Guidewire Software, Inc. Form 10-Q Summary
Reporting period: Three and six months ended January 31, 2014; fiscal year ending July 31. The financial statements are unaudited. Guidewire provides core software platforms for property and casualty insurance operations, including PolicyCenter, ClaimCenter and BillingCenter, plus maintenance and professional services.
Financial Results and Liquidity
| Metric | Three months ended Jan. 31, 2014 | Three months ended Jan. 31, 2013 | Six months ended Jan. 31, 2014 | Six months ended Jan. 31, 2013 |
|---|---|---|---|---|
| Total revenue | $83.5 million | $72.2 million | $150.0 million | $135.5 million |
| Gross profit | $44.8 million | $40.8 million | $71.4 million | $76.5 million |
| Gross margin | 54% | 56% | 48% | 57% |
| Operating income (loss) | $(2.3) million | $5.1 million | $(20.4) million | $5.0 million |
| Net income (loss) | $(0.9) million | $5.5 million | $(11.5) million | $5.9 million |
| Diluted earnings (loss) per share | $(0.01) | $0.09 | $(0.18) | $0.10 |
| Adjusted EBITDA | $18.2 million | $16.4 million | $16.4 million | $27.2 million |
| Operating cash flow | Not separately provided | Not separately provided | $5.7 million | $3.1 million |
Revenue mix: For the quarter, license revenue was $35.2 million, maintenance revenue was $9.9 million and services revenue was $38.4 million. For the six-month period, the amounts were $54.1 million, $19.5 million and $76.4 million, respectively. Services represented 46% of quarterly revenue and 51% of six-month revenue.
Balance sheet and liquidity: At January 31, 2014, cash and cash equivalents were $217.6 million, short-term investments were $226.6 million and long-term investments were $144.2 million, totaling approximately $588.4 million in cash, cash equivalents and investments. Working capital was approximately $435.0 million. Total liabilities were $87.4 million, including $51.5 million of deferred revenue. The filing reports no debt arrangements or borrowings.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue increased 16% to $83.5 million; six-month revenue increased 11% to $150.0 million.
- Quarterly license revenue increased 15%, primarily from new orders, ClaimCenter and continued adoption of PolicyCenter and BillingCenter. Six-month license revenue increased 5%.
- Services revenue increased 19% for the quarter and 17% for the six-month period, primarily from additional implementation activity.
- Gross margin declined from 56% to 54% for the quarter and from 57% to 48% for the six-month period. The decline was driven by a higher services mix, lower services margins, increased personnel and consultant costs, stock-based compensation, and license-related royalties and amortization.
- Six-month services gross margin fell to 6% from 15%; quarterly services gross margin was 9% in both periods.
- Operating expenses increased 32% for the quarter and 28% for the six-month period. Six-month research and development, sales and marketing, and general and administrative expenses increased 23%, 45% and 12%, respectively.
- Stock-based compensation increased to $18.9 million for the quarter and $33.6 million for the six-month period, compared with $10.4 million and $20.2 million, respectively, in the prior-year periods.
- The company completed a follow-on public offering in October 2013, issuing 8.3 million shares at $48.75 per share and receiving approximately $389.9 million of net proceeds before offering costs.
- Deferred revenue increased 25% from July 31, 2013, to $51.5 million at January 31, 2014.
Guidance, Outlook, Risks and Unusual Items
- Management expects research and development, sales and marketing, general and administrative expenses, and services delivery costs to increase in absolute dollars as the company invests in growth, product innovation, international expansion and customer acquisition.
- Management expects positive operating cash flow annually, but quarterly cash flow may fluctuate substantially due to revenue timing, collections, bonus payments, commissions and changes in deferred revenue.
- Management believes existing cash, investments and operating cash flows are sufficient to fund operations for at least the next 12 months.
- Revenue is seasonal, with higher order activity generally occurring in the second and fourth fiscal quarters. Revenue recognition can vary with payment terms, contract structure, implementation milestones, perpetual-license sales and customer renewals.
- Professional services generate substantially lower margins than license and maintenance revenue. Continued growth in services as a percentage of revenue could pressure overall profitability.
- The company faces risks from lengthy sales and implementation cycles, customer concentration, competition, international operations, foreign exchange, cybersecurity and cloud-service disruptions, intellectual-property claims, product defects, personnel retention and economic conditions affecting insurance-industry technology spending.
- Accenture sought U.S. Supreme Court review of the ruling invalidating its patent. If review is allowed and Accenture ultimately prevails, Guidewire could owe an additional $20.0 million; otherwise, no further settlement payment is due. No amount was outstanding under the company’s letters of credit at January 31, 2014.
- The company reports no material changes to contractual obligations, no material non-cancellable purchase commitments, and no off-balance-sheet arrangements.
- Management concluded that disclosure controls and procedures were effective as of January 31, 2014, and reported no material changes in internal control over financial reporting during the quarter.
Key Facts Investors Should Verify
- Whether services growth and implementation execution improve the sharply lower six-month services and consolidated gross margins.
- Whether elevated operating expenses and stock-based compensation can be offset by recurring license and maintenance growth.
- The timing and quality of new orders, renewals, perpetual-license activity and revenue recognition under complex customer contracts.
- Progress in converting the $51.5 million deferred-revenue balance into recognized revenue and cash collections.
- The status and ultimate outcome of Accenture’s potential Supreme Court appeal and the possible $20.0 million payment.
- Customer concentration: the ten largest customers represented 38% of quarterly revenue and 39% of six-month revenue, although no individual customer exceeded 10% of revenue.
- The company’s use of approximately $588.4 million of cash, cash equivalents and investments following the equity offering, including investment-duration, credit and interest-rate exposure.