Guidewire Software, Inc. — Fiscal 2021 First-Quarter Form 10-Q
Reporting period: Three months ended October 31, 2020; unaudited results. Guidewire provides core operations, digital engagement, analytics, and artificial-intelligence applications to property and casualty insurers through cloud subscriptions and self-managed software.
Financial performance
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Total revenue | $169.8 million | $157.0 million | Up 8% |
| Subscription and support revenue | $58.0 million | $49.0 million | Up 18% |
| License revenue | $65.3 million | $54.4 million | Up 20% |
| Services revenue | $46.6 million | $53.6 million | Down 13% |
| Gross profit | $78.8 million | $76.2 million | Up 4% |
| Gross margin | 46% | 48% | Down 2 percentage points |
| Operating loss | $31.6 million | $24.6 million | Loss increased |
| Operating margin | (18%) | (17%) | Down 1 percentage point |
| Net loss | $20.2 million | $15.0 million | Loss increased |
| Diluted net loss per share | $0.24 | $0.18 | Loss per share increased |
Cash flow, liquidity, debt, and balance sheet
- Cash used in operating activities was $15.7 million, compared with $18.1 million used in the prior-year quarter.
- Free cash flow was negative $20.2 million, improving from negative $29.1 million.
- Cash, cash equivalents, and investments totaled $1.405 billion at October 31, 2020, compared with $1.434 billion at July 31, 2020. Working capital was $1.163 billion.
- Investing cash outflow was $53.4 million, including $346.4 million of investment purchases, $1.9 million of property and equipment purchases, $2.6 million of capitalized software development, and $2.0 million of strategic equity investments.
- The company had $400.0 million principal amount of 1.25% convertible senior notes due 2025, carried at $333.5 million net. The notes had a fair value of $436.3 million at quarter-end and a conversion price of approximately $113.75 per share.
- In October 2020, the board authorized up to $200.0 million of share repurchases. The company repurchased 48,997 shares for $5.0 million, leaving $195.0 million available.
- Management stated that existing liquidity should be sufficient to fund operations for at least the next 12 months.
Material changes versus the prior comparable period
- Subscription revenue increased $9.2 million, primarily from new Guidewire Cloud orders. Subscription revenue represented 22% of total revenue versus 18% a year earlier.
- License revenue benefited from a large multi-year term-license renewal that contributed approximately $11.6 million of incremental revenue. Management cautioned that upfront recognition may create a difficult comparison in the first quarter of fiscal 2022.
- Services revenue declined $7.1 million because of COVID-19-related travel restrictions, increased investments in cloud migrations and implementations, reduced travel reimbursement, and lower-billing-rate arrangements.
- Subscription and support gross margin fell to 36% from 49% as cloud operations personnel and infrastructure costs increased. Services gross margin declined to negative 10% from approximately break-even.
- Research and development expense increased 13% to $52.6 million, while sales and marketing expense increased 11% to $36.6 million. Total operating expenses increased 10% to $110.4 million.
- Interest income fell $4.8 million because of lower investment yields. Other income improved by $2.8 million, primarily from foreign-exchange gains.
- Stock-based compensation expense increased to $28.1 million from $24.6 million and represented a significant non-cash expense.
- Annual recurring revenue was $513 million at October 31, 2020, compared with $514 million at July 31, 2020.
Outlook, management commentary, risks, and unusual items
- Management expects subscriptions to comprise a majority of new deals. The transition from upfront term-license revenue to ratable subscription revenue may reduce near-term reported revenue growth and increase deferred revenue.
- Cloud operations and research and development spending are expected to increase as Guidewire scales its cloud customer base, enhances security and infrastructure, and migrates products to the cloud.
- COVID-19 continued to delay sales activity, customer implementations, travel, and professional-services engagements. Management expected economic effects to continue through fiscal 2021 or potentially longer.
- Management expects services revenue and services gross margin to remain pressured by implementation investments, partner-led implementations, lower billing rates, and pandemic-related disruptions.
- Key risks include lengthy and variable sales and implementation cycles, dependence on a relatively small number of insurance customers, intense competition, cloud execution and service-level obligations, cybersecurity and privacy requirements, foreign-currency volatility, and customer renewals.
- One customer represented at least 10% of revenue for the quarter and one customer represented at least 10% of accounts receivable at quarter-end; the filing does not identify the customer in the provided text.
- The company had $18.2 million of unrecognized tax benefits and was under examination by the California Franchise Tax Board for fiscal 2017 and 2018 tax returns.
- A putative securities class action filed in July 2020 was voluntarily dismissed without prejudice in October 2020. No material legal-proceeding accrual was recorded.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter.
- The filing does not provide clear numerical revenue or earnings guidance for fiscal 2021 in the provided text.
Important facts for investors to verify
- Whether subscription growth and cloud adoption offset the near-term revenue and margin effects of ratable recognition and higher cloud-delivery costs.
- The sustainability and comparability of license revenue after the unusually large multi-year renewal in Q1 FY2021.
- Progress toward improving negative services margins and subscription gross margins.
- Quarterly operating cash burn, annual cash generation, and the effect of share repurchases and potential acquisitions on liquidity.
- Potential cash requirements, dilution, or refinancing risk associated with the $400.0 million convertible notes due in 2025.
- Customer concentration, renewals, annual recurring revenue trends, and the impact of COVID-19 on sales and implementation timing.
- Exposure to cybersecurity, privacy, data-transfer, foreign-exchange, tax-audit, and contractual indemnification risks.