Guidewire Software, Inc. — Fiscal 2020 Q2 Form 10-Q Summary
Business context and reporting period
Guidewire provides software, cloud subscriptions, professional services, maintenance, and a partner ecosystem for property and casualty insurers. Its offerings support core insurance operations, data and analytics, and digital engagement.
This filing covers the three and six months ended January 31, 2020, Guidewire’s fiscal second quarter and first six months of fiscal 2020. The prior comparable periods ended January 31, 2019. The financial statements are unaudited.
Key financial metrics
| Metric | Three months ended January 31, 2020 | Year-over-year change | Six months ended January 31, 2020 | Year-over-year change |
|---|---|---|---|---|
| Total revenue | $173.5 million | Up 3% | $330.5 million | Down 5% |
| License and subscription revenue | $105.0 million | Up 21% | $187.4 million | Up 3% |
| Maintenance revenue | $21.1 million | Down 1% | $42.1 million | Flat |
| Services revenue | $47.4 million | Down 22% | $101.0 million | Down 19% |
| GAAP gross profit | $89.9 million | Up 1% | $166.0 million | Down 11% |
| GAAP gross margin | 52% | Down from 53% | 50% | Down from 54% |
| GAAP operating loss | $18.0 million | Compared with $6.3 million loss | $42.6 million | Compared with $3.8 million loss |
| GAAP net income (loss) | $(19.9) million | Compared with approximately breakeven | $(34.9) million | Compared with $6.3 million income |
| GAAP diluted loss per share | $(0.24) | Compared with $0.00 | $(0.42) | Compared with $0.08 income |
| Non-GAAP operating income | $15.4 million | Down from $25.4 million | $22.6 million | Down from $58.5 million |
| Non-GAAP diluted EPS | $0.21 | Down from $0.33 | $0.34 | Down from $0.71 |
| Free cash flow | Not separately provided | — | $(12.1) million | Improved from $(25.1) million |
Subscription revenue increased 94% in the quarter and 89% for the six-month period, while term-license revenue increased 4% in the quarter but declined 15% for the six-month period. Annual Recurring Revenue was $474 million at January 31, 2020, compared with $460 million at July 31, 2019.
License and subscription gross margin was 74% for the quarter and 73% for the six-month period, down from 83% and 85%, respectively. Services generated gross losses of $5.1 million in the quarter and $4.8 million for the six-month period.
Operating expenses increased 13% to $107.9 million in the quarter and 9% to $208.6 million for the six-month period. Six-month stock-based compensation expense was $51.3 million, compared with $47.7 million in the prior-year period.
Liquidity, cash flow, debt, and balance sheet
- Cash, cash equivalents, and investments totaled approximately $1.330 billion at January 31, 2020, compared with $1.338 billion at July 31, 2019.
- Cash and cash equivalents were $218.5 million, versus $254.1 million at July 31, 2019. Working capital was $1.065 billion.
- Operating cash flow was $1.3 million for the six months ended January 31, 2020, compared with $(13.0) million in the prior-year period.
- Investing cash flow was $(38.1) million, including $11.3 million of property and equipment purchases and $2.2 million of capitalized software development costs.
- The company had $400.0 million principal amount of 1.25% convertible senior notes due March 2025. Their net carrying value was $323.7 million and estimated fair value was $472.0 million at January 31, 2020.
- Total lease liabilities were $111.9 million following adoption of ASC 842, with $88.5 million of operating lease assets.
- Management stated that existing liquidity is expected to fund operations for at least the next 12 months.
Material changes versus the prior comparable period
- Revenue growth shifted toward subscriptions: subscription revenue rose $13.9 million in the quarter and $26.7 million year to date, primarily from Guidewire Cloud InsuranceSuite orders.
- Term-license revenue declined year to date because the prior-year period included $24.9 million from large fiscal 2019 term-license deals, including a ten-year contract that contributed $14.5 million of revenue.
- Services revenue declined because of completed large implementations, increased participation by systems integrators in cloud implementations, and company investments in certain customer projects.
- License and subscription cost of revenue increased 83% in the quarter and 81% year to date, driven mainly by higher cloud operations and infrastructure costs.
- Gross margin declined as the company invested in cloud operations, experienced lower term-license revenue, and incurred lower-margin services investments.
- Research and development, sales and marketing, and general and administrative expenses all increased, reflecting investments in cloud delivery, sales capacity, headquarters infrastructure, information security, and growth support.
- The company recognized a $10.4 million BEAT tax liability in the quarter, including $4.2 million attributable to the current fiscal year and $6.2 million attributable to the prior fiscal year.
- ASC 842 lease accounting was adopted on August 1, 2019, adding operating lease assets and liabilities without affecting opening retained earnings.
Guidance, outlook, management commentary, risks, and unusual items
- Management expects subscriptions to become a majority of annual new sales. Because subscription revenue is recognized ratably, greater subscription mix can reduce near-term reported revenue growth and increase deferred revenue.
- Management expects continued investment in cloud operations, research and development, sales and marketing, and general and administrative infrastructure. License and subscription margins may fluctuate or decline as cloud customers increase.
- Sales and revenue are seasonal, with historically higher order activity in the second and fourth fiscal quarters. Large transactions and ASC 606 revenue timing can make period-to-period comparisons difficult.
- Remaining performance obligations were $384.1 million at January 31, 2020, excluding professional-services contracts billed on a time-and-materials basis.
- The company identified the coronavirus outbreak, travel restrictions, and possible delays to implementations and sales activity as risks. It also cited Brexit, economic uncertainty, foreign exchange movements, competition, data security, privacy regulation, lengthy sales cycles, customer concentration, and reliance on systems-integrator partners.
- Guidewire’s former chief executive officer became board chair in August 2019, and the chief financial officer notified the company of his planned resignation effective after filing this Form 10-Q.
- No material legal proceedings or material contractual changes were reported. The company stated that it had no material off-balance-sheet arrangements.
- Management concluded that disclosure controls and procedures were effective as of January 31, 2020, with no material changes to internal control over financial reporting during the quarter.
Important facts investors should verify
- Whether subscription growth and ARR expansion offset the delayed revenue recognition and margin pressure associated with the cloud transition.
- The sustainability of cloud gross margins as infrastructure, cloud operations, security, and implementation costs increase.
- The timing and financial impact of large term-license renewals, new customer contracts, and fourth-quarter seasonality.
- Cash generation relative to the $400.0 million convertible notes, potential cash settlement or repurchase obligations, and $111.9 million of lease liabilities.
- The effect of the $10.4 million BEAT liability, ongoing tax examinations, and $6.8 million of unrecognized tax benefits.
- The execution of the CFO transition and the company’s continued remediation of controls following the prior restatement and previously identified revenue-control material weakness.
- Whether coronavirus-related restrictions, customer budget changes, implementation delays, or systems-integrator execution affect bookings, services revenue, collections, or customer renewals.