that are observable, unadjusted quoted prices in markets that are not active, or otherinputs that are observable or can be corroborated by observable market data; andLevel 3-Unobservable inputs that are supported by little or no market activity, which require the Company to develop its own assumptions.The categorization of a financial instrument within the valuation hierarchy is based upon the lowest level of input that is significant to the fair valuemeasurement. The carrying value of the Company's accounts receivable, accounts payable and accrued liabilities approximates their fair value due to theshort-term nature of these instruments and is based on Level 2 inputs.We base the fair value of our Level 1 financial instruments, which are in active markets, using quoted market prices for identical instruments.We obtain the fair value of our Level 2 financial instruments, which are not in active markets, from a third-party professional pricing service usingquoted market prices for identical or comparable instruments, rather than direct observations of quoted prices in active markets. Our professional pricingservice gathers observable inputs for all of our fixed income securities from a variety of industry data providers (e.g. large custodial institutions) and otherthird-party sources. Once the observable inputs are gathered, all data points are considered and an average price is determined.We validate the quoted market prices provided by our primary pricing service by comparing their assessment of the fair values of our Level 2investment portfolio balance against the fair values of our Level 2 investment portfolio balance provided by our investment managers. Our investmentmanagers use similar techniques to our professional pricing service to derive pricing as described above.We did not own any Level 3 financial assets or liabilities as of July 31, 2013 or 2012.64Table of ContentsThe following tables summarize the Company's financial assets and liabilities measured at fair value on a recurring basis, by level within the fair valuehierarchy: July 31, 2013 Level 1 Level 2 Level 3 Total (in thousands)Assets Cash and cash equivalents: Commercial paper$— $20,597 $— $20,597 Corporate bonds— 2,003 — 2,003 Money market funds33,216 — — 33,216Short-term investments: U.S. agency securities— 9,097 — 9,097 Asset-backed securities— 2,421 — 2,421 Commercial paper— 15,190 — 15,190 Corporate bonds— 47,572 — 47,572 Foreign government bonds— 775 — 775 Municipal debt securities— 1,877 — 1,877Long-term investments: U.S. agency securities— 28,007 — 28,007 Asset-backed securities— 2,100 — 2,100 Corporate bonds— 13,715 — 13,715 Municipal debt securities— 7,218 — 7,218 Total assets$33,216 $150,572 $— $183,788 July 31, 2012 Level 1 Level 2 Level 3 Total (in thousands)Assets Cash and cash equivalents: Money market funds$105,107 $— $— $105,107 Certificates of deposit3,726 — — 3,726 Total assets$108,833 $— $— $108,83365Table of Contents3. Balance Sheet ComponentsProperty and EquipmentProperty and equipment consist of the following: July 31, 2013 July 31, 2012 (in thousands)Computer hardware$8,820 $8,125Software4,460 3,599Furniture and fixtures2,666 1,854Leasehold improvements6,536 5,600 Total property and equipment22,482 19,178Less accumulated depreciation(9,568) (7,254) Property and equipment, net$12,914 $11,924As of July 31, 2013 and 2012, no property and equipment was pledged as collateral against borrowings. Amortization of leasehold improvements isincluded in depreciation expense. Depreciation expense was $4.5 million, $2.6 million and $1.5 million during the years ended July 31, 2013, 2012 and2011, respectively.Goodwill and Intangible AssetsThe following table presents changes in the carrying amount of goodwill: Total (in thousands)Goodwill, July 31, 2012$—Acquired goodwill9,048Goodwill, July 31, 2013$9,048Refer to Note 10, Acquisition, for further details on goodwill acquired during the period.Intangible assets consist of the following: July 31, 2013 (in thousands)Acquired technology: Cost $7,200Accumulated amortization (321)Net $6,87966Table of ContentsAmortization expense was $0.3 million, $0.3 million and $0.7 million during the years ended July 31, 2013, 2012 and 2011, respectively. Estimatedaggregate amortization expense for each of the next five fiscal years is as follows: Future AmortizationFiscal Year Ending July 31, (in thousands)2014 $1,4402015 1,4402016 1,4402017 1,4402018 1,119Thereafter —Total $6,879Accrued Employee CompensationAccrued employee compensation consists of the following: July 31, 2013 July 31, 2012 (in thousands) Accrued bonuses$13,072 $12,718 Accrued commission2,043 4,068 Accrued vacation7,335 5,684 Payroll accruals3,852 4,032 Total$26,302 $26,5024. Net Income per ShareThe following table sets forth the computation of the Company’s basic and diluted net income per share for the years ended July 31, 2013, 2012 and2011: Fiscal years ended July 31, 2013 2012 2011 (in thousands, except share and pershare amounts)Numerator: Net income$15,383 $15,200 $35,558Non-cumulative dividends to preferred stockholders— (1,574) (3,291)Undistributed earnings allocated to preferred stockholders— (3,544) (20,568)Net income, basic15,383 10,082 11,699Adjustments to net income for dilutive options and restricted stock options— 467 1,747Net income, diluted$15,383 $10,549 $13,446Net income per share: Basic$0.27 $0.29 $0.83Diluted$0.25 $0.25 $0.7667Table of Contents Fiscal years ended July 31, 2013 2012 2011 (in thousands, except share and per shareamounts)Denominator: Weighted average shares used in computing net income per share: Basic56,331,018 34,774,983 14,064,055Weighted average effect of diluted stock options3,428,972 4,380,549 2,682,215Weighted average effect of dilutive restricted stock units2,183,097 2,323,787 1,010,622Weighted average effect of dilutive stock warrants (1)— 29,866 6,967Diluted61,943,087 41,509,185 17,763,859(1) Series C convertible preferred stock warrants were automatically converted to equivalent common stock warrants upon the Company’s IPO onJanuary 24, 2012 and converted or cancelled as of April 30, 2012.The following outstanding shares of common stock equivalents were excluded from the computation of diluted net income per share for the periodspresented because including them would have been antidilutive: Fiscal years ended July 31, 2013 2012 2011Stock options to purchase common stock320,325 329,671 1,975,982Restricted stock units57,829 86,273 163,0315. Commitments and ContingenciesThe following table presents a summary of the Company’s contractual obligations and commitments as of July 31, 2013: Lease Obligations Royalty Obligations (1) Purchase Commitments (2) TotalFiscal Year Ending July 31,(in thousands)2014$4,967 $429 $296 $5,69220154,778 414 183 5,37520164,812 105 — 4,91720174,693 — — 4,69320184,766 — — 4,766Thereafter4,828 — — 4,828Total$28,844 $948 $479 $30,271(1) Royalty obligations primarily represent our obligations under our non-cancelable agreements related to software used in certain revenue-generating agreements.(2) Purchase commitments consist of agreements to purchase services, entered into in the ordinary course of business. These represent non-cancelable commitments for which apenalty would be imposed if the agreement was canceled for any reason other than an event of default as described by the agreement.LeasesThe Company leases certain facilities and equipment under operating leases. The Company entered into an operating lease agreement in September 2007for its corporate headquarters in California that expired in July 2012. In connection with the lease, the Company opened a letter of credit which expired uponthe expiration of the lease in July 2012. On November 23, 2009, the Company entered into a sublease agreement for additional conference space expiring inJuly 2012. On December 5, 2011, the Company entered into a seven-year lease for a facility to serve as its new corporate headquarters, located in Foster City,California, for approximately 97,674 square feet of space commencing August 1, 2012. In connection with the new lease, the Company opened an unsecuredletter of credit with Silicon Valley Bank for $1.2 million.Lease expense for all worldwide facilities and equipment, which is being recognized on a straight-line basis over terms of the various leases, was $5.3million, $4.0 million and $2.3 million during the years ended July 31, 2013, 2012 and 2011, respectively. This expense is net of sublease income of $1.2million for each of the years ended July 31, 2012 and 2011.68Table of ContentsLetters of CreditIn addition to the unsecured letter of credit noted above, the Company had no and three outstanding letters of credit required by certain customers tosecure contractual commitments and prepayments as of July 31, 2013 and 2012, respectively. Certain of these letters of credit were fully secured by cashbalances, which were classified as restricted cash in our consolidated balance sheets as of July 31, 2012. In July 2012, the Company entered into anunsecured letter of credit agreement related to a customer arrangement for PLN 10.0 million (approximately $3.1 million as of July 31, 2013) to securecontractual commitments and prepayments. No amounts were outstanding under our unsecured letters of credit as of July 31, 2013 or July 31, 2012.Legal ProceedingsIn December 2007, Accenture Global Services GmbH and Accenture LLP (collectively, “Accenture”), a competitor, filed a lawsuit against the Companyin the U.S. District Court for the District of Delaware (the “Delaware Court") (Accenture Global Services GmbH and Accenture LLP v. Guidewire Software,Inc., Case No 07-826-SLR). Accenture alleged infringement of U.S. Patent No. 7,013,284 (the “ '284 patent”), among others, by our products; trade-secretmisappropriation; and tortious interference with business relations. Accenture sought damages and an injunction. The Company denied Accenture's claims,and asserted counterclaims seeking a declaration that our products do not infringe the patents, that the patents are invalid and that the '284 patent isunenforceable. We also asserted counterclaims against Accenture for breach of contract and trade secret misappropriation. On May 31, 2011, the DelawareCourt granted the Company's motion for summary judgment finding that Accenture's '284 patent is invalid. In July 2011, Accenture filed an appeal to theUnited States Court of Appeals for the Federal Circuit (the “Appeals Court”) of the Delaware Court's judgment of invalidity of the '284 patent.In October 2011, the Company agreed with Accenture to resolve all outstanding litigation concerning their respective insurance claims managementsoftware. As part of the settlement, the parties agreed to a royalty free cross license of all then-current patents and patent applications. In connection with thesettlement, the Company has paid $10.0 million to Accenture with a potential additional payment based on the final outcome of Accenture’s appeal regardingthe validity of its ‘284 patent. On September 5, 2013, the Appeals Court ruled in the Company's favor, affirming the decision of the District Court andholding the '284 patent invalid. Accenture may still request United States Supreme Court review or rehearing by the full Federal Circuit sitting en banc, and, ifAccenture is allowed to appeal and is ultimately successful, then the Company has agreed to pay Accenture an additional $20.0 million. Otherwise, no furtherpayments would be due in connection with the settlement. The Company expensed the $10.0 million litigation provision in fiscal year 2011 as it believes thatno future benefit is attributable to the cross license.In addition to the matters described above, from time to time, the Company is involved in various other legal proceedings and receives claims from timeto time, arising from the normal course of business activities. The Company has accrued for estimated losses in the accompanying consolidated financialstatements for matters with respect to which we believe the likelihood of an adverse outcome is probable and the amount of the loss is reasonably estimable.IndemnificationThe Company sells software licenses and services to its customers under contracts (“Software License”). Each Software License contains the terms ofthe contractual arrangement with the customer and generally includes certain provisions for defending the customer against any claims that the Company’ssoftware infringes upon a patent, copyright, trademark, or other proprietary right of a third party. Software Licenses also indemnify the customer againstlosses, expenses, and liabilities from damages that may be assessed against the customer in the event the Company’s software is found to infringe upon suchthird party rights.The Company has not had to reimburse any of its customers for losses related to indemnification provisions and no material claims against theCompany are outstanding as of July 31, 2013 and 2012. For several reasons, including the lack of prior indemnification claims and the lack of a monetaryliability limit for certain infringement cases under various Software Licenses, the Company cannot estimate the amount of potential future payments, if any,related to indemnification provisions.The Company has also agreed to indemnify its directors and executive officers for costs associated with any fees, expenses, judgments, fines andsettlement amounts incurred by any of these persons in any action or proceeding to which any of these persons is, or is threatened to be, made a party byreason of the person’s service as a director or officer, including any action by the Company, arising out of that person’s services as the Company’s director orofficer or that person’s services provided to any other company or enterprise at the Company’s request. The Company maintains director and officer insurancecoverage that may enable the Company to recover a portion of any future amounts paid.69Table of Contents6. Stockholders’ Equity and Stock-based CompensationStock-based Compensation ExpenseStock-based compensation expense related to all employee and non-employee stock-based awards is as follows: Fiscal years ended July 31, 2013 2012 2011 Stock-based compensation expense:(in thousands)Cost of maintenance revenues$1,217 $379 $120 Cost of services revenues12,493 3,741 1,264 Research and development9,131 3,759 1,372Sales and marketing5,970 2,936 903 General and administrative9,588 7,443 3,021 Total stock-based compensation expense38,399 18,258 6,680Tax benefit from stock-based compensation12,933 7,137 2,646Total stock-based compensation expense, net of tax effect$25,466 $11,121 $4,034Stock-based compensation for the year ended July 31, 2013 includes $1.0 million of expense related to the modification of RSUs upon acceleratedvesting terms for the retirement of one of the Company's officers, $1.0 million reversal of previously recognized expense for unvested awards upon terminationof one of the Company's officers, and $1.7 million of expense for multiple performance-based awards which were mainly tied to fiscal year 2013 financialresults. Amounts for the year ended July 31, 2012 include a stock compensation expense of $1.2 million related to service performed prior to the IPO forRSUs granted to the Company’s Chief Executive Officer whereby the performance condition for these grants was satisfied upon the Company’s IPO closing,and a $0.9 million related to a change in estimated forfeiture rate upon the IPO event.As of July 31, 2013, total unrecognized compensation cost, adjusted for estimated forfeitures, was as follows: As of July 31, 2013 Unrecognized Expense Average ExpectedRecognition Period (in thousands) (in years) Restricted stock units$41,135 1.3 Stock options2,699 1.0 $43,834 RSUsRSU activity under the Company’s equity incentive plans is as follows: RSUs Outstanding Number of RSUsOutstanding Weighted Average GrantDate Fair ValueBalance as of July 31, 20123,992,177 $8.00Granted2,024,221 33.68Released(1,623,182) 9.88Canceled(365,615) 17.72Balance as of July 31, 20134,027,601 $19.2770Table of ContentsThe weighted average per share grant date fair value of RSUs granted during each of the fiscal years ended July 31, 2013, 2012 and 2011was $33.68,$13.65 and $4.70, respectively. The fair value of RSUs released during the years ended July 31, 2013, 2012 and 2011 was $56.2 million, $41.2 millionand $0.0 million, respectively.On March 9, 2011, the Company granted a series of three awards totaling 878,800 performance-based RSUs to its President and Chief ExecutiveOfficer. Each of these RSUs was subject to time-based vesting and performance vesting. In addition, each of the RSUs was subject to a separate performancecondition, as follows:•The RSUs covering 502,200 shares of common stock were subject to satisfaction of an IPO of the Company’s equity securities, which occurredin January 2012;•The RSUs covering 251,100 shares of common stock were subject to full and final dismissal or final adjudication of certain specified litigationto the satisfaction of the Board, which occurred in July 2011; and•The RSUs covering 125,500 shares of common stock were subject to satisfaction of a pre-established revenue target for fiscal year 2012, whichwas satisfied upon close of fiscal year 2012.Stock OptionsStock option activity under the Company’s equity incentive plans is as follows: Number of StockOptions Outstanding Weighted AverageExercise Price Weighted AverageRemaining ContractualLife Aggregate IntrinsicValue (1) (in years) (in thousands)Balance as of July 31, 20126,486,641 $3.74 6.1 $142,321Granted377,412 32.36 Exercised(2,905,296) 3.12 Canceled(195,529) 10.55 Balance as of July 31, 20133,763,228 $6.74 5.7 $139,315Vested and expected to vest as of July 31, 20133,714,254 $6.56 5.7 $138,163Exercisable as of July 31, 20133,413,948 $4.47 5.4 $134,139(1) Aggregate intrinsic value represents the difference between the exercise price of the option and the Company’s closing stock price of $43.76 and $25.66 on July 31, 2013and July 31, 2012, respectively.The options exercisable as of July 31, 2013 include options that are exercisable prior to vesting. The total intrinsic value of options exercised wasapproximately $86.0 million, $31.2 million and $2.6 million for the years ended July 31, 2013, 2012 and 2011, respectively. The weighted average grant datefair value of options granted was $14.06, $4.51 and $3.46 for the years ended July 31, 2013, 2012 and 2011, respectively.Additional information regarding options outstanding as of July 31, 2013 is as follows: Options Outstanding Options ExercisableExercise PriceNumber of OptionsOutstanding Remaining ContractualLife (Years) Exercise Price perShare Number of OptionsExercisable Exercise Price perShare$0.16—1.00446,350 2.4 $0.54 446,350 $0.541.25—2.56107,600 3.1 2.02 107,600 2.022.74752,484 4.0 2.74 752,484 2.743.50203,068 4.7 3.50 203,068 3.503.73604,396 5.6 3.73 595,269 3.733.92510,888 6.4 3.92 499,488 3.924.50—7.50539,978 7.7 6.90 518,994 6.948.65—11.00223,959 8.1 8.87 221,250 8.8811.00--33.00322,490 9.1 31.84 54,930 32.2535.00 and over52,015 9.3 36.42 14,515 35 3,763,228 5.7 $6.74 3,413,948 $4.4771Table of ContentsValuation of AwardsDetermining Fair Value of Stock OptionsThe fair value of the common stock underlying the stock options and restricted stock units granted prior to the IPO have been determined by the Board.Because there had been no public market for the Company’s common stock, the Board had determined the fair value of the common stock at the time of thegrant by considering a number of objective and subjective factors including valuations of comparable companies, sales of redeemable convertible preferredstock to unrelated third parties, operating and financial performance, lack of liquidity of capital stock and general and industry-specific economic outlook,amongst other factors. The fair value of the underlying common stock was determined by the Board until the Company’s common stock was listed on theNew York Stock Exchange upon IPO. Awards granted subsequent to the Company’s IPO reflect the fair value of common stock as of the end of trading on thegrant date.The fair value of each grant of stock options was determined by the Company and the Board using the methods and assumptions discussed below.Each of these inputs is subjective and generally requires significant judgment to determine.Valuation Method—The Company estimates the fair value of its stock options using the Black-Scholes option-pricing model.Expected Term—The expected term represents the period that the stock-based awards are expected to be outstanding. The Company uses the simplifiedmethod to determine the expected term for its option grants as provided by the Securities and Exchange Commission. The simplified method calculates theexpected term as the average of the time-to-vesting and the contractual life of the options. The Company uses the simplified method to determine its expectedterm because of its limited history of stock option exercise activity.Expected Volatility—The expected volatility is derived from the historical stock volatilities of several comparable publicly listed peers over a periodapproximately equal to the expected term of the options as the Company has limited trading history by which to determine the volatility of its own commonstock.Risk-Free Interest Rate— The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for zero coupon U.S.Treasury notes with maturities approximately equal to the expected term of the options.Expected Dividend—The expected dividend is zero as the Company has never paid dividends and has no expectations to do so.Summary of Assumptions—The fair value of the employee stock options were estimated on the grant dates using a Black-Scholes option-pricing modelwith the following weighted average assumptions: Fiscal years ended July 31, 2013 2012 2011Expected life (in years)5.1 - 6.1 5.3 - 6.3 6.03Risk-free interest rate0.6% - 1.2% 1.2% - 1.5% 1.9%Expected volatility45.1% - 48.7% 44.1% - 46.4% 46.1%Expected dividend yield—% —% —%Forfeiture Rate—The Company estimates its forfeiture rate based on an analysis of its actual forfeitures and will continue to evaluate the adequacy ofthe forfeiture rate based on actual forfeiture experience, analysis of employee turnover behavior, and other factors. The impact from a forfeiture rate adjustmentwill be recognized in full in the period of adjustment, and if the actual number of future forfeitures differs from that estimated, the Company may be requiredto record adjustments to stock-based compensation expense in future periods.Convertible Preferred StockUpon the closing of the Company's IPO on January 30, 2012, all outstanding convertible preferred stock was converted into 25,357,721 shares ofcommon stock on a one-to-one basis. As of July 31, 2013 and 2012, the Company was authorized to issue 25,000,000 shares of convertible preferred stock,respectively, with a par value of $0.0001 per share. As of July 31, 2013 and 2012, no shares of convertible preferred stock were issued and outstanding.72Table of ContentsCommon Stock Reserved for Future IssuanceAs of July 31, 2013 and 2012, the Company was authorized to issue 500,000,000 common shares with a par value of $0.0001 per share, respectively,and 57,909,277 and 53,956,608 common shares were issued and outstanding, respectively. As of July 31, 2013 and 2012, the Company had reservedshares of common stock, on an as-if-converted basis, for future issuance as follows: July 31, 2013 July 31, 2012Exercise of stock options to purchase common stock3,763,228 6,486,641Vesting of restricted stock units4,027,601 3,992,177Issuances of shares available under stock plans9,194,058 7,655,332Total common stock reserved for issuance16,984,887 18,134,150Equity Incentive PlansIn February 2007, the Company’s board of directors (“Board”) adopted and the stockholders approved the 2006 Stock Plan (“2006 Plan”) as anamendment and restatement of the stockholder-approved 2002 Stock Option/Stock Issuance Plan, as amended, which provides for the issuance of incentiveand nonstatutory options to employees and nonemployees of the Company and under which 13,920,757 shares had been reserved for issuance as of July 31,2013.In July 2009, the Board adopted and the stockholders approved the 2009 Stock Plan (“French Plan”). Under the French Plan, 31,000 shares had beenreserved for issuance as of July 31, 2013. The number of shares exercised and issued under the French Plan reduced the corresponding number of sharesavailable under the 2006 Plan.In June 2010, the Board adopted and the stockholders approved the 2010 Restricted Stock Unit Plan (“2010 Plan”). As of July 31, 2013, the Companyhad reserved 3,908,028 shares of common stock for issuance under the 2010 Plan.On September 14, 2011, the Board, upon the recommendation of the Compensation Committee of the Board (“Committee”), adopted the 2011 StockPlan (“2011 Plan”), which was subsequently approved by the Company’s stockholders in January 2012. The 2011 Plan provides flexibility to the Committeeto use various equity-based incentive awards as compensation tools to motivate the Company’s workforce. The Company had initially reserved 7,500,000shares of its common stock for the issuance of awards under the 2011 Plan. In addition, the number of shares remaining available for grant under the 2006Plan and 2010 Plan immediately prior to the closing of the IPO were added to the shares available under the 2011 Plan. The number of shares remainingavailable for grant under the French Plan expired upon the IPO. The 2011 Plan provides that the number of shares reserved and available for issuance underthe plan will automatically increase each January 1, beginning on January 1, 2013, by up to 5% of the outstanding number of shares of the Company’scommon stock on the immediately preceding December 31. This number is subject to adjustment in the event of a stock split, stock dividend or other definedchanges in the Company’s capitalization. With the adoption of the 2011 Plan upon the completion of the Company’s IPO, both option and RSU grants nowreduce the 2011 Plan reserve. As of July 31, 2013, the Company had reserved 11,760,300 shares of common stock for issuance under the 2011 Plan.The shares the Company issues under the 2011 Plan will be authorized but unissued shares or shares that are reacquired. The shares of common stockunderlying any awards under the 2011 Plan, 2010 Plan and 2006 Plan that are forfeited, canceled, held back upon exercise or settlement of an award to satisfythe exercise price or tax withholding, reacquired by the Company prior to vesting, satisfied without any issuance of stock or are otherwise terminated (otherthan by exercise) are added back to the shares of common stock available for issuance under the 2011 Plan. The shares of common stock underlying anyoutstanding awards under the French Plan that are forfeited, canceled or otherwise not issued will expire and not be available for future issuance.No awards may be granted under the 2011 Plan after the date that is 10 years from the effectiveness of the plan. No awards under the 2011 Plan weregranted prior to the Company’s IPO. Following the closing of the IPO, no additional awards will be made under the 2006 Plan, French Plan and 2010 Plan.73Table of Contents7. Income TaxesThe Company’s income before provision for income taxes for the years ended July 31, 2013, 2012 and 2011 is as follows: Fiscal years ended July 31, 2013 2012 2011 (in thousands)Domestic$12,814 $17,033 $1,077International4,398 6,146 7,219Income before provision for income taxes$17,212 $23,179 $8,296The provision for income taxes consists of the following: Fiscal years ended July 31, 2013 2012 2011 (in thousands)Current: U.S. federal$1,296 $— $192State999 544 259Foreign3,479 1,522 404Total current5,774 2,066 855Deferred: U.S. federal(3,416) 5,292 (24,322)State5 (266) (3,326)Foreign(534) 887 (469)Total deferred(3,945) 5,913 (28,117)Total provision for (benefit from) income taxes$1,829 $7,979 $(27,262)The total income tax expense differs from the amounts computed by applying the statutory federal income tax rate of 35% during the years endedJuly 31, 2013, 2012 and 2011 as follows: Fiscal years ended July 31, 2013 2012 2011 (in thousands)Computed tax expense$6,024 $8,113 $2,906Nondeductible items and other779 877 475State taxes, net of federal benefit(1,336) (841) 477Foreign income taxed at different rates1,405 258 (2,593)Tax credits(7,199) (1,356) (1,330)Change in valuation allowance2,156 928 (27,197) Total provision for (benefit from) income taxes$1,829 $7,979 $(27,262)74Table of ContentsThe tax effects of temporary differences that gave rise to significant portions of deferred tax assets and liabilities are as follows: Fiscal years ended July 31, 2013 2012 2011 (in thousands)Accruals and reserves$3,647 $2,273 $8,307Stock-based compensation11,672 5,645 —Deferred revenues510 5,088 2,373Property & equipment— 153 —State taxes— 165 121Net operating loss carryforwards2,244 2,957 12,768Tax credits14,233 9,192 6,908 Total deferred tax assets32,306 25,473 30,477Less valuation allowance4,874 2,718 1,790 Net deferred tax assets27,432 22,755 28,687Less deferred tax liabilities: Property & equipment440 — 570Intangible assets2,268 — —Foreign deferred revenue736 550 — Total net deferred tax assets$23,988 $22,205 $28,117During the years ended July 31, 2013, 2012 and 2011, the Company was able to consider positive evidence in determining the realizability of itsdeferred tax assets, including projections for future growth, and determined a significant portion of the valuation allowance was not required. A correspondingbenefit of $27.2 million was recorded for the year ended July 31, 2011. A valuation allowance of $4.9 million, $2.7 million and $1.8 million remained as ofJuly 31, 2013, 2012, and 2011, respectively, for California research and development credits that were not more likely than not realizable.The Company had net operating loss carryforwards of the following: Fiscal years ended July 31, 2013 2012 2011 (in thousands) U.S. federal$133,660 $46,110 $29,020 California80,561 40,021 34,655 Other states19,831 7,953 3,996 Total net operating loss carryforwards$234,052 $94,084 $67,671The Company had research and development tax credit (“R&D credit”) carryforwards of the following: Fiscal years ended July 31, 2013 2012 2011 (in thousands) U.S. federal$12,973 $6,565 $5,648 California11,980 7,558 4,271 Total R&D credit carryforwards$24,953 $14,123 $9,919The U.S. federal and California net operating loss carryforwards will start to expire in 2028 and 2016, respectively. The U.S. federal R&D credit willstart to expire in 2023. California R&D tax credits have no expiration.The excess tax benefits associated with stock option exercises are recorded directly to stockholders’ equity only when realized. As a result, the pre-taxexcess tax benefits included in federal and California net operating loss carryforwards but not reflected in deferred tax assets for fiscal year 2013 are $131.8million and $56.6 million, respectively.Federal and California laws impose restrictions on the utilization of net operating loss carryforwards and R&D credit carryforwards in the event of achange in ownership of the Company, which constitutes an “ownership change” as defined by Internal Revenue Code Sections 382 and 383. The Companyexperienced an ownership change in the past that does not75Table of Contentsmaterially impact the availability of its net operating losses and tax credits. Nevertheless, should there be an ownership change in the future, the Company’sability to utilize existing carryforwards could be substantially restricted.The Company provides U.S. income taxes on the earnings of foreign subsidiaries, unless the subsidiaries’ earnings are considered indefinitelyreinvested outside the United States. As of July 31, 2013, U.S. income taxes were not provided for on the cumulative total of $12.4 million of undistributedearnings from certain foreign subsidiaries. As of July 31, 2013, the unrecognized deferred tax liability for these earnings was approximately $1.1 million.Unrecognized Tax BenefitsThe following table summarizes the activity related to unrecognized tax benefits: Fiscal years ended July 31, 2013 2012 2011 (in thousands)Unrecognized benefit - beginning of period$3,937 $2,419 $335Gross increases - prior period tax positions370 478 1,436Gross increases - current period tax positions2,420 1,040 648Unrecognized benefit - end of period$6,727 $3,937 $2,419During the year ended July 31, 2013, the Company’s unrecognized tax benefits increased by $2.4 million, primarily associated with the Company’sfederal and California R&D credits. As of July 31, 2013, the Company had unrecognized tax benefits of $3.3 million that, if recognized, would affect theCompany’s effective tax rate.The Company or one of its subsidiaries files income taxes in the U.S. federal jurisdiction and various states and foreign jurisdictions. If the Companyutilizes net operating losses or tax credits in future years, the U.S. federal, state and local, and non-U.S. tax authorities may examine the tax returns coveringthe period in which the net operating losses and tax credits arose. As a result, the Company’s tax returns in the U.S. and California remain open to examinationfrom fiscal years 2002 through 2013. Substantially all material foreign income tax matters in Australia have been concluded through the year ended July 31,2007. The Company has been audited in Canada and substantially concluded all material income tax matters through July 31, 2009.8. Employee 401(k) PlanThe Company’s employee savings and retirement plan is qualified under Section 401 of the Internal Revenue Code. The plan is available to all regularemployees on the Company’s U.S. payroll and provides employees with tax-deferred salary deductions and alternative investment options. Employees maycontribute up to 25% of their salary up to the statutory prescribed annual limit. In calendar years 2013 and 2012, the Company match for employees’contributions to the plan was up to $2,000 per participant per calendar year.9. Segment InformationThe Company operates in one segment. The Company’s chief operating decision maker (the “CODM”), its Chief Executive Officer, manages theCompany’s operations on a consolidated basis for purposes of allocating resources. When evaluating the Company’s financial performance, the CODMreviews separate revenues information for the Company’s license, maintenance and professional services offerings, while all other financial information isreviewed on a consolidated basis. All of the Company’s principal operations and decision-making functions are located in the United States.The following table sets forth revenues by country based on the billing address of the customer: Fiscal years ended July 31, 2013 2012 2011 (in thousands) United States$172,793 $127,473 $89,714 Canada42,632 35,690 24,632 Australia15,316 19,619 17,388 United Kingdom20,660 16,223 17,362 Other49,248 33,056 23,376 Total revenues$300,649 $232,061 $172,47276Table of ContentsNo other country accounted for more than 10% of revenues during the years ended July 31, 2013, 2012 and 2011.The following table sets forth the Company’s property and equipment, net by geographic region: July 31, 2013 July 31, 2012 (in thousands) North America$11,353 $11,522 Europe1,276 388 Asia Pacific285 14 Total$12,914 $11,92410.AcquisitionOn May 10, 2013, the Company purchased all of the outstanding equity interests of Millbrook, Inc., a privately held provider of data models andplatforms, technology accelerators and business intelligence solutions for P&C insurers. The aggregate cost of the acquisition was $14.7 million net ofacquired cash. In addition, the Company issued $3.7 million in RSUs, vesting of which is subject to time-based vesting requirements and therefore areexcluded from the purchase consideration. The related value is recognized as compensation expense over the requisite service period. The Company believesthat the acquisition of Millbrook will enhance reporting capabilities of our software. The results of Millbrook's operations from May 10, 2013 to July 31, 2013are included in the Company's results for the fourth quarter of fiscal year 2013 and were not material. Transaction expenses of $0.7 million were expensed asincurred.The allocation of the purchase price is preliminary and is therefore subject to change. The purchase price remains subject to post-closing adjustmentsrelated to the changes in the fair value of working capital as of the closing date. The aggregate cost of the acquisition, net of acquired cash, was allocated asfollows: Total Purchase PriceAllocation Estimated Useful Lives (in thousands) (in years)Assets acquired, net $590 n/aDeveloped technology 7,200 5.0Deferred tax liability (2,094) n/aGoodwill 9,048 n/aTotal purchase price $14,744 Management assigned preliminary fair values to the identifiable intangible assets by applying the income approach. This fair value measurement isbased on significant inputs that are not observable in the market and thus represents a Level 3 measurement. The valuation models were based on estimates offuture operating projections of the acquired business and rights to sell new products containing the acquired technology as well as judgments on the discountrates used and other variables. The Company developed forecasts based on a number of factors including pricing projections of future products, expectedcustomer interest, a discount rate that is representative of the weight average cost of capital, and a long-term sustainable growth rate based on market analysis.The Company is amortizing the acquired intangible asset on a straight-line basis over its estimated useful life.The pro forma results of operations have not been presented because the effects of the business combination described above were not material to ourconsolidated results of operations.Item 9.Changes in and Disagreements with Accountant on Accounting and Financial DisclosureNone. Item 9A.Controls and ProceduresEvaluation of Disclosure Controls and ProceduresOur management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of ourdisclosure controls and procedures (as defined in Rules 13a- 15(e) and 15d- 15(e) under the Securities77Table of ContentsExchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this Annual Report on Form 10-K. Based on such evaluation,our principal executive officer and principal financial officer have concluded that as of such date, our disclosure controls and procedures were effective.Management’s Annual Report on Internal Control Over Financial ReportingOur management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company as defined in Rule13a-15(f) or 15d-15(f) of the Exchange Act. Internal control over financial reporting is a process designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles,and includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactionsand dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements inaccordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of ourmanagement and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition ofour assets that could have a material effect on our financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluationof effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate.Our management assessed the effectiveness of the Company's internal control over financial reporting as of July 31, 2013 using the criteria set forth bythe Committee of Sponsoring Organizations of the Treadway Commission (COSO) in its Internal Control-Integrated Framework (1992). Based on thisassessment and those criteria, management concluded that our internal control over financial reporting was effective as of July 31, 2013.Our internal control over financial reporting has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report,which appears in Part II, Item 8 of this Form 10-K.Inherent Limitations of Internal ControlsOur management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or ourinternal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute,assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provideabsolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include therealities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can becircumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any systemof controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed inachieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree ofcompliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error orfraud may occur and not be detected.Changes in Internal Control over Financial ReportingThere were no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or arereasonably likely to materially affect, our internal control over financial reporting. Item 9B.Other InformationNone.PART III 78Table of ContentsItem 10.Directors, Executive Officers and Corporate GovernanceThe information required by this item concerning our executive officers is set forth under the heading “Executive Officers of the Registrant” in Part I,Item 1 of this Annual Report on Form 10-K.We have adopted a Code of Business Conduct and Ethics that applies to all of our directors, officers and employees, including our principal executiveofficer and principal financial officer. The Code of Business Conduct and Ethics is posted on our investor relations website.We will post any amendments to, or waivers from, a provision of this Code of Business Conduct and Ethics by posting such information on ourwebsite, at the address and location specified above.The other information required by this item will be contained in our definitive proxy statement to be filed with the Securities and Exchange Commissionin connection with our 2013 annual meeting of stockholders (the “Proxy Statement”), which is expected to be filed not later than 120 days after the end of ourfiscal year ended July 31, 2013, and is incorporated in this report by reference. Item 11.Executive CompensationThe information required by this item will be set forth in the Proxy Statement and is incorporated herein by reference. Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersThe information required by this item will be set forth in the Proxy Statement and is incorporated herein by reference. Item 13.Certain Relationships and Related Transactions and Director IndependenceThe information, if any, required by this item will be set forth in the Proxy Statement and is incorporated herein by reference. Item 14.Principal Accountant Fees and ServicesThe information required by this item will be set forth in the Proxy Statement and is incorporated herein by reference.79Table of ContentsPART IV Item 15.Exhibits and Financial Statement Schedules(a) The following documents are filed as part of this report:1. Consolidated Financial StatementsSee Index to Consolidated Financial Statements at Item 8 herein.2. Financial Statement SchedulesSchedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in thefinancial statements or notes herein.3. ExhibitsSee the Exhibit Index immediately following the signature page of this Annual Report on Form 10-K.The exhibits listed below are filed or incorporated by reference as part of this Annual Report on Form 10-K.80Table of ContentsSignaturesPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalfby the undersigned, thereunto duly authorized. GUIDEWIRE SOFTWARE, INC. By: /S/ MARCUS S. RYU Marcus S. Ryu President and Chief Executive OfficerPOWER OF ATTORNEYEach person whose individual signature appears below hereby authorizes and appoints Marcus S. Ryu and Karen Blasing, and each of them, with full powerof substitution and resubstitution and full power to act without the other, as his or her true and lawful attorney-in-fact and agent to act in his or her name,place and stead and to execute in the name and on behalf of each person, individually and in each capacity stated below, and to file any and all amendments tothis Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities andExchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act andthing, ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his substitute or substitutes may lawfully do or cause to bedone by virtue thereof.Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant andin the capacities and on the dates indicated.Signature Title Date /S/ MARCUS S. RYU President, Chief Executive Officer and Director (Principal Executive Officer) September 26, 2013Marcus S. Ryu /S/ KAREN BLASING Chief Financial Officer (Principal Financial and Accounting Officer) September 26, 2013Karen Blasing /S/ Kenneth W. Branson Director September 26, 2013Kenneth W. Branson /S/ John Cavoores Director September 26, 2013John Cavoores /S/ Craig Conway Director (Executive Chairman) September 26, 2013Craig Conway /S/ Neal Dempsey Director September 26, 2013Neal Dempsey /S/ Guy Dubois Director September 26, 2013Guy Dubois /S/ Steven M. Krausz Director September 26, 2013Steven M. Krausz /S/ Craig Ramsey Director September 26, 2013Craig Ramsey /S/ Clifton Thomas Weatherford Director September 26, 2013Clifton Thomas Weatherford 81Table of ContentsEXHIBIT INDEXExhibitNumber Description Incorporated byReference FromForm Incorporatedby ReferenceFromExhibitNumber Date Filed3.1 Amended and Restated Certificate of Incorporation. 10-Q 3.1 March 14, 20123.2 Amended and Restated Bylaws. 8-K 3.1 January 22, 20134.1 Form of Common Stock certificate of the Registrant. S-1/A 4.1 January 9, 201210.1 Form of Indemnification Agreement between the Registrantand each of its directors and executive officers. S-1/A 10.1 October 28, 201110.2 2006 Stock Plan and forms of agreements thereunder. S-1 10.2 September 2, 201110.3 2009 Stock Plan and forms of agreements thereunder. S-1 10.3 September 2, 201110.4 2010 Restricted Stock Unit Plan and forms of agreementsthereunder. S-1 10.4 September 2, 201110.5 2011 Stock Plan and forms of agreements thereunder. S-1/A 10.5 December 13, 201110.6 Form of Executive Agreement. S-1/A 10.6 October 28, 201110.7 Senior Executive Incentive Bonus Plan. S-1/A 10.12 December 13, 201110.8 Lease Agreement between Parkside Towers, L.P. and theRegistrant dated as of December 5, 2011. S-1/A 10.13 December 13, 201121.1 Subsidiaries of the Registrant. Filed herewith — —23.1 Consent of KPMG LLP, Independent Registered PublicAccounting Firm. Filed herewith — —31.1 Certification of the Chief Executive Officer pursuant toSection 302 of the Sarbanes-Oxley Act. Filed herewith — —31.2 Certification of the Chief Financial Officer pursuant toSection 302 of the Sarbanes-Oxley Act. Filed herewith — — 32.1* Certification of the Chief Executive Officer and the ChiefFinancial Officer pursuant to Section 906 of the Sarbanes-Oxley Act. Furnished herewith — 101.INS** XBRL Instance Document Filed herewith — — 101.SCH** XBRL Taxonomy Extension Schema Document Filed herewith — — 101.CAL** XBRL Taxonomy Extension Calculation Linkbase Document Filed herewith — — 101.DEF** XBRL Taxonomy Extension Definition Linkbase Document Filed herewith — 101.LAB** XBRL Taxonomy Extension Label Linkbase Document Filed herewith — — 101.PRE** XBRL Taxonomy Extension Presentation LinkbaseDocument Filed herewith — *The certifications furnished in Exhibit 32.1 hereto are deemed to accompany this Annual Report on Form 10-K and will not be deemed “filed” for purposesof Section 18 of the Securities Exchange Act of 1934, as amended. Such certifications will not be deemed to be incorporated by reference into any filingsunder the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that the registrant specificallyincorporates it by reference.**Users of this data are advised that, pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registrationstatement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 andotherwise are not subject to liability under these sections.82Exhibit 21.1Country Subsidiary and addressAustralia Guidewire Software Pty Ltd. (Aus) Level 2, 95 Pitt Street Sydney NSW 2000 Germany Guidewire Software GmbH Zeppelinstrabe 71-73 81669 Munchen France Guidewire Software France SAS 19 Boulevard Malesherbes 75008 Paris FRANCE United Kingdom Guidewire Software Ltd. (UK) 4th Floor, 9 Cloak Lane London EC4R 2RU U.K. Japan Guidewire Software Japan KK 12/F Yurakucho Ekimae Bldg, 2-7-1 Yurakucho, Chiyoda-ku, Tokyo Canada Guidewire Canada Ltd. 5600 Explorer Drive, Suite 202 Mississauga Ontario Canada L4W 4Y2 New Zealand Guidewire Software Pty Ltd. (New Zealand Branch) Level 2, 95 Pitt Street Sydney NSW 2000 Hong Kong Guidewire Software Asia Ltd. (HK) C/- Vistra (Hong Kong) Limited Suite 5704-5, 57th Floor, Central Plaza 18 Harbour Road, Wanchai, Hong Kong Ireland Guidewire Software (Ireland) Ltd. Ground Floor, Units 1 & 2, Nexus Building Block 6A, Blanchardstown Corporate Park Ballycoolin, Dublin 15, Ireland Italy Guidewire Software Italy SRL. Via XX Settembre 3 10121 Turin Italy Poland Guidewire Software Poland Sp. Z o.o. Ulica Sienna 83/218 00-815 Warszaww Poland China Guidewire Software (Beijing) Co. Ltd. 14th Floor, A Tower, Pacific Century Place 2A Workers Stadium Road North Chaoyong District, Beijing 100027 P.R. China United States Millbrook, Inc. 707 Eagleview Boulevard, Ste 307 Uwchlan Township, Chester County, PAExhibit 23.1Consent of Independent Registered Public Accounting FirmThe Board of DirectorsGuidewire Software, Inc.:We consent to the incorporation by reference in the registration statements (Nos. 333-179799 and 333-187004) on Form S-8 of Guidewire Software, Inc. of ourreport dated September 26, 2013, with respect to the consolidated balance sheets of Guidewire Software, Inc. and subsidiaries as of July 31, 2013 and 2012,and the related consolidated statements of income, comprehensive income, stockholders' equity, and cash flows for each of the years in the three-year periodended July 31, 2013, and the effectiveness of internal control over financial reporting as of July 31, 2013, which report appears in the July 31, 2013 annualreport on Form 10-K of Guidewire Software, Inc.KPMG LLPSanta Clara, CASeptember 26, 2013Exhibit 31.1CERTIFICATION PURSUANT TO RULE 13a-14(a) OR 15d-14(a) OFTHE SECURITIES EXCHANGE ACT OF 1934,AS ADOPTED PURSUANT TO SECTION 302 OFTHE SARBANES-OXLEY ACT OF 2002I, Marcus S. Ryu, certify that:1.I have reviewed this Annual Report on Form 10-K of Guidewire Software, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, inlight of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition,results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure thatmaterial information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly duringthe period in which this report is being prepared;b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, toprovide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance withgenerally accepted accounting principles;c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of thedisclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andd)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter(the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’sinternal control over financial reporting; and5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditorsand the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely toadversely affect the registrant’s ability to record, process, summarize and report financial information; andb)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control overfinancial reporting. Date:September 26, 2013 By:/s/ MARCUS S. RYU Marcus S. Ryu President and Chief Executive Officer (Principal Executive Officer)Exhibit 31.2CERTIFICATION PURSUANT TO RULE 13a-14(a) OR 15d-14(a) OFTHE SECURITIES EXCHANGE ACT OF 1934,AS ADOPTED PURSUANT TO SECTION 302 OFTHE SARBANES-OXLEY ACT OF 2002I, Karen Blasing, certify that:1.I have reviewed this Annual Report on Form 10-K of Guidewire Software, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, inlight of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition,results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure thatmaterial information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly duringthe period in which this report is being prepared;b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, toprovide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance withgenerally accepted accounting principles;c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of thedisclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andd)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter(the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’sinternal control over financial reporting; and5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditorsand the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely toadversely affect the registrant’s ability to record, process, summarize and report financial information; andb)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control overfinancial reporting. Date:September 26, 2013 By:/s/ KAREN BLASING Karen Blasing Chief Financial Officer (Principal Financial Officer)Exhibit 32.1CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICERPURSUANT TO18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002In connection with the Annual Report on Form 10-K of Guidewire Software, Inc. for the year ended July 31, 2013 as filed with the Securities and ExchangeCommission on the date hereof (the “Report”), Marcus S. Ryu, as Chief Executive Officer of Guidewire Software, Inc., hereby certifies, pursuant to 18 U.S.C. Section1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge, the Report fully complies with the requirements of Section13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in the Report fairly presents, in all material respects, the financial condition and results ofoperations of Guidewire Software, Inc.Date:September 26, 2013 By:/s/ MARCUS S. RYU Marcus S. Ryu President and Chief Executive Officer (Principal Executive Officer) In connection with the Annual Report on Form 10-K of Guidewire Software, Inc. for the year ended July 31, 2013 as filed with the Securities and ExchangeCommission on the date hereof (the “Report”), Karen Blasing, as Chief Financial Officer of Guidewire Software, Inc., hereby certifies, pursuant to 18 U.S.C. Section 1350, asadopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of her knowledge, the Report fully complies with the requirements of Section 13(a) or15(d) of the Securities Exchange Act of 1934, and the information contained in the Report fairly presents, in all material respects, the financial condition and results of operationsof Guidewire Software, Inc.Date:September 26, 2013 By:/s/ KAREN BLASING Karen Blasing Chief Financial Officer (Principal Financial Officer)

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