Business Context and Reporting Period
This Form 8-K, filed on May 1, 2019, reports a material accounting error by Guidewire Software, Inc. regarding revenue recognition for fiscal years ended July 31, 2018 (FY18) and 2017 (FY17). The Audit Committee concluded that previously issued financial statements for these periods should no longer be relied upon due to a misapplication of vendor specific objective evidence (VSOE) provisions under ASC 605.
Key Financial Metrics and Impact
- Revenue Impact: The error resulted in a net reduction to revenue of less than $5 million for each of FY18 and FY17.
- Materiality: The reduction represents less than 1% of previously reported total revenue ($661 million in FY18 and $514 million in FY17).
- Accounting Treatment: The error affected the timing of revenue recognition (ratable over one year vs. upfront) but did not change the total amount of revenue to be recognized under ASC 605.
- Current Period: Revenue recognition under ASC 606 and guidance for the fiscal year ending July 31, 2019, are not impacted.
- Internal Controls: The Company has concluded that its disclosure controls and procedures and internal control over financial reporting were not effective for the Non-Reliance Periods and will report a material weakness.
Material Changes and Restatement
The Company intends to restate its previously filed consolidated financial statements to correct the technical accounting error. The correction involves reclassifying amounts that would have been recorded as deferred revenue under ASC 605. Due to the adoption of ASC 606 on August 1, 2018, these amounts will be recorded as part of the transition adjustment to opening retained earnings on that date. The Company notes that corrected revenue figures would have exceeded guidance for all impacted quarters except the quarter ended July 31, 2018, where it would have been in the upper half of the guidance range.
Outlook, Risks, and Contingencies
- Restatement Timeline: The restatement is expected to be completed in advance of the Form 10-Q filing for the quarter ended April 30, 2019.
- Business Operations: The error does not reflect a change in the underlying business; customer relationships remain ongoing, and payments have been collected.
- Risks: Risks include potential delays in filing amended reports, additional accounting adjustments, and potential claims or proceedings including stockholder litigation or regulatory actions by the SEC or U.S. Attorney's Office.
- Forward-Looking Uncertainty: Final conclusions on the impact of the restatement are subject to continued analysis and could differ from preliminary estimates.
Investor Verification Checklist
- Verify the final restated financial statements for FY17 and FY18 upon the filing of the amended 10-Ks.
- Monitor the Form 10-Q for the quarter ended April 30, 2019, for the transition adjustment to opening retained earnings.
- Review the Company's disclosure regarding the remediation plan for the material weakness in internal controls.
- Watch for any announcements regarding regulatory inquiries or litigation stemming from the restatement.