Guidewire Software, Inc. — Fiscal 2021 Q2 Form 10-Q
Reporting period: Quarter and six months ended January 31, 2021; filed March 4, 2021. Financial statements are unaudited. Guidewire provides software and cloud services primarily to property and casualty insurers, including core insurance operations, digital engagement, analytics, and artificial intelligence applications.
Financial performance and liquidity
| Metric | Three months ended Jan. 31, 2021 | Year-over-year change | Six months ended Jan. 31, 2021 | Year-over-year change |
|---|---|---|---|---|
| Total revenue | $180.1 million | Up 4% | $349.9 million | Up 6% |
| Subscription and support revenue | $59.6 million | Up 20% | $117.5 million | Up 19% |
| License revenue | $77.9 million | Up 2% | $143.2 million | Up 9% |
| Services revenue | $42.6 million | Down 10% | $89.1 million | Down 12% |
| Gross profit | $88.2 million | Down 2% | $167.0 million | Up 1% |
| Gross margin | 49% | Down from 52% | 48% | Down from 50% |
| Loss from operations | $27.1 million | Loss increased from $18.0 million | $58.7 million | Loss increased from $42.6 million |
| Net loss | $8.7 million | Improved from $19.9 million | $28.8 million | Improved from $34.9 million |
| GAAP diluted loss per share | $0.10 | Improved from $0.24 | $0.34 | Improved from $0.42 |
Revenue mix: Subscription revenue increased 35% in the quarter and 34% for the six-month period, while term-license revenue increased 5% and 11%, respectively. Perpetual-license revenue declined sharply and represented less than 1% of total revenue.
Cash flow: Net cash used in operating activities was $2.4 million for the six months, compared with $1.3 million provided in the prior-year period. Free cash flow was negative $12.8 million versus negative $12.1 million. Investing activities provided $5.7 million, while financing activities used $40.9 million, primarily because of share repurchases.
Liquidity: Cash, cash equivalents, and investments totaled $1.375 billion at January 31, 2021, compared with $1.434 billion at July 31, 2020. Working capital was $1.158 billion. Management stated that existing liquidity should fund operations for at least the next 12 months.
Debt and obligations: The company had $400.0 million principal amount of 1.25% convertible senior notes due 2025, carried at $336.9 million net of discount and issuance costs. Lease liabilities totaled $133.0 million, with future operating lease payments of $161.4 million before imputed interest.
Material changes versus the prior comparable period
- Subscription growth continued to drive the transition toward cloud-based offerings; subscription revenue increased $9.8 million in the quarter and $19.0 million year to date.
- Services revenue declined primarily because COVID-19 travel restrictions reduced billable travel costs by $3.7 million in the quarter and $7.7 million year to date. Reduced billing rates and investments in customer cloud migrations also pressured services results.
- Subscription and support gross margin fell to 33% in the quarter and 34% year to date, from 43% and 46%, respectively, as cloud operations, personnel, infrastructure, and security investments increased.
- Services remained loss-making at a gross margin of negative 15% in the quarter and negative 12% year to date, compared with negative 11% and negative 5% in the prior periods.
- Operating expenses rose 7% in the quarter and 8% year to date, reflecting higher headcount and investment in research and development, sales and marketing, and general and administrative functions.
- Net loss improved despite higher operating losses because of a $14.2 million tax benefit and $6.8 million of other income in the quarter. Other income primarily reflected foreign-currency gains; the prior-year period had a small other expense.
- The company recognized approximately $1.7 million of Canadian Emergency Wage Subsidy benefits in the quarter, reducing compensation expense.
- In October 2020, the board authorized a $200.0 million share-repurchase program. The company repurchased $43.9 million of stock during the six months, leaving $156.1 million available at January 31, 2021.
Guidance, outlook, commentary, and risks
- Management expects subscriptions to comprise a majority of new arrangements and expects continued migration from term licenses to cloud subscriptions. Because subscription revenue is recognized ratably, revenue growth may lag order and ARR growth.
- Annual recurring revenue was $520 million at January 31, 2021, compared with $514 million at July 31, 2020.
- Management expects continued investment in cloud operations, research and development, sales and marketing, and customer migrations. Subscription and support margins may fluctuate or remain pressured, while services margins are expected to face continued COVID-19-related challenges through fiscal 2021 and potentially longer.
- The company expects positive operating cash flow on an annual basis but noted substantial quarterly variability due to invoicing, collections, bonuses, commissions, and tax payments.
- COVID-19 continued to delay sales activities, implementations, travel, and professional-services engagements. Management expects economic effects to continue through fiscal 2021 or possibly longer and stated that delayed sales may be rescheduled rather than canceled.
- Key risks include execution of the cloud transition, lengthy and seasonal sales cycles, customer concentration, competitive pressure, cybersecurity and privacy obligations, reliance on third-party infrastructure including AWS, foreign-currency volatility, implementation delays, services underutilization, and potential impairment of investments, lease assets, long-lived assets, or goodwill.
- The California Franchise Tax Board was examining the company’s fiscal 2017 and 2018 state tax returns. Unrecognized tax benefits were $11.7 million at January 31, 2021.
- ASU 2020-06 is expected to apply beginning August 1, 2022. Management believes the required if-converted method for the convertible notes could adversely affect diluted earnings per share.
- Disclosure controls and procedures were assessed as effective, and no material changes to internal control over financial reporting were identified during the quarter.
Important facts for investors to verify
- Whether ARR growth accelerates as subscription bookings and customer migrations increase, despite ratable revenue recognition.
- Whether cloud operations can scale efficiently enough to restore subscription and support gross margins.
- The duration and financial effect of COVID-19-related delays on services revenue, implementations, collections, and customer demand.
- The sustainability of operating cash flow and the effect of continued share repurchases on liquidity.
- The timing, terms, and potential dilution or cash-settlement requirements of the 2025 convertible senior notes.
- The impact of foreign-currency movements, tax-audit outcomes, and the adoption of ASU 2020-06 on future reported results.
- Customer renewal, expansion, and concentration trends, including the effect of large multi-year term-license transactions on quarterly comparability.