Digital Marketing Company for Sale

DUCK CREEK TECHNOLOGIES, INC. Management’s Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

HubSpot : 17 Email Marketing Best Practices That Actually Drive Results
Written by publishing team

The following discussion and analysis of our financial condition and results of
operations should be read together with our consolidated financial statements
and related notes included elsewhere in this Quarterly Report on Form 10-Q. This
discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from the
forward-looking statements included herein. Factors that could cause or
contribute to such differences include, but are not limited to, those identified
below and those discussed in the section entitled Part II, "Item 1A. Risk
Factors" and elsewhere in this Quarterly Report on Form 10-Q.

Abstract


We are a leading SaaS provider of core systems for the P&C insurance industry.
We have achieved our leadership position by combining over twenty years of deep
domain expertise with the differentiated SaaS capabilities and low-code
configurability of our technology platform. We believe we are the first company
to provide carriers with an end-to-end suite of enterprise-scale core system
software that is purpose-built as a SaaS solution. Our product portfolio is
built on our modern technology foundation, the Duck Creek Platform, and works
cohesively to improve the operational efficiency of insurers' core processes
(policy administration, claims management and billing) as well as other critical
functions. The Duck Creek Platform enables our customers to be agile and rapidly
capitalize on market opportunities, while reducing their total cost of
technology ownership.

Our deep understanding of the P&C insurance industry has enabled us to develop a
single, unified suite of insurance software products that is tailored to address
the key challenges faced by carriers worldwide. Our solutions promote carriers'
nimbleness by enabling rapid integration and streamlining the ability to
capture, access and utilize data more effectively. The Duck Creek Suite includes
several products that support the P&C insurance process lifecycle, such as:

• Duck Creek Policy: A solution that enables insurance companies to develop and launch

New insurance products and management of all aspects of document management,

From product identification to quotation, binding and service



    •  Duck Creek Billing: a solution that supports fundamental payment and
       invoicing capabilities (such as billing and collections, commission
       processing, disbursement management and general ledger capabilities) for
       all insurance lines and bill types

• Duck Creek Claims: A solution that supports the entire claims lifecycle

From first notice of loss through investigation, payments and negotiations,

Reporting and closing



In addition, we offer other innovative solutions, such as Duck Creek Rating,
Duck Creek Insights, Duck Creek Digital Engagement, Duck Creek Distribution
Management, Duck Creek Reinsurance Management, Duck Creek Anywhere Managed
Integrations and Duck Creek Industry Content, which provide additional features
and functionalities that further help our customers meet the increasing and
evolving demands of the P&C industry. Our customers purchase and deploy Duck
Creek OnDemand, our SaaS solution, either individually or as a suite.

We sell our SaaS solutions through recurring fee arrangements where revenue is
recognized on a monthly basis following deployment to the customer, which we
refer to as subscription revenue. Substantially all of our new bookings come
from the sale of SaaS subscriptions of Duck Creek OnDemand. For the three months
ended November 30, 2021 and 2020, SaaS ACV bookings represented 94% and 95% of
our total ACV bookings, respectively. Historically, we have also sold our
products through perpetual and term license arrangements, most commonly
installed on-premise, where license revenue is typically recognized in full upon
delivery of the software to the customer. We generally price our SaaS and
license arrangements at individually negotiated rates based on the amount of a
customer's DWP that will be managed by our solutions with pre-determined fee
adjustments as the customer's DWP increases over the term of the contract, which
typically ranges from three to seven years for our SaaS arrangements. We
typically invoice our customers monthly, in advance, for SaaS fees whereas our
term licenses are typically invoiced annually, in advance. The total cost of a
perpetual license is billed in full upon contract signing.

We also derive revenue from maintenance and support services on our perpetual
and term license products (primarily software updates, rights to unspecified
software upgrades on a when-and-if-available basis and remote support services).
We recognize revenue on a monthly basis as maintenance and support services are
provided to customers. We generate revenue by providing professional services
for both our SaaS solutions and perpetual and term license products (primarily
related to implementation services) to the extent requested by our customers.
The vast majority of our professional services revenue is recognized on a time
and materials basis as the work is delivered to our customers. Our customers may
also choose to obtain implementation services through our network of third-party
SI partners who provide implementation and other related services to our
customers. Our partnerships with leading SIs allow us to grow our business more
efficiently by giving us scale to service our growing customer base. We continue
to grow our services organization, including increasing the number of qualified
consultants we employ and investing time and resources to develop relationships
with new SI partners in existing and new markets.

                                       19

--------------------------------------------------------------------------------


We sell our products and services to a wide variety of carriers, including many
of the largest and most recognizable brands in the P&C insurance industry, as
well as smaller national and regional carriers. Our direct sales team focuses on
obtaining new customers, which includes carriers that currently operate
internally developed or competing systems, as well as selling into our existing
customer base, which includes marketing our SaaS solutions to our term and
perpetual license customers to drive adoption of our SaaS solutions and
cross-selling additional applications. We are committed to continued training
and development in order to increase the productivity of our sales team, with
regional sales centers in North America, Europe and Australia. Our sales team is
complemented by our partnerships with third-party partners, including leading
SIs and solution partners. These partners provide additional market validation
to our offerings, enhance our sales force through co-marketing efforts and offer
greater speed and efficiency of implementation capabilities and related services
to our customers. We also engage in a variety of traditional and online
marketing activities designed to provide sales support and build brand
recognition and enhance our reputation as an industry leader.

We believe our strong customer relationships are a result of our ability to
develop innovative technology and incorporate our deep domain expertise into
products that serve mission critical functions in our customers' day-to-day
operations. We have over 150 insurance customers, of which approximately 70 have
purchased one or more of our SaaS solutions. For customer concentration
purposes, customers are assessed two ways: individual entities (customers) and
combining customers that are under common control (consolidated entities). We
had one consolidated entity that accounted for more than 10% of our total
revenue in the first quarter of fiscal 2022 and a different consolidated entity
that accounted for more than 10% of our total revenue in the first quarter of
fiscal 2021.

The main factors and trends that affect the results of our operations


Increased focus on the sale of our SaaS solutions and resulting changing revenue
mix. A central part of our strategy is to continue to grow our subscription
revenue by signing new SaaS customers and increasing sales to our existing SaaS
customers. Additionally, over time we also expect to migrate existing term and
perpetual license customers to our SaaS solutions. As a result, our software
revenue mix will continue to change over time as the portion of license revenue
(primarily recognized up-front) decreases and the portion of subscription
revenue (recognized monthly) increases, which may make our results in any one
period difficult to compare to any other period. For the three months ended
November 30, 2021 and 2020, subscription revenue was 81% and 79% of software
revenue, respectively.

Continued and increased adoption of our solutions by customers. Strong customer
relationships are a key driver of our success given the importance of customer
references for new sales. Our long-term relationships with existing customers
provide us with significant opportunities to reach customer decision-makers and
sell our product offerings that address the specific customer's needs, allowing
us to recognize incremental sales with lower sales and marketing spend than for
a new customer. With the continued launch of new functionality for the Duck
Creek Suite, we have the opportunity to realize incremental value by selling
additional functionality to customers that do not currently utilize our full
product portfolio and by encouraging existing term and perpetual license
customers to adopt our SaaS solutions. As we demonstrate our value to customers,
we believe we will have the opportunity to sell them additional solutions.
Moreover, because our products are priced on the basis of the amount of DWP
generated by our customers, we expect our revenue will grow as our customers
grow their businesses.

Timing of license revenue recognition and changing contract terms. Because our
offerings are typically priced based on a customer's DWP, and our business
relies on a relatively small number of high-value contracts, the license
revenues recognized in any fiscal period in which we sign a term license with a
large global carrier may be disproportionally higher than revenues recognized in
a period in which we only sign term licenses with smaller carriers. We generally
experience lengthy sales cycles because potential customers typically undertake
a rigorous pre-purchase decision-making and evaluation process. Additionally,
our license revenue may significantly increase in any given period in which a
new license contract is signed. In fiscal 2018, we revised our contracting
practices and began to sell our term licenses with an initial two-year committed
term and optional annual renewals instead of our historical three to six year
committed terms. This contracting change has impacted historical
period-over-period revenue comparisons. However, because of our revenue mix
shift to subscription and since our contracts going forward are expected to
have, initial two-year committed terms, this change is not expected to have a
material impact on the comparability of our results and in future periods. Our
term license revenue accounted for 4% of software revenue during both the three
months ended November 30, 2021 and 2020.

Investment in sales and marketing organization. We plan to continue to invest in
our sales and marketing efforts to grow our customer base, increase sales of
additional functionality to existing customers and encourage carriers who
currently operate legacy systems or use one or more of our competitor's
applications to adopt our SaaS solutions. We expect to add sales personnel and
expand our marketing activities. We also intend to continue to expand our
international sales and marketing organization, which we believe will be an
important factor in our continued growth. Our sales and marketing expenses
totaled $13.2 million and $12.6 million in the three months ended November 30,
2021 and 2020, respectively. We expect sales and marketing expenses to continue
to increase in absolute dollars for the foreseeable future.

                                       20

--------------------------------------------------------------------------------


Investment in SaaS operations. We will continue to invest in Duck Creek
OnDemand, including through our new SaaS operations center and continued growth
in the number of our cloud and SaaS operations experts, to further our goal of
delivering the best experience for our SaaS customers. Personnel related costs
of our SaaS operations team and data hosting costs are the fastest growing
components of our cost of subscription revenue. Our cost of subscription revenue
totaled $14.6 million and $10.1 million in the three months ended November 30,
2021 and 2020, respectively.

Investment in technology and research and development efforts. We are committed
to continuing to deliver market-leading software to carriers and believe that
maintaining our product leadership is critical to driving further revenue
growth. As a result, we intend to continue to make significant investments in
our research and development efforts to extend the functionality and breadth of
our current solutions as well as develop and launch new products and tools to
address the evolving needs of the P&C insurance industry. Our research and
development expenses totaled $12.3 million and $11.1 million during the three
months ended November 30, 2021 and 2020, respectively. We expect research and
development expenses to increase in absolute dollars for the foreseeable future.

Mix of professional services revenue. Our professional services teams ensure the
successful configuration and integration of our solutions and provide continuous
support to our customers. We recognize most of our professional services revenue
during initial deployment and recognize additional revenue for services provided
over the lifetime of a customer's use of our software. Over time, a customer's
spend on professional services decreases as a percentage of their overall spend
with us. In addition, although we plan on increasing our professional services
headcount in the long-term, we expect to shift an increasing percentage of
implementation work to our network of third-party SIs to better enable us to
meet growing market demand. As a result, we expect our overall professional
services revenue to increase in absolute dollars due to the growth in the number
of our SaaS customers, but to decrease as a percentage of total revenue. During
the three months ended November 30, 2021 and 2020, our professional services
revenue was $29.5 million and $23.5 million, respectively.

COVID-19 expenses. In March 2020, we implemented various measures in response to
the ongoing COVID-19 pandemic to ensure the safety of our employees. Over a
two-day period, we shifted 100% of our employee base to work from home and
suspended international and domestic travel. This policy remained largely in
place throughout fiscal year 2021, with only certain exceptions being made on a
case-by-case basis. In the beginning of fiscal year 2022, we began re-opening
offices and resumed some business travel. As a result, there have been slight
increases in travel-related expenses in fiscal year 2022.

Due to the success of our work from home program, we have established a
remote-first policy for all employees. Under this policy, employees can work
from home but have the option to work out of physical office locations when they
would like.

Compensation based on shares. For the three months ending November 30, 2021, part of the share-based compensation has decreased due to liability-based bonuses whose value depends, in part, on the company’s share price and other market-based metrics.

Components of results of operations

he won


We generate our revenue from selling subscriptions to our SaaS solutions,
licensing our term and perpetual software applications, providing maintenance
and support services (primarily software updates, rights to unspecified software
upgrades on a when-and-if-available basis and remote support services) to our
term and perpetual license customers and providing professional services
(primarily related to implementation services) to the extent requested by either
our SaaS or term and perpetual license customers. We generally price our SaaS
and licenses arrangements based on the amount of a customer's DWP that will be
managed by our software solutions and may include volume-based pricing for
customers managing a higher amount of DWP with our solutions. Our SaaS and
license contracts generally include provisions for additional fees when the
amount of the customer's DWP managed by our software solutions exceed
agreed-upon caps within defined reporting periods, which are recognized on an as
incurred basis. Software revenue is comprised of subscription revenue and
revenue from licenses and maintenance and support services. Total revenue is
comprised of software revenue plus revenue from our professional services.

Subscription


Our subscription revenue is comprised of fees from customers accessing our Duck
Creek OnDemand platform and other SaaS solutions. Revenue for a reporting period
is generally recognized ratably in proportion to the total contractual DWP,
beginning when the service has been made available to the customer. Our
subscription revenue accounted for 81% and 79% of software revenue during the
three months ended November 30, 2021 and 2020, respectively.

licenses


On an increasingly limited basis, we sell licenses for our solutions on either a
renewable term basis or a perpetual basis. The total contractual consideration
allocated to the license is recognized as revenue upon delivery of the software
to a customer, assuming

                                       21
--------------------------------------------------------------------------------


all other revenue recognition criteria are satisfied. We sell our term licenses
with an initial two-year committed term and optional annual renewals, with the
revenue allocated to the initial two-year license period recognized in full upon
delivery of the license. We expect potential volatility across quarters for our
license revenue due to the timing of license renewals and sales. Our license
revenue accounted for 4% of software revenue during both the three months ended
November 30, 2021 and 2020, respectively.

Maintenance and support


In connection with our term and perpetual license arrangements, we offer
maintenance and support under renewable, fee-based contracts that include
unspecified software updates and upgrades released when and if available,
software patches and fixes and email and phone support. Our maintenance and
support fees are typically priced as a fixed percentage of the associated
license fees. We recognize maintenance and support revenue from customers
ratably over the committed term of the contract. Substantially all term and
perpetual license customers purchase an agreement for maintenance and support.
We expect to continue to generate a relatively consistent stream of revenue from
the maintenance and support services we provide to our existing license
customers. However, we expect revenue from maintenance and support services to
decrease as a percentage of software revenue as we continue to deemphasize
license sales in favor of our SaaS solutions. Our maintenance and support
revenue accounted for 14% and 17% of software revenue during the three months
ended November 30, 2021 and 2020, respectively.

Professional Services


We offer professional services, primarily related to implementation of our
products, in connection with both our SaaS solutions and software license
products. The vast majority of professional services engagements are billed to
customers on a time and materials basis and revenue is generally recognized upon
delivery of our services. We expect our professional services revenue to grow
over time in absolute dollars due to customer growth and an increasing need for
implementation services, but decrease as a percentage of total revenue. We
believe the rate at which we sell our software will drive a greater need for
implementation services that will support both an increase in our professional
services revenue and an increase in demand for the services provided by our
third-party SIs. Our professional services revenue generates lower gross margins
than our software revenue and accounted for 40% of our total revenue for both
the three months ended November 30, 2021 and 2020.

revenue cost


Our cost of revenue has fixed and variable components and depends on the type of
revenue earned in each period. Cost of revenue includes amortization expense
associated with acquired technology and other operating expenses directly
related to the cost of products and services, including depreciation expense. We
expect our cost of revenue to increase in absolute dollars as we continue to
hire personnel, to provide hosting services, technical support and consulting
services to our growing customer base.

Subscription cost


Our cost of subscription revenue is primarily comprised of cloud infrastructure
costs, royalty fees paid to third-parties, amortization of acquired technology
intangible assets and personnel-related expenses for our SaaS operations teams,
including salaries and other direct personnel-related costs.

License cost

Our cost of licensing revenue primarily consists of royalty fees paid to third parties and amortization of acquired intangible technology assets.

Maintenance and support cost


Our cost of maintenance and support revenue is comprised of personnel-related
expenses for our technical support team, including salaries and other direct
personnel-related costs. While we expect the cost of maintenance and support
revenue will increase in the near term, it may decrease in the future if we
successfully transition our term and perpetual license customers to our SaaS
solutions.

Cost of Professional Services

Our professional services cost income primarily consists of personnel related expenses for professional service personnel and contractors, including salaries and other direct employee related costs.

                                       22

--------------------------------------------------------------------------------

Gross margins


Gross margins have been and will continue to be affected by a variety of
factors, including the average sales price of our products and services, DWP
volume growth, the mix of revenue between SaaS solutions, software licenses,
maintenance and support and professional services and changes in cloud
infrastructure and personnel costs. As we transition our product mix to include
more SaaS customers, we expect our overall gross margin percentages to decrease
in the near-term due to our SaaS gross margin percentages being lower than our
license gross margin percentages. Over time, we expect gross margins to increase
as we onboard additional customers, achieve growth within existing customers and
realize greater economies of scale.

Operating expenses

research and development


Our research and development expenses consist primarily of costs incurred for
personnel-related expenses for our technical staff, including salaries and other
direct personnel-related costs. Additional expenses include consulting and
professional fees for third-party development resources. We expect our research
and development expenses to increase in absolute dollars for the foreseeable
future as we continue to dedicate substantial resources to develop, improve and
expand the functionality of our solutions. Costs incurred in the preliminary
design and development stages of our SaaS projects are generally expensed as
incurred in accordance with FASB ASC 350-40, Internal-Use Software. Once a SaaS
project has reached the application development stage, certain internal,
external, direct and indirect costs may be subject to capitalization. Generally,
costs are capitalized until the technology is available for its intended use.
Subsequent costs incurred for the development of future upgrades and
enhancements, which are expected to result in additional functionality, follow
the same protocol for capitalization.

Sales and marketing expenses


Our sales and marketing expenses consist primarily of personnel related costs
for our sales and marketing functions, including salaries and other direct
personnel-related costs. Additional expenses include marketing program costs,
including costs related to our Formation (held annually, when possible)
conference and amortization of acquired intangible assets related to customer
relationships. While we expect our sales and marketing expenses to increase on
an absolute dollar basis in the near term as we continue to increase investments
to support our growth, we also anticipate that sales and marketing expenses will
remain relatively consistent as a percentage of total revenue.

General and administrative expenses


Our general and administrative expenses consist primarily of personnel-related
costs for our executive, finance, human resources, information technology and
legal functions, including salaries and other direct personnel-related costs.
Additional expenses include professional fees, amortization of acquired
trademarks, tradenames and domain name intangible assets, insurance and
acquisition-related costs. While we expect other general and administrative
expense to increase on an absolute dollar basis in the near term as we continue
to increase investments to support our growth and as a result of our becoming a
public company, we also anticipate that general and administrative expenses will
decrease as a percentage of total revenue over time.

Change in the fair value of the contingent consideration


Certain of our acquisitions have included a component of contingent
consideration to be paid to the sellers if certain performance levels are
achieved by the acquired entity over a specific period of time. Contingent
consideration was initially recorded at fair value on the acquisition date
based, in part, on a range of estimated probabilities for achievement of these
performance levels. The fair value was periodically adjusted as actual
performance levels become known and updates were made to the estimated
probabilities for future performance. A gain or loss was recognized in the
income statement for fair value adjustments. As a result of additional
acquisitions, it is possible that we will incur gains or losses in the future
due to the change in the fair value of contingent consideration.

Other income (expenses), net


Other income (expense), net consists primarily of foreign exchange gains and
losses resulting from fluctuations in foreign exchange rates on receivables and
payables denominated in currencies other than the U.S. dollar.

                                       23

--------------------------------------------------------------------------------

Interest expense, net


Interest expense, net comprises interest expense accrued or paid on our
indebtedness, net of interest income earned on our cash balances. We expect
interest income (expense) to vary each reporting period depending on the amount
of outstanding indebtedness, cash, cash equivalents, and investment balances,
and prevailing interest rates.

Income tax provision


We are subject to taxes in the United States as well as other tax jurisdictions
or countries in which we conduct business. Earnings from our non-U.S. activities
are subject to local country income tax and may be subject to current U.S.
income tax. Due to cumulative losses, we maintain a valuation allowance against
our deferred tax assets, except in certain foreign subsidiaries that generate
income. We consider all available evidence, both positive and negative, in
assessing the extent to which a valuation allowance should be applied against
our deferred tax assets. Realization of our U.S. deferred tax assets depends
upon future earnings, the timing and amount of which are uncertain.

Operations results

Comparison of the three months ended November 30, 2021 And November 30, 2020


The following table sets forth our consolidated results of operations for the
periods indicated, expressed in total dollar terms and as a percentage of total
revenue:



                                                           Three Months Ended November 30,
(dollars in thousands)                                  2021                              2020
                                                             Percent of                       Percent of
                                                           Total Revenue                    Total Revenue
Revenue
Subscription                               $   35,705                  48 %   $  27,909                 47 %
License                                         1,912                   3         1,350                  2
Maintenance and support                         6,277                   9         6,190                 11
Professional services                          29,527                  40        23,457                 40
Total revenue                                  73,421                 100        58,906                100
Cost of revenue
Subscription                                   14,585                  20        10,084                 17
License                                           244                   -           388                  1
Maintenance and support                           880                   1           842                  1
Professional services                          15,242                  21        13,716                 23
Total cost of revenue                          30,951                  42        25,030                 42
Gross margins                                  42,470                  58        33,876                 58
Operating expenses
Research and development                       12,321                  17        11,104                 19
Sales and marketing                            13,167                  18        12,597                 21
General and administrative                     15,035                  20        14,418                 25
Change in fair value of contingent
consideration                                      67                   -             3                  -
Total operating expense                        40,590                  55        38,122                 65
Income (loss) from operations                   1,880                   3        (4,246 )               (7 )
Other expense, net                               (696 )                (1 )         (47 )                -
Interest expense, net                            (118 )                 -           (43 )                -
Income (loss) before income taxes               1,066                  (2 )      (4,336 )               (7 )
Provision for income taxes                        374                   1           315                  -
Net income (loss)                          $      692                   1 %   $  (4,651 )               (7 )%




                                       24
--------------------------------------------------------------------------------

The following table shows compensation expenses based on the shares included in our results of operations for the periods indicated:


                                               Three Months Ended November 

30,

                                                2021                     

2020

Cost of subscription revenue              $             42         $        

80

Cost of maintenance and support revenue                  8                        7
Cost of services revenue                              (100 )                    610
Research and development                               229                      511
Sales and marketing                                    (60 )                    899
General and administrative                           1,093                      985

Total Equity-Based Compensation Expense $1,212

  3,092




Revenue

Subscription

Subscription revenue increased $7.8 million, or 28%, during the three months
ended November 30, 2021 versus the three months ended November 30, 2020, due to
a combination of sales to new customers and increased revenue generated from
existing customers, which includes sales of new services and contractual growth.

license


License revenue increased $0.6 million, or 42%, during the three months ended
November 30, 2021 versus the three months ended November 30, 2020 primarily due
to a line of business expansion for an existing on-premise customer, partially
offset by the timing of multi-year licenses.

Maintenance and support


Maintenance and support revenue increased 1%, during the three months ended
November 30, 2021 versus the three months ended November 30, 2020 primarily due
to renewal term increases of maintenance and support fees charged to customers
during the period.

Professional services

Professional services revenue increased $6.1 million, or 26%, during the three
months ended November 30, 2021 versus the three months ended November 30, 2020
primarily due to growth of our existing software customer base and the launch of
several large implementation projects, partially offset by a decrease from
completed project implementations.

revenue cost

Increased cost of revenue $5.9 millionor 24% in the three months ended
November 30, 2021 Compared to the three months ending November 30, 2020.

Subscription cost


Cost of subscription revenue increased $4.5 million, or 45%, during the three
months ended November 30, 2021 versus the three months ended November 30, 2020
primarily due to an increase in SaaS customers, and is comprised of a $2.4
million increase in hosting costs due to usage increase, a $1.1 million increase
in payroll and related costs including bonuses as we added employees to build
out the SaaS operations team, a $0.5 million increase in computer hardware and
software costs, a $0.2 million increase in professional services, and a $0.2
million increase in contingent labor.

License cost


Cost of license revenue decreased 37% in the three months ended November 30,
2021 versus the three months ended November 30, 2020 primarily due to a decrease
in royalties paid to third parties.

                                       25

--------------------------------------------------------------------------------

Maintenance and support cost


Cost of maintenance and support revenue increased 5%, in the three months ended
November 30, 2021 versus the three months ended November 30, 2020 primarily due
to an increase in personnel-related costs required to support our term and
perpetual license customers.

Cost of professional services


Cost of professional services revenue increased $1.5 million, or 11%, in the
three months ended November 30, 2021 versus the three months ended November 30,
2020. Payroll and related costs increased $1.7 million, driven by increased
headcount and contingent labor increased $0.5 million. These increases were
offset by a $0.7 million decrease in share-based compensation expense.

Gross margins


Gross margins increased $8.6 million, or 25%, in the three months ended November
30, 2021 versus the three months ended November 30, 2020, primarily due to a
$3.3 million increase in subscription gross margin, a $4.5 million increase in
professional services gross margin, a $0.7 million increase in license gross
margin, and a nominal increase in maintenance and support gross margin. The
increase in subscription gross margins was driven by strong growth in
subscription revenue, as well as cost growth below expected levels primarily
based on the timing of new hires.

Our gross margin percentage was flat at 58% for both the three months ended
November 30, 2020 and November 30, 2021. However, there were shifts within gross
margin. The subscription gross margin percentage decreased, professional
services gross margin percentage and license gross margin percentage increased
and maintenance and support gross margin percentage remained static.

Operating expenses

Research and development expenditures


Research and development expense increased $1.2 million, or 11%, during the
three months ended November 30, 2021 versus the three months ended November 30,
2020, primarily due to a $1.0 million increase in payroll costs and bonuses from
increased headcount, a $0.2 million increase in the amortization of capitalized
software costs, a $0.1 million increase in computer hardware and software costs,
and a $0.1 million increase in hosting costs. These increases were partially
offset by a $0.3 million decrease in share-based compensation.

Sales and Marketing Expenses


Sales and marketing expense increased $0.6 million, or 5%, during the three
months ended November 30, 2021 versus the three months ended November 30, 2020,
primarily due to a $0.9 million increase in payroll costs and bonuses from
increased headcount, a $0.2 million increase in recruiting, a $0.2 million
increase in travel and entertainment, a $0.1 million increase in commission
expense, and a $0.1 million increase in training, partially offset by a $0.9
million decrease in share-based compensation, and a $0.2 million decrease in
marketing programs.

General and administrative expenses


General and administrative expense increased $0.6 million, or 4%, in the three
months ended November 30, 2021 versus the three months ended November 30, 2020,
primarily due to a $0.8 million increase in bad debt expense, a $0.5 million
increase in payroll costs and bonuses from increased headcount, a $0.2 million
increase in computer hardware and software costs, a $0.1 million increase in
share-based compensation, a $0.1 million increase in insurance, and a $0.1
million increase in contingent labor. These increases were partially offset by a
$1.2 million decrease in professional services expense primarily due to costs
associated with our secondary follow-on offering in the first quarter of fiscal
2021 and a $0.2 million decrease in facilities.

Change in the fair value of the contingent consideration


Change in fair value of contingent consideration is due to changes in estimated
contingent consideration as well as present value calculations related to the
contingent consideration estimates of the acquisition of Outline Systems LLC, a
provider of P&C distribution channel management software and longstanding member
of our partner ecosystem (now Duck Creek Distribution Management). The final
contingent consideration has been paid in full as of November 30, 2021.

Other income (expenses), net


Other income (expense), net increased $0.6 million during the three months ended
November 30, 2021 as compared to the three months ended November 30, 2020,
primarily due to fluctuations in foreign exchange rates on receivables and
payables denominated in currencies other than the U.S. dollar, partially offset
by a $0.1 million gain on the derecognition of a lease liability.

                                       26

--------------------------------------------------------------------------------

Interest expense, net


Interest expense, net increased slightly in the three months ended November 30,
2021 versus the three months ended November 30, 2020. Interest expense consists
of fees paid to maintain the revolving credit facility, though there were no
outstanding borrowings in either period. These expenses were partially offset by
interest income received from cash, cash equivalents, and short-term
investments.



Provision for Income Taxes

Provision for income taxes increased 19% in the three months ended November 30,
2021 versus the three months ended November 30, 2020 primarily due to the impact
of goodwill amortized for tax not for book, impact of higher profits in foreign
subsidiaries and state taxes.

liquidity and capital


To date, we have financed our operations primarily through cash provided by
operating activities, our revolving credit facility, and, most recently, through
net proceeds received from our IPO. As of November 30, 2021, we had $251.7
million in cash and cash equivalents, $96.0 million of short-term investments,
no outstanding borrowings under our revolving credit facility and $0.9 million
of outstanding letters of credit. We also had $44.1 million of additional
principal availability under our revolving credit facility. We believe that our
existing cash and cash equivalents and short-term investments, together with
cash provided by operating activities and amounts available under our revolving
credit facility, will be sufficient to meet our operating working capital and
capital expenditure requirements over at least the next twelve months. Our
future cash requirements will depend on many factors, including our rate of
revenue growth, the expansion of our sales and marketing activities, the timing
and extent of our spending to support our research and development efforts,
investments in cloud infrastructure and operating costs, and expansion into
other markets. At any given time, we may be evaluating one or more potential
investments in, or acquisitions of, businesses or technologies, which could
require us to seek additional equity or debt financing. Additional sources of
liquidity and capital resources, including equity or debt financing, may not be
available on terms favorable to us or at all.

As of November 30, 2021, $116.3 million of cash was held by our foreign
subsidiaries. Of this cash balance, $100.0 million is the result of repaying an
intercompany loan during the three months ended November 30, 2021 and is held in
a U.S. dollar-based bank account. We currently do not anticipate a need to
repatriate these funds to finance our U.S. operations; however, we may utilize
all or part of the $100.0 million to finance future acquisitions.

Summary of cash flows for the three months ended November 30, 2021 And November 30, 2020

Below is a summary of our cash flows from operating, investing and financing activities for the indicated periods:



                                                         Three Months Ended
                                                            November 30,
($ in thousands)                                         2021          2020
Net cash used in operating activities                  $ (24,603 )   $ (22,172 )
Net cash provided by (used in) investing activities       95,061          (724 )
Net cash (used in) financing activities                   (4,376 )      (5,822 )
Net increase (decrease) in cash and cash equivalents      66,082       (28,718 )
Cash and cash equivalents - beginning of period          185,657       389,878
Cash and cash equivalents - end of period              $ 251,739     $ 361,160




Operating Activities

We used $24.6 million of cash from operating activities during the three months
ended November 30, 2021, resulting from our net income, after excluding the
impact of non-cash charges, of $7.7 million and $32.3 million of cash used in
working capital activities. Cash used in working capital activities during the
three months ended November 30, 2021 was primarily due to annual bonus payments
of $18.8 million, an increase in accounts receivable and unbilled revenue of
$7.7 million, an increase in prepaid expenses of $2.5 million, a payment of
contingent earnout liability in excess of its fair value at acquisition of $1.7
million, and a decrease in deferred revenue of $3.7 million.

We used $22.2 million of cash from operating activities during the three months
ended November 30, 2020, resulting from our net income, after excluding the
impact of non-cash charges, of $3.7 million and $25.9 million of cash used in
working capital activities. Cash used in working capital activities during the
three months ended November 30, 2020 was primarily due to annual bonus payments
of $18.2 million and Phantom unit settlement payments of $6.7 million.

                                       27

--------------------------------------------------------------------------------

Non-cash charges in all periods include depreciation and amortization, stock-based compensation expense, deferred taxes, and the change in the fair value of potential profit obligations.

investment activities

Net cash used in investing activities consists of the purchase of property and equipment, capitalization of costs of internal use programmes, and investments in short-term government-backed securities.


We had cash provided by investing activities of $95.1 million during the three
months ended November 30, 2021 compared to cash used in investing activities of
$0.7 million in the three months ended November 30, 2020. During the three
months ended November 30, 2021, we had maturities of short-term investments of
$95.9 million. The Company had not yet made these investments in the prior year.

In the three months ended November 30, 2021, we spent approximately $0.5 million
on purchases of property, plant and equipment, compared to $0.2 million during
the three months ended November 30, 2020. Additionally, our capitalized costs
for internal use software were $0.2 million less during the three months ended
November 30, 2021 compared to the prior year period.

financing activities


We used $4.4 million in financing activities during the three months ended
November 30, 2021, compared to cash used in financing activities of $5.8 million
during the three months ended November 30, 2020. Cash used in financing
activities during the three months ended November 30, 2021 primarily related to
a $3.9 million contingent earnout liability payment, as compared to a $1.9
million contingent earnout liability payment in the prior year. During the three
months ended November 30, 2020, the Company made $3.7 million in payments of
deferred IPO costs and a $0.2 million payment for deferred Class E units
offering costs.

Other financial data and key metrics

Non-GAAP Financial Actions


We report our financial results in accordance with accounting principles
generally accepted in the United States ("GAAP"); however, management believes
evaluating the Company's ongoing operating results may be enhanced if investors
have additional non-GAAP financial measures. Specifically, management reviews
Adjusted EBITDA, Free Cash Flow, Non-GAAP Gross Margin, Non-GAAP Income from
Operations and Non-GAAP Net Income (Loss), each of which is a non-GAAP financial
measure, to manage our business, make planning decisions, evaluate our
performance and allocate resources and, for the reasons described below,
considers them to be effective indicators, for both management and investors, of
our financial performance over time.

We believe that Adjusted EBITDA, Free Cash Flow, Non-GAAP Gross Margin, Non-GAAP
Income from Operations and Non-GAAP Net Income (Loss) help investors and
analysts in comparing our results across reporting periods on a consistent basis
by excluding items that we do not believe are indicative of our core operating
performance. These non-GAAP financial measures have limitations as analytical
tools and should not be considered in isolation from, or as a substitute for,
the analysis of other GAAP financial measures, including net income and cash
flows from operating activities. For example, with respect to Adjusted EBITDA,
some of these limitations include:

• It does not reflect our cash outlays, or the future requirements of

capital expenditures or contractual obligations;

• It does not reflect changes or monetary requirements of our business

capital needs

• Does not reflect interest expense, or cash requirements for it

Service interest or principal payments on our indebtedness;

• Does not reflect income tax expenses or cash requirements for payment

our taxes and

• Although depreciation and amortization are non-cash charges, assets

that are consumed and consumed frequently should be replaced in

Future and adjusted EBITDA does not reflect any cash requirements for it

alternatives.



These non-GAAP financial measures are not universally consistent calculations,
limiting their usefulness as comparative measures. Other companies may calculate
similarly titled financial measures differently than we do or may not calculate
them at all. Additionally, these non-GAAP financial measures are not
measurements of financial performance or liquidity under GAAP. In order to
facilitate a clear understanding of our consolidated historical operating
results, you should examine our non-GAAP financial measures in conjunction with
our historical combined financial statements and notes thereto included
elsewhere in this Quarterly Report.

                                       28

--------------------------------------------------------------------------------

Non-GAAP financial measures and the key metrics we use to run our business are described below:


Adjusted EBITDA. We define Adjusted EBITDA as net loss before interest expense,
net; other income (expense), net; provision for income taxes; depreciation of
property and equipment; amortization of intangible assets; share-based
compensation expense; and the change in fair value of contingent consideration.
We believe Adjusted EBITDA provides investors and other users of our financial
information consistency and comparability with our past financial performance
and facilitates period-to-period comparisons of operations. Adjusted EBITDA was
$7.8 million and $3.6 million for the three months ended November 30, 2021 and
2020, respectively. A reconciliation of Adjusted EBITDA to net loss, the most
directly comparable GAAP financial measure, is presented below for the periods
indicated.



                                                             Three Months Ended November 30,
($ in thousands)                                             2021                     2020
GAAP Net Income (Loss)                                  $           692         $          (4,651 )
Provision for income taxes                                          374                       315
Other expense, net                                                  696                        47
Interest expense, net                                               118                        43
Depreciation of property and equipment                              704                       787
Amortization of intangible assets                                 3,929                     3,994
Share-based compensation expense                                  1,212                     3,092
Change in fair value of contingent earnout liability                 67                         3
Adjusted EBITDA                                         $         7,792         $           3,630
Adjusted EBITDA as a percent of total revenue                        11 %                       6 %




Free Cash Flow. We define Free Cash Flow as net cash provided by operating
activities, less purchases of property and equipment and capitalized
internal-use software. We consider Free Cash Flow to be an important measure in
facilitating period-to-period comparisons of liquidity. We use Free Cash Flow in
conjunction with traditional GAAP measures as part of our overall assessment of
liquidity. Free Cash Flow was ($25.5) million and ($22.9) million for the three
months ended November 30, 2021 and November 30, 2020, respectively. A
reconciliation of Free Cash Flow to net cash provided by (used in) operating
activities, the most directly comparable GAAP financial measure, is presented
below for the periods indicated.



                                          Three Months Ended
                                             November 30,
($ in thousands)                          2021          2020

Net cash used in operating activities Dollars (24603) $ (22172)
Procurement of property and equipment (540) (188) Capitalized internal use software

            (366 )        (536 )
Free Cash Flow                          $ (25,509 )   $ (22,896 )




Non-GAAP Gross Margin. We define Non-GAAP Gross Margin as GAAP gross margin
before the portion of share-based compensation expense; amortization of
intangible assets; and amortization of capitalized internal-use software that is
included in cost of revenue. We believe Non-GAAP Gross Margin provides investors
and other users of our financial information consistency and comparability with
our past financial performance and facilitates period-to-period comparisons of
gross margin. Non-GAAP Gross Margin was $44.1 million and $36.3 million for the
three months ended November 30, 2021 and 2020, respectively. A reconciliation of
Non-GAAP Gross Margin to gross margin, the most directly comparable GAAP
financial measure, is presented below for the periods indicated.



                                                           Three Months Ended November 30,
($ in thousands)                                             2021                  2020
GAAP Gross Margin                                       $        42,470       $        33,876
Share-based compensation expense                                    (50 )                 697
Amortization of intangible assets                                 1,121                 1,186
Amortization of capitalized internal-use software                   561                   498
Non-GAAP Gross Margin                                   $        44,102       $        36,257




                                       29
--------------------------------------------------------------------------------




Non-GAAP Income from Operations. We define Non-GAAP Income from Operations as
GAAP loss from operations before share-based compensation expense; amortization
of intangible assets; and the change in fair value of contingent consideration.
We believe Non-GAAP Income from Operations provides investors and other users of
our financial information consistency and comparability with our past financial
performance and facilitates period-to-period comparisons of operations. Non-GAAP
Income from Operations was $7.1 million and $2.8 million for the three months
ended November 30, 2021 and 2020, respectively. A reconciliation of Non-GAAP
Income from Operations to loss from operations, the most directly comparable
GAAP financial measure, is presented below for the periods indicated.



                                                             Three Months Ended November 30,
($ in thousands)                                             2021                     2020
GAAP Income (Loss) from Operations                      $         1,880         $          (4,246 )
Share-based compensation expense                                  1,212                     3,092
Amortization of intangible assets                                 3,929                     3,994
Change in fair value of contingent earnout liability                 67                         3
Non-GAAP Income from Operations                         $         7,088         $           2,843




Non-GAAP Net Income (Loss). We define Non-GAAP Net Income as GAAP net loss
before share-based compensation expense; amortization of intangible assets; and
change in fair value of contingent earnout liability. We believe Non-GAAP Net
Income provides investors and other users of our financial information
consistency and comparability with our past financial performance and
facilitates period-to-period comparisons of operations. Non-GAAP Net Income was
$4.8 million and $2.1 million for the three months ended November 30, 2021 and
2020, respectively. A reconciliation of Non-GAAP Net Income to net loss, the
most directly comparable GAAP financial measure, is presented below for the
periods indicated.



                                                              Three Months Ended
                                                                 November 30,
($ in thousands)                                    2021           Per Share          2020           Per Share
GAAP Net Income (Loss) (1)                      $         692     $      0.01     $      (4,651 )   $     (0.04 )
Add: GAAP tax provision                                   374                               315
GAAP pre-tax income (loss)                              1,066                            (4,336 )
Share-based compensation expense                        1,212                             3,092
Amortization of intangible assets                       3,929                             3,994
Change in fair value of contingent earnout
liability                                                  67                                 3
Non-GAAP pre-tax income                                 6,274                             2,753
Non-GAAP tax provision applied at a 24% tax
rate (1)                                                1,506                               661
Non-GAAP Net Income (1)                         $       4,768     $      0.04     $       2,092     $      0.02

Shares used in computing Non-GAAP income per
share

amounts:

GAAP weighted-average shares - basic              132,038,274               

130788359

GAAP dilutive shares                                2,173,936                            -

Non-GAAP diluted shares are excluded from GAAP

  loss per share calculation (using the
treasury stock method)                                      -               

3,227,281

Non-GAAP weighted-average shares - diluted        134,212,210                       134,015,640



(1) GAAP tax provision is mainly related to state taxes and income taxes

       in profitable foreign jurisdictions.  We maintain a full valuation
       allowance against our deferred tax assets in the U.S.  For purposes of
       determining our Non-GAAP Net Income, we have applied a tax rate of 24%
       which represents our estimated effective tax rate.


Net Dollar Retention Rate. We calculate SaaS Net Dollar Retention Rate by
annualizing SaaS revenue recorded in the last month of the measurement period
for those revenue-generating customers in place throughout the entire
measurement period (the latest twelve-month period). We divide the result by
annualized SaaS revenue from the month that is immediately prior to the
beginning of the measurement period, for all revenue-generating customers in
place at the beginning of the measurement period. Our SaaS Net Dollar Retention
Rate was 122% and 118% as of November 30, 2021 and 2020, respectively. Our
calculation excludes one existing contract for a service no longer offered on a
standalone basis by the Company. We believe SaaS Net Dollar Retention Rate is an
important metric for the Company because, in addition to providing a measure of
retention, it indicates our ability to grow revenue within existing customer
accounts. SaaS Net Dollar Retention Rate is included in a set of metrics that we
calculate quarterly to review with management as well as periodically with
members of our board of directors.

                                       30

--------------------------------------------------------------------------------


SaaS Annual Recurring Revenue ("SaaS ARR"). We calculate SaaS ARR by annualizing
the recurring subscription revenue recognized in the last month of the
measurement period (the latest twelve-month period). Our SaaS ARR was $145.5
million and $103.9 million as of November 30, 2021 and 2020, respectively. Our
calculation excludes one existing contract for a service no longer offered on a
standalone basis by the Company. We believe SaaS ARR provides important
information about our ability to acquire new subscription SaaS customers and to
maintain and expand our relationship with existing subscription SaaS customers.
SaaS ARR is included in a set of metrics that we calculate quarterly to review
with management as well as periodically with members of our board of directors.



Indebtedness

On October 4, 2016, we entered into a credit agreement with a group of lenders
for a revolving credit facility with a maximum borrowing capacity of
$30.0 million that was originally scheduled to mature on October 4, 2019. On
October 2, 2019, we amended certain of the financial covenants and extended our
credit agreement for two years to a maturity date of October 2, 2021. On October
22, 2021, the Company executed an amended and restated credit agreement for its
revolving credit facility with a five-year term, increasing its maximum
borrowing capacity from $30.0 million to $45.0 million.

Our revolving credit facility is guaranteed by the Company and certain of its
domestic subsidiaries and secured by substantially all of our tangible and
intangible assets. Interest accrues on our revolving credit facility at a
variable rate based upon the type of borrowing made by us. Loans under our
revolving credit facility bear interest at a rate of LIBOR (as administered by
ICE Benchmark Administration) plus an applicable margin, or incur interest at
the higher of: (i) the Prime Rate, (2) the Fed Funds Rate plus 0.5%, or
(3) LIBOR plus 1.0%, plus an applicable margin. The applicable margin ranges
from 1.0% to 2.0% depending on the interest rate basis and type of borrowing
elected (eurocurrency rate loan, base rate loan, swing rate loan or letter of
credit). In addition to interest on our revolving credit facility, we pay a
commitment fee of 0.5% per annum on the unused portion of our revolving credit
facility, as well as customary letter of credit fees. Repayment of any amounts
borrowed are not required until maturity of our revolving credit facility,
however we may repay any amounts borrowed at any time, without premium or
penalty.

The Company is required to meet certain financial and nonfinancial covenants
under the terms of the revolving credit facility. These covenants include limits
on the creation of liens, limits on making certain investments, limits on
incurring additional indebtedness, and maintaining a leverage ratio at or below
a maximum level. The Company was in compliance with these financial and
nonfinancial covenants as of November 30, 2021.

We incurred $0.7 million of costs directly related to obtaining our revolving
credit facility which have been recorded as deferred financing fees and are
amortized to legal expense on a straight-line basis over the term of our
revolving credit facility. During fiscal 2017, we executed an irrevocable
standby letter of credit totaling $0.8 million against our revolving credit
facility in lieu of a cash security deposit for one of our office leases. Two
additional irrevocable standby letters of credit were executed during fiscal
2019 for $0.2 million and $0.1 million, respectively, against our revolving
credit facility in lieu of cash deposits for two of our office leases. In fiscal
2020, the $0.2 million letter of credit was reduced by $0.1 million. Apart from
the letters of credit, we did not have any borrowings outstanding on our
revolving credit facility as of November 30, 2021 and November 30, 2020.

Balance Sheet Arrangements


We did not have any off-balance sheet arrangements, as defined in Regulation
S-K, Item 303(a)(4)(ii) promulgated by the SEC under the Securities Act, in the
three months ended November 30, 2021 and 2020, respectively.

Significant accounting policies and estimates


The process of preparing our financial statements in conformity with U.S. GAAP
requires the use of estimates and judgments that affect the reported amounts of
assets, liabilities, revenue and expenses. These estimates and judgments are
based on historical experience, future expectations and other factors and
assumptions we believe to be reasonable under the circumstances. The most
significant estimates and judgments are reviewed on an ongoing basis and are
revised when necessary. Actual amounts may differ from these estimates and
judgments. A summary of our significant accounting policies is contained in Note
2 of our unaudited consolidated financial statements included elsewhere in this
Quarterly Report on Form 10-Q. There have been no material changes in our
critical accounting policies from those disclosed in our Annual Report on Form
10-K for the year ended August 31, 2021 filed with the SEC on October 29, 2021.

Modern Accounting Statements


A summary of recent accounting pronouncements and our assessment of any expected
impact of these pronouncements if known is included in Note 2 of our unaudited
consolidated financial statements included elsewhere in this Quarterly Report on
Form 10-Q.

                                       31

————————————————– ——————————-

© Edgar Online, Source glimpses

.

About the author

publishing team