Acquisitions

The Company’s acquisitions during fiscal years 2018 and 2017 were all accounted for as business combinations. U.S. GAAP requires the Company to recognize separately from goodwill the assets acquired and the liabilities assumed at the acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair value of the assets acquired and the liabilities assumed. The Company utilized the discounted cash flow methodology and the profit allocation methodology under the income approach to estimate the fair values of the intangible assets. The acquired intangible assets are amortized over their estimated useful lives. The Company used the cost build-up approach to estimate the fair value of deferred revenue by estimating the costs related to fulfilling the obligation plus an additional markup for an assumed operating margin to reflect the profit a third party would expect to make on the costs incurred. These fair value measurements were based on significant inputs that were not observable in the market and thus represents a Level 3 measurement. The valuation models were based on estimates of future operating projections of the acquired business and rights to sell new products containing the acquired technology as well as judgments on the discount rates used and other variables. The Company developed forecasts based on a number of factors including future revenue and operating cost projections, a discount rate that is representative of the weighted average cost of capital, in addition to royalty and long-term sustainable growth rates based on market analysis.

Fiscal Year 2018

Cyence Acquisition

On November 1, 2017, the Company completed its acquisition of Cyence, Inc. (“Cyence”) for an aggregate consideration of approximately $260.3 million, including approximately 146.6 million in cash, and equity consideration valued at approximately $113.7 million of newly issued Guidewire common stock and options, net of certain adjustments including a net working capital adjustment (the “Cyence Acquisition”). Through the acquisition, the Company gained a cloud-based data listening and risk analytics technology offering for the property and casualty insurance (“P&C”) industry which enables underwriting new and evolving risks, such as cyber risk. The results of Cyence’s operations have been included in the Company’s results of operations since November 1, 2017, the date of acquisition.

As part of the acquisition, the Company assumed certain Cyence compensation agreements, including RSAs and stock options with an estimated fair value of $37.6 million. Based on the service period related to the period prior to the acquisition date, $18.2 million was allocated to the purchase price, and $19.4 million relating to post-acquisition services will be recorded as operating expenses over the remaining requisite service periods. RSAs were valued based on the November 1, 2017 grant date value, and the estimated fair value of the stock options assumed by the Company was determined using the Black-Scholes option pricing model.

The adjustments reflected herein to determine the purchase consideration are preliminary and may change as the Company finalizes these adjustments during the measurement period based on new information as it becomes available. The measurement period will end no later than October 31, 2018. The preliminary purchase consideration is as follows (in thousands):




Cash consideration paid at close	$	146,651
Equity issued to shareholders	102,493
Issuance of replacement awards	11,205
Total preliminary purchase consideration	$	260,349

In conjunction with the preliminary purchase price allocation, the Company determined that Cyence’s separately identifiable intangible assets were developed technology, customer contracts and related relationships, order backlog, and trade names. The valuation method used was in accordance with the Company’s policy, practice, and experience as described above. The valuation models were based on estimates of future operating projections of Cyence and rights to sell new products containing the acquired technology as well as judgments on the discount rates used and other variables. The Company developed forecasts based on a number of factors including future revenue and operating cost projections, a discount rate that is representative of the weighted average cost of capital, in addition to royalty and long-term sustainable growth rates based on a market analysis. The Company amortizes the acquired intangibles over their estimated useful lives as set forth in the table below.

The allocation of purchase price is preliminary pending the final valuation of intangible and tangible assets acquired and liabilities assumed, certain acquired deferred tax assets and completion of certain statutory tax filing requirements and is therefore subject to potential future measurement period adjustments. The preliminary allocation of the purchase consideration is as follows:



	Preliminary Purchase Price Allocation		Estimated Useful Lives
	(in thousands)		(in years)
Acquired assets, net of assumed liabilities	$	9,620
Developed technology	28,400		5
Customer contracts and related relationships	17,700		5
Order backlog	3,200		2
Trademarks	2,500		7
Goodwill	198,929
Total preliminary purchase consideration	$	260,349

The goodwill of $198.9 million arising from the Cyence Acquisition consists largely of the acquired workforce and the opportunity to expand the Company’s customer base. The goodwill recognized is not expected to be deductible for income tax purposes.

Cyence’s post-acquisition results of operations were included in the Company’s results of operations. Since the acquisition date of November 1, 2017 through July 31, 2018, total revenue and net loss of Cyence was $11.0 million and $20.3 million, respectively. The Company incurred $5.2 million of total acquisition-related costs that were recognized in general and administrative expenses in fiscal year 2018.

Unaudited Pro Forma Financial Information

The following unaudited pro forma financial information presents the combined results of operations for the Company and Cyence for the fiscal years ended July 31, 2018 and 2017, after giving effect to the Cyence Acquisition as if it had occurred on August 1, 2016. The unaudited pro forma financial information includes adjustments to give effect to pro forma events that are directly attributable to the business combination and factually supportable. The unaudited pro forma financial information presented includes the business combination accounting effects resulting from the acquisition, including adjustments for the amortization of intangible assets, stock-based compensation, deferred revenue, and transaction costs on August 1, 2016 with a corresponding reduction of these amounts in the period originally recognized.

The unaudited pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the results of operations that would have been realized if the Cyence acquisition had been completed on August 1, 2016, nor does it purport to project the results of operations of the combined company in future periods. The unaudited pro forma financial information does not give effect to any anticipated integration costs related to the acquired company. Consequently, actual results will differ from the unaudited pro forma financial information.

The unaudited pro forma financial information is as follows (in thousands):



	Fiscal years ended July 31,
	2018			2017
Pro forma revenue	$	665,999		$	524,102
Pro forma net loss	$	(22,618	)	$	(9,891	)
Pro forma net loss per share -- basic and diluted	$	(0.29	)	$	(0.13	)

The pro forma revenue and net loss reflects material, nonrecurring adjustments, such as transaction, transition and integration-related charges (including legal, accounting and other professional fees, and retention bonuses) that resulted from the acquisition.

Fiscal Year 2017

ISCS Acquisition

On February 16, 2017, the Company completed its acquisition of ISCS, Inc., a privately-held company that provides a cloud-based, all-in-one system for policy administration, billing and claims management to P&C insurers (“ISCS Acquisition”). The purchase price of the ISCS Acquisition was $160 million, subject to certain preliminary adjustments including a net working capital adjustment, which resulted in cash consideration paid of $154.9 million. The fair value of all assets acquired and liabilities assumed was finalized in the fiscal quarter ended April 30, 2018. A portion of the consideration has been placed into an escrow account as partial security to satisfy any potential claims, including the indemnification liability for state sales taxes. The ISCS Acquisition is intended to enhance the Company's ability to serve those P&C insurers that prefer a cloud-based, all-in-one platform that offers policy, billing, and claims management functionality. Total acquisition costs of $1.1 million were expensed as incurred, and recorded as general and administrative expenses in the accompanying consolidated statement of operations in fiscal year 2017. The results of ISCS’ operations have been included in the Company’s results of operations since February 16, 2017, the acquisition date.

In connection with the ISCS Acquisition, the Company recorded an indemnification asset of $1.6 million, which represents the selling security holders’ obligation under the Agreement and Plan of Merger to indemnify the Company for unpaid state sales taxes. The indemnification asset was recognized on the same basis as the corresponding liability, which is based on its estimated fair value as of the date of acquisition.

The ISCS Acquisition was accounted for as a business combination. As part of the purchase price allocation, the Company determined that ISCS’s separately identifiable intangible assets were developed technology, customer contracts and related relationships, and order backlog. The valuation method used was in accordance with the Company’s policy, practice, and experience as described above. The allocation of the purchase consideration was as follows:



	Total Purchase Price Allocation		Estimated Useful Lives
	(in thousands)		(in years)
Acquired assets, net of assumed liabilities	$	4,530
Developed technology	43,300		4
Customer contracts and related relationships	7,000		9
Order backlog	3,500		4
Deferred tax assets	171
Goodwill	96,431
Total preliminary purchase price	$	154,932

The goodwill of $96.4 million arising from the ISCS Acquisition consists largely of the acquired workforce, expected synergies and the opportunity to expand the Company’s customer base. The goodwill recognized is expected to be deductible for income tax purposes.

FirstBest Acquisition

On August 31, 2016, the Company acquired all of the outstanding equity interests of FirstBest Systems, Inc. (the “FirstBest Acquisition”), a privately-held provider of underwriting management systems and related applications for P&C insurers. Total consideration for the FirstBest Acquisition was $37.8 million which included amounts placed into escrow to cover future potential claims. The fair value of all assets acquired and liabilities assumed was finalized in the fiscal quarter ended October 31, 2017. The Company believes that the FirstBest Acquisition will enable the expansion of its insurance platform by providing insurers in the U.S. and Canada writing complex commercial, specialty, and workers’ compensation lines greater support for their risk assessment and decision-making processes. Total acquisition costs of $1.2 million were expensed as incurred and recorded as general and administrative expenses in the accompanying consolidated statement of operations, of which, $0.9 million were expensed as incurred during the year ended July 31, 2017 and $0.3 million were expensed as incurred during the year ended July 31, 2016.

The FirstBest Acquisition was accounted for as a business combination. As part of the purchase price allocation, the Company determined that FirstBest’s separately identifiable intangible assets were developed technology, customer contracts and related relationships, and order backlog. The valuation method used was in accordance with the Company’s policy, practice and experience as described above. The allocation of the purchase consideration was as follows:



	Total Purchase Price Allocation		Estimated Useful Lives
	(in thousands)		(in years)
Acquired assets, net of assumed liabilities	$	2,518
Developed technology	8,000		5
Customer contracts and related relationships	6,500		9
Order backlog	900		3
Deferred tax assets, net	4,406
Goodwill	15,434
Total purchase price	$	37,758

The goodwill of $15.4 million arising from the acquisition consists largely of the acquired workforce, expected synergies and the opportunity to expand the Company’s customer base. The goodwill recognized is not expected to be deductible for income tax purposes.