Guidewire Software, Inc. — Fiscal 2017 First-Quarter Form 10-Q Summary
Reporting period: Three months ended October 31, 2016, compared with the three months ended October 31, 2015. The unaudited statements are prepared under U.S. GAAP. Guidewire provides a software platform for property and casualty insurers, including core transaction processing, data management and analytics, and digital engagement.
Key Financial Metrics
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Total revenue | $94.1 million | $82.3 million | 14% |
| License and other revenue | $38.7 million | $32.3 million | 20% |
| Maintenance revenue | $16.5 million | $14.0 million | 18% |
| Services revenue | $38.9 million | $35.9 million | 8% |
| Gross profit | $52.1 million | $47.1 million | 11% |
| Gross margin | 55% | 57% | Down 2 percentage points |
| Loss from operations | $(18.3) million | $(9.0) million | Loss increased |
| Net loss | $(7.9) million | $(1.6) million | Loss increased |
| Diluted loss per share | $(0.11) | $(0.02) | — |
| Adjusted EBITDA | $2.6 million | $8.0 million | Down $5.3 million |
| Cash used in operating activities | $(12.9) million | $(10.9) million | Outflow increased $2.0 million |
Balance Sheet, Liquidity and Debt
- Cash, cash equivalents and investments totaled $686.2 million at October 31, 2016, including $131.1 million of cash and cash equivalents, $399.3 million of short-term investments and $155.9 million of long-term investments.
- Working capital was $505.4 million, compared with $588.6 million at July 31, 2016.
- Total liabilities were $109.2 million and stockholders’ equity was $794.2 million.
- The filing reports no commercial debt arrangements, material non-cancellable purchase commitments or off-balance-sheet arrangements.
- Two unsecured letters of credit totaling approximately $2.9 million supported lease and customer commitments; no amounts were outstanding.
- Management stated that existing cash, cash equivalents and liquidity sources should fund operations for at least the next 12 months.
Material Changes Versus the Prior Comparable Period
- Revenue growth was led by license and other revenue, including a $4.5 million increase in perpetual license revenue. Perpetual revenue remains volatile and represented a small portion of total license revenue.
- Gross margin declined to 55% from 57%, primarily because of higher services headcount, acquisition-related personnel costs and deferred revenue associated with a large cloud implementation.
- Services gross margin declined to 7% from 12%. Management expects services margins to decline significantly during fiscal 2017 because of hiring and training, recent acquisitions and substantial revenue deferrals, with potential improvement in fiscal 2018 as deferred amounts are recognized.
- Research and development, sales and marketing, and general and administrative expenses increased 20%, 32% and 27%, respectively. Total operating expenses increased 26% to $70.4 million, or 75% of revenue.
- Stock-based compensation charged to income increased to $17.9 million from $15.1 million. Unrecognized stock-based compensation totaled $155.0 million at October 31, 2016.
- Guidewire acquired FirstBest Systems on August 31, 2016, for approximately $37.8 million. The preliminary allocation included $16.3 million of goodwill and $15.4 million of acquired intangible assets. FirstBest’s contribution to quarterly results was not material.
- Investing cash outflow increased to $79.8 million from $9.5 million, primarily because of the FirstBest acquisition and higher net purchases of marketable securities.
- Four-quarter recurring revenue increased to $272.7 million from $224.7 million for the comparable four-quarter period, including $210.3 million of term license and other revenue and $62.5 million of maintenance revenue.
Outlook, Commentary, Risks and Unusual Items
- No specific quantitative revenue or earnings guidance is provided in the filing.
- Management expects annual operating cash flow to remain positive, although quarterly cash flow may fluctuate substantially because of invoicing, collections, bonus payments, commissions and taxes.
- Seasonality is significant: customer orders generally increase in the second and fourth fiscal quarters, while services margins may be lower in quarters with fewer billable days.
- A large national-insurer cloud implementation resulted in $4.7 million of current-period services billings being deferred and $2.4 million of direct costs being deferred. Total deferred services revenue related to the engagement was $9.9 million at October 31, 2016. Management projected recognition to begin in the second half of fiscal 2017, subject to fulfillment of revenue-recognition criteria.
- Deferred revenue totaled $68.8 million, including $22.7 million of deferred license and other revenue, $30.9 million of deferred maintenance revenue and $15.3 million of deferred services revenue.
- The company continues to invest in international expansion, research and development, cloud offerings, data and analytics, digital engagement and system-integrator relationships. Management expects operating expenses to increase in absolute dollars.
- Guidewire expects to adopt the new revenue recognition standard on August 1, 2018, using the cumulative-effect transition method. The ultimate impact on reported revenue and earnings remains under evaluation.
- Key risks include lengthy and variable sales and implementation cycles, customer concentration, seasonality, services-margin pressure, competition, acquisition integration, cloud-transition execution, cybersecurity and privacy, foreign currency volatility, intellectual property claims, changing accounting standards and dependence on employee retention.
- The company recorded a $0.7 million foreign-currency loss in other expense during the quarter. It reported no material legal proceedings or litigation accruals.
- Management concluded that disclosure controls and procedures were effective at October 31, 2016, with no material changes to internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether the deferred cloud-implementation revenue and related costs are recognized as projected in the second half of fiscal 2017 and how that affects services margins.
- The sustainability of license growth, particularly excluding volatile perpetual-license revenue and considering seasonal order timing.
- The pace and cost of hiring and the effect of FirstBest and EagleEye integration on gross margins and operating expenses.
- Customer renewal, expansion and concentration trends, including the effect of large customers’ negotiating leverage.
- The impact of the August 2018 revenue-recognition adoption on contract terms, reported revenue timing, deferred revenue and comparability.
- Cash-flow conversion and whether quarterly operating cash outflows normalize after seasonal bonus and commission payments.
- The company’s ability to maintain high stock-based compensation, research and development and sales investments while reducing GAAP operating losses.