The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and the notes thereto included elsewhere in this document and the Risk Factors included in Item 1A of Part II of this Quarterly Report on Form 10-Q. All information presented herein is based on our fiscal calendar. Unless otherwise stated, references in this report to particular years or quarters refer to our fiscal years ended in July and the associated quarters of those fiscal years. We do not undertake, and specifically disclaim, any obligation to update any forward-looking statements to reflect the occurrence of events or circumstances after the date of such statements except as required by law.
Overview
We 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 our inception, our mission has been to empower P&C insurance carriers to transform and improve their businesses by replacing their legacy core systems with our software platform.

We derive our revenues from licensing our software applications, providing maintenance support and providing professional services to the extent requested 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 required by a customer, we license our software on a perpetual basis. In addition, certain of our multi-year term licenses provide the customer with the option to purchase 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 or, in certain cases, quarterly for both recurring term license and maintenance fees, and we invoice our perpetual license customers either in full at contract signing or on an installment basis and invoice related maintenance fees annually, in advance. Our focus is to encourage recurring term license arrangements instead of perpetual license arrangements, and we have historically experienced seasonal variations in our revenues as a result of increased customer orders in our second and fourth fiscal quarters and subsequent annual fees.

To extend our technology leadership position in our market, we intend to continue to focus on product innovation through research and development and aggressively pursue new customers and up-sell additional products within our existing customer base. This will require us to make continued investment in our research and development and sales and marketing functions to capitalize on opportunities for growth. We expect research and development, sales and marketing and general and administrative expenses to continue to increase in absolute dollars for the foreseeable future to support this strategy. Research and development and sales and marketing expenses are also expected to increase as a percentage of revenues in future periods as we focus on expanding our technological 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 the mix 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 customer wins 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 and may take longer.
Opportunities, Challenges, & Risks
Since August 2010, our license revenues from new orders and subsequent annual payments have generally been recognized when payment is due from our customers. Historically, and to a lesser extent during fiscal years 2013, 2012 and 2011, our license revenues from existing orders have been recognized under three methods: under the residual method when payment is due and payable from our customers, under the percentage-of-completion method as we complete customer implementations of our software, or under the zero gross margin method as we complete customer implementations of our software. During the three months ended October 31, 2012 and 2011, our license revenues accounted for 33% and 40% of our total revenues, and our recurring term license revenues accounted for 33% and 24% of our total revenues, respectively.
Our maintenance revenues are generally recognized annually over the committed maintenance term. Our maintenance fees are typically priced as a fixed percentage of the associated license fees and generate lower gross margins than our license revenues. Our maintenance revenues accounted for 15% and 14% of our total revenues during the three months ended October 31, 2012 and 2011, respectively.

We charge services fees on a time and materials basis and revenues are typically recognized upon delivery of our services. We derive our services revenues primarily from implementation services performed for our customers, revenues related to reimbursable travel expenses and training fees. Our services revenues generate lower gross margins than our license and maintenance revenues and accounted for 52% and 46% of our total revenues during the three months ended October 31, 2012 and 2011, respectively.
We enter into multi-year renewable contracts to license our software and provide technical support and unspecified upgrades to our software as they become available. Regardless of contract length, we typically invoice our customers for annual and, in certain cases, quarterly amounts at the contract signing and at each anniversary date. Our deferred revenues consist only of amounts that have been invoiced, but not yet recognized as revenues. As a result, deferred revenues and change in deferred revenues are incomplete measures of the strength of our business and are not necessarily indicative of our future performance. Further, we expect to recognize our current deferred services revenue into income but do not expect significant deferrals of services revenue in future periods. Deferred license and service revenues related to projects under contract accounting as of October 31, 2012 were $5.1 million and $4.7 million, respectively. Such deferral is in accordance with our Revenue Recognition policy as described in Note 1 to the consolidated financial statements.
We have historically experienced seasonal variations in our revenues as a result of increased customer orders in our second and fourth fiscal quarters and subsequent annual fees. We generally see increased orders 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 fiscal quarter due to efforts by our sales team to achieve annual incentives. As a result, a significantly higher percentage of our annual license fees are invoiced and recognized as revenues during those quarters at contract inception or in the subsequent quarter when the annual license payment is due and in subsequent years upon the anniversary of the contract date. We generally expect these seasonal trends to continue in the future, which may cause quarterly fluctuations in our results of operations and certain financial metrics. Our perpetual license revenues are not consistent from quarter to quarter. We expect that perpetual license revenues recognized in fiscal 2013 will be significantly lower than those recognized in prior periods, due to continued adoption of recurring term licenses.
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 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 a subsequent fiscal quarter;

•          we may enter into license agreements with specified terms for product
           upgrades or functionality, which may require us to delay revenue
           recognition 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.

For example, we received new orders for both term and perpetual licenses in the fourth quarter of fiscal year 2011 that committed future product functionality that was delivered in the first quarter of fiscal year 2012. As a result, our license revenues in the first quarter of fiscal year 2012 were $7.2 million higher than they would have been had the functionality been delivered in the fourth fiscal quarter of fiscal year 2011.
In addition, our revenue may fluctuate if our customers make an early payment of their annual fees. For example, during the three months ended January 31, 2012, we recognized $2.5 million of revenue upon early payment of annual fees from one customer, which would have been otherwise recognized during the three months ended April 30, 2012.
Product implementations, the primary driver of our services revenues, typically last 6 to 24 months and may take longer. No customer accounted for 10% or more of our revenues for the three months ended October 31, 2012 and one customer accounted for 13% of our revenues for the three months ended October 31, 2011. Our ten largest customers accounted for 42% and 51% of our total revenues for the three months ended October 31, 2012 and 2011, respectively. We count as customers distinct buying entities, which may include multiple national or regional subsidiaries of large, global P&C insurance carriers.
We generated revenues of $63.3 million and $52.4 million in the three months ended October 31, 2012 and 2011, respectively. We generate the majority of our revenues in the United States and Canada. Our revenues from outside the United States and Canada as a percentage of total revenues were 28% and 29% in the three months ended October 31, 2012 and 2011, respectively. We generated net income of $0.4 million and $4.8 million in the three months ended October 31, 2012 and 2011, respectively.

Key Business Metrics
We use certain key metrics to evaluate and manage our business, including rolling four-quarter recurring revenues from term licenses and total maintenance. In addition, we present select GAAP and non-GAAP financial metrics that we use internally to manage the business and that we believe are useful for investors. These metrics include Adjusted EBITDA and operating cash flow. Four-Quarter Recurring Revenues
We measure four-quarter recurring revenues by adding the total term license revenues and total maintenance revenues recognized in the preceding four quarters ended in the stated period and excluding perpetual license revenues, revenues from perpetual buyout rights and services revenues. This metric allows us to better understand the trends in our recurring revenues because it typically reduces the variations in any particular quarter caused by seasonality, the effects 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 eight periods presented were:

                                                                             Four quarters ended
                          10/31/2012      7/31/2012       4/30/2012       1/31/2012       10/31/2011       7/31/2011       4/30/2011       1/31/2011
                                                                                (in thousands)
Term license revenues   $     83,114     $   74,869     $    70,165     $    70,871     $     64,174     $    60,541     $    54,797     $    53,121
Total maintenance
revenues                      31,802         29,538          27,581          25,412           23,818          21,321          20,188          19,658
Total four-quarter
recurring revenues      $    114,916     $  104,407     $    97,746     $    96,283     $     87,992     $    81,862     $    74,985     $    72,779

Adjusted EBITDA
We define Adjusted EBITDA as net income plus provision for (benefit from) income taxes, other (income) expense, net, interest income, net, depreciation and amortization and stock-based compensation. 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 $10.8 million and $12.1 million for the three months ended October 31, 2012 and 2011, respectively.
We believe Adjusted EBITDA, a non-GAAP measure, is useful, in addition to other financial measures presented in accordance with GAAP, in evaluating our operating performance compared to that of other companies in our industry, as this metric generally eliminates the effects of certain items that may vary for different companies for reasons unrelated to overall operating performance. We believe that:

•         Adjusted EBITDA provides investors and other users of our financial
          information consistency and comparability with our past financial
          performance, facilitates period-to-period comparisons of operations and
          facilitates comparisons with other companies, many of which use similar
          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 our
          litigation provision from Adjusted EBITDA because the amount of such
          expenses in any specific period may not directly correlate to the
          underlying 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 the preparation of our annual operating budget and quarterly forecasts, to evaluate the effectiveness of our business strategies and to communicate with our board of directors regarding our financial performance.
Adjusted EBITDA should not be considered as a substitute for other measures of financial performance reported in accordance with GAAP. There are limitations to using non-GAAP financial measures, including that other companies may calculate these measures differently than we do. We compensate for the inherent limitations associated with using Adjusted EBITDA through disclosure of these limitations, presentation of our financial statements in accordance with GAAP and reconciliation of Adjusted EBITDA to the most directly comparable GAAP measure, net income.

The following table provides a reconciliation of net income to Adjusted EBITDA:

                                             Three Months Ended October 31,
                                                2012                 2011
                                                     (in thousands)
Reconciliation of Adjusted EBITDA:
Net income                                $          447       $        4,812
Non-GAAP adjustments:
Provision for (benefit from) income taxes           (278 )              3,044
Other (income) expense, net                         (141 )                316
Interest income, net                                 (90 )                (40 )
Depreciation and amortization                      1,100                  679
Total stock-based compensation                     9,784                3,312
Adjusted EBITDA                           $       10,822       $       12,123

Operating Cash Flows
We monitor our cash flows from operating activities, or operating cash flows, as a key measure of our overall business performance, which enables us to analyze our financial performance without the effects of certain non-cash items such as depreciation and amortization and stock-based compensation expenses. Additionally, operating cash flows takes into account the impact of changes in deferred revenues, which reflects the receipt of cash payment for products before they are recognized as revenues. Our operating cash flows are significantly impacted by changes in deferred revenues, timing of bonus payments 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 outflows of $16.3 million and $27.1 million for the three months ended October 31, 2012 and 2011, respectively. For a further discussion of our operating cash flows, see "Liquidity and Capital Resources-Cash Flows from Operating Activities." Results of Operations
The following tables set forth our results of operations for the periods presented (in thousands, except per share data, and as a percentage of our total revenues) for those periods. The data have been derived from the unaudited Condensed Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q which, in the opinion of our management, reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial position and results of operations for the interim periods presented. The operating results for any period should not be considered indicative of results for any future period. This information should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in our Annual Report on Form 10-K filed with the SEC on September 25, 2012.

                                                    Three Months Ended October 31,
                                                     2012                     2011
Revenues :                                                  (in thousands)
License                                     $            20,812       $            20,815
Maintenance                                               9,370                     7,106
Services                                                 33,119                    24,459
Total revenues                                           63,301                    52,380
Cost of revenues:
License                                                     167                       299
Maintenance                                               1,564                     1,266
Services                                                 25,826                    17,925
Total cost of revenues                                   27,557                    19,490
Gross profit :
License                                                  20,645                    20,516
Maintenance                                               7,806                     5,840
Services                                                  7,293                     6,534
Total gross profit                                       35,744                    32,890
Operating expenses:
Research and development                                 14,764                    10,959
Sales and marketing                                      12,376                     7,361
General and administrative                                8,666                     6,438
Total operating expenses                                 35,806                    24,758
Income (loss) from operations                               (62 )                   8,132
Interest income, net                                         90                        40
Other income (expense), net                                 141                      (316 )
Income before provision for (benefit from)
income taxes                                                169                     7,856
Provision for (benefit from) income taxes                  (278 )                   3,044
Net income                                  $               447       $             4,812


                                                       Three Months Ended October 31,
                                                      2012                        2011
Revenues :
License                                                    33  %                       40  %
Maintenance                                                15  %                       14  %
Services                                                   52  %                       46  %
Total revenues                                            100  %                      100  %
Total cost of revenues                                     44  %                       37  %
Total gross profit                                         56  %                       63  %
Operating expenses:
Research and development                                   23  %                       21  %
Sales and marketing                                        20  %                       14  %
General and administrative                                 13  %                       12  %
Total operating expenses                                   56  %                       47  %
Income (loss) from operations                               -  %                       16  %
Interest income, net                                        -  %                        -  %
Other income (expense), net                                 -  %                       (1 )%
Income before provision for (benefit from)
income taxes                                                -  %                       15  %
Provision for (benefit from) income taxes                  (1 )%                        6  %
Net income                                                  1  %                        9  %

Comparison of the Three Months Ended October 31, 2012 and 2011
Revenues
Please refer to Note 1 of Notes to Condensed Consolidated Financial Statements
for a description of our accounting policy related to revenue recognition.

                               Three Months Ended October 31,
                              2012                            2011
                                      % of total                 % of total      Change
                      Amount           revenues      Amount       revenues        ($)       (%)
                                       (in thousands, except percentages)
 Revenues:
 License        $    20,812                33 %     $ 20,815          40 %     $     (3 )    - %
 Maintenance          9,370                15 %        7,106          14 %        2,264     32 %
 Services            33,119                52 %       24,459          46 %        8,660     35 %
 Total revenues $    63,301               100 %     $ 52,380         100 %     $ 10,921     21 %

License Revenues
License revenues were consistent compared to the prior year, primarily driven by
increasing term licensing of our core products: PolicyCenter, BillingCenter and
ClaimCenter , and increased sales and marketing efforts in the North America and
Europe, offset by a decrease in perpetual license revenues in the current
quarter.
                                      Three Months Ended October 31,
                                 2012                                 2011
                                        % of license                      % of license        Change
                       Amount            revenues          Amount          revenues             ($)          (%)
                                                (in thousands, except percentages)
License
revenues:
Term             $    20,603                  99 %      $   12,358               59 %      $    8,245        67  %
Perpetual                209                   1 %           8,457               41 %          (8,248 )     (98 )%
Total license
revenues              20,812                 100 %      $   20,815              100 %      $       (3 )       -  %

The $8.2 million increase in term license revenues compared to the prior year was primarily driven by $4.4 million of revenues recognized from new orders during the three months ended October 31, 2012 and $3.2million of non-recurring revenues recognized due to obtainment of reliable estimates for one customer, related to prior year orders during the three months ended October 31, 2012. In addition, there was $1.8 million of revenue recognized due to timing of payment for one customer who paid on time in the current period rather than in advance of the due date in the comparable period, partially offset by a decrease of $1.4 million of revenue recognized due to completion of project implementation in prior periods.
The $8.2 million decrease in perpetual license revenues compared to the prior year was primarily driven by new customers' increasingly signing term license agreements since the fiscal quarter ended October 31, 2011.
Our perpetual license revenues are not consistent from quarter to quarter. Maintenance Revenues
The $2.3 million increase in maintenance revenues compared to the prior year was primarily driven by $1.4 million of revenues recognized due to new orders since the three months ended October 31, 2011 and $0.7 million of revenue recognized upon attainment of the required revenue recognition criteria related to prior year orders during the three months ended October 31, 2012. Services Revenues
The $8.7 million increase in service revenues compared to the prior year was primarily driven by an additional $5.7 million of revenues related to implementation of our software as well as $1.7 million of non-recurring revenues recognized due to obtainment of reliable estimates for one customer during the three months ended October 31, 2012. An additional $1.0 million in revenues were recognized related to reimbursable travel expenses.

Deferred Revenues

                                               As of
                               October 31, 2012      July 31, 2012            Change
                                     Amount              Amount            ($)         (%)
                                           (in thousands, except percentages)
Deferred revenues:
Deferred license revenues     $           19,596    $        25,766    $  (6,170 )   (24 )%
Deferred maintenance revenues             17,159             21,536       (4,377 )   (20 )%
Deferred services revenues                 6,851              8,214       (1,363 )   (17 )%
Total deferred revenues       $           43,606    $        55,516    $ (11,910 )   (21 )%

The $6.2 million decrease in deferred license revenues compared to the prior . . .