Guidewire Software, Inc. — Fiscal 2015 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended April 30, 2015; fiscal year ends July 31. Financial statements are unaudited. Guidewire provides software platforms for property and casualty insurance operations, including PolicyCenter, ClaimCenter and BillingCenter, plus related maintenance and professional services.
Key Financial Metrics
| Metric | Three months ended April 30, 2015 | Year-over-year change | Nine months ended April 30, 2015 | Year-over-year change |
|---|---|---|---|---|
| Total revenue | $85.4 million | 4% | $254.6 million | 10% |
| License revenue | $33.3 million | 4% | $105.8 million | 23% |
| Maintenance revenue | $12.2 million | 17% | $36.9 million | 23% |
| Services revenue | $40.0 million | 1% | $112.0 million | (4%) |
| Gross profit | $47.5 million | 4% | $146.9 million | 21% |
| Gross margin | 56% | Flat | 58% | Up from 53% |
| Operating income (loss) | $(6.7) million | Down from $0.1 million | $(7.0) million | Improved from $(8.0) million |
| Net income (loss) | $(3.0) million | Worse than $(1.9) million | $(2.0) million | Improved from $(5.0) million |
| Adjusted EBITDA | $7.6 million | Down from $12.3 million | $36.4 million | Up from $28.7 million |
| Operating cash flow | Not separately provided | — | $30.7 million | Up from $26.1 million |
Figures are in millions except percentages. Basic and diluted loss per share were $0.04 for the quarter and $0.03 for the nine-month period, compared with $0.03 and $0.08, respectively, in the prior-year periods.
Balance Sheet, Liquidity and Capital Structure
- Cash, cash equivalents and investments totaled $643.8 million at April 30, 2015, compared with $647.8 million at July 31, 2014.
- Cash and cash equivalents were $156.9 million; short-term investments were $393.1 million; long-term investments were $93.8 million.
- Working capital was $531.0 million, compared with $421.0 million at fiscal year-end.
- Total liabilities were $109.6 million, including $63.8 million of deferred revenue. The filing reports no debt arrangements, lines of credit or material non-cancellable purchase commitments.
- Deferred revenue increased 15% from July 31, 2014, primarily due to new license billings not yet recognized as revenue.
- Capital expenditures were $5.1 million for the nine months. The company believes existing liquidity will fund operations for at least the next 12 months.
Material Changes Versus the Prior Comparable Period
- Revenue growth was led by license and maintenance revenue. Term-license revenue increased 9% in the quarter and 25% for the nine months; perpetual-license revenue declined 32% and 8%, respectively, reflecting the continuing shift toward term arrangements.
- Services revenue was essentially flat in the quarter but declined 4% year to date, reflecting completion of major implementation projects and the transfer of implementation work to system integrator partners.
- Year-to-date gross margin improved to 58% from 53%, primarily because of the larger mix of higher-margin license revenue.
- Operating expenses increased 19% in both the quarter and nine-month period. Research and development increased 24% for the quarter and 23% year to date, while sales and marketing increased 12% and 14%, respectively.
- Quarterly operating results deteriorated despite revenue growth because operating expenses grew faster than gross profit. Year-to-date operating and net losses improved from the prior year.
- Stock-based compensation increased to $12.4 million for the quarter and $37.9 million year to date, compared with $10.4 million and $31.7 million, respectively.
- Foreign-exchange losses contributed to $1.3 million of other expense for the nine-month period, compared with $0.2 million of other income in the prior-year period.
- Operating cash flow increased by $4.6 million year to date. Investing cash flow was positive $3.8 million, compared with negative $318.8 million in the prior year, when excess cash from a public offering was invested in securities.
Guidance, Outlook, Commentary and Risks
- Management expects term-license and maintenance revenue to continue growing, while services revenue is expected to decline as a percentage of total revenue as system integrator partners perform more implementation work.
- Management expects quarterly gross margins to vary with the mix of license, maintenance and lower-margin services revenue.
- Research and development, sales and marketing, and general and administrative expenses are expected to increase in absolute dollars as Guidewire invests in product innovation, international expansion, sales capacity and infrastructure.
- Sales are seasonal, with higher customer ordering generally occurring in the second and fourth fiscal quarters. Long sales cycles, implementation periods of six to 24 months or longer, payment timing, perpetual-license transactions and revenue-recognition requirements can cause substantial quarterly volatility.
- Key risks include intense competition, dependence on a relatively small number of large insurance customers, customer renewal and expansion rates, execution of complex implementations, reliance on system integrators, international expansion, foreign-currency fluctuations, cybersecurity and privacy incidents, intellectual-property claims, employee retention and the ability to control rising operating expenses.
- The company is evaluating new revenue-recognition guidance under ASU 2014-09; the filing states that the potential impact had not yet been determined.
- There were no material legal proceedings expected to have a material adverse effect, no material change in contractual obligations outside the ordinary course, and no material indemnification claims outstanding. Two unsecured letters of credit totaling approximately $3.6 million supported lease and customer commitments; no amounts were drawn.
- Management concluded that disclosure controls and procedures were effective as of April 30, 2015, with no material changes in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether term-license growth and the $208.9 million of four-quarter recurring revenue as of April 30, 2015 translate into sustained revenue growth and improved profitability.
- Whether elevated research and development, sales and marketing, general and administrative spending and stock-based compensation can be absorbed without continued operating losses.
- The timing and quality of new customer orders, renewals, expansions, perpetual-license buyouts and deferred-revenue conversion.
- Services utilization, implementation economics and the extent to which system integrators reduce services revenue while improving overall margins.
- The effect of foreign-exchange movements, international expansion, customer concentration, competition and long implementation cycles on future results.
- The eventual adoption method and financial statement impact of the new revenue-recognition standard.
- Liquidity and investment portfolio composition, including the company’s exposure to interest rates, credit risk and approximately $21.2 million of cash held in foreign tax jurisdictions.