Guidewire Software, Inc. — Fiscal 2015 Second-Quarter Form 10-Q
Unaudited quarterly report for the three and six months ended January 31, 2015, compared with the same periods ended January 31, 2014. Guidewire provides software platforms for property and casualty insurance operations, including PolicyCenter, ClaimCenter and BillingCenter, together with maintenance and implementation services.
Financial Results and Key Metrics
| Metric | Three months ended Jan. 31, 2015 | Year-over-year change | Six months ended Jan. 31, 2015 | Year-over-year change |
|---|---|---|---|---|
| Total revenue | $89.4 million | 7% | $169.2 million | 13% |
| License revenue | $43.7 million | 24% | $72.5 million | 34% |
| Maintenance revenue | $12.2 million | 23% | $24.7 million | 26% |
| Services revenue | $33.6 million | (12%) | $72.0 million | (6%) |
| Gross profit | $55.4 million | 17% | $99.3 million | 31% |
| Gross margin | 62% | Up from 57% | 59% | Up from 51% |
| Income from operations | $3.3 million | Down from $4.5 million | $(0.3) million | Improved from $(8.1) million |
| Net income | $4.0 million | Up from $3.3 million | $1.0 million | Improved from $(3.1) million |
| Adjusted EBITDA | $17.9 million | Down from $18.8 million | $28.1 million | Up from $17.5 million |
| Operating cash flow | Not separately provided | — | $4.1 million | Down from $5.7 million |
Six-month diluted earnings per share were $0.01, compared with a loss of $0.05 in the prior-year period. Quarterly diluted earnings per share were $0.06, compared with $0.05.
Balance Sheet, Liquidity and Debt
- Cash, cash equivalents and investments totaled $627.2 million at January 31, 2015, compared with $647.8 million at July 31, 2014.
- Cash and cash equivalents were $125.2 million; short-term investments were $420.2 million and long-term investments were $81.8 million.
- Working capital was $544.4 million, compared with $421.0 million at July 31, 2014.
- Total liabilities were $89.9 million, primarily deferred revenue and operating liabilities. The filing reports no commercial debt arrangements, credit lines or material non-cancellable purchase commitments.
- Management believes existing cash, cash equivalents and liquidity sources are sufficient to fund operations for at least the next 12 months.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by increased adoption of InsuranceSuite, expanded existing-customer orders and international activity. Four-quarter recurring revenue increased to $204.6 million from $153.7 million a year earlier.
- Term license revenue increased 21% in the quarter and 34% for the six-month period. Management attributed the six-month increase to $9.9 million from new or expanded orders and $7.7 million from invoicing, payment timing and contractual effects.
- Services revenue declined as major implementation projects were completed and customers engaged system integrator partners more heavily. Services gross margin was 9% in the quarter and 12% year to date.
- Gross margin improved primarily because higher-margin license and maintenance revenue represented a larger share of the revenue mix.
- Operating expenses increased 21% in the quarter and 18% year to date, reflecting continued investment in research and development, sales and marketing, international expansion, professional services and infrastructure.
- Research and development headcount increased to 361 from 305, sales and marketing headcount to 224 from 204, and cost-of-revenue headcount to 526 from 512, each compared with January 31, 2014.
- Net income benefited from income tax benefits of $1.0 million in the quarter and $1.6 million year to date. The prior-year quarter had a $1.4 million tax provision, while the prior-year six-month period had a $4.5 million tax benefit.
- Foreign currency losses increased other expense to $0.9 million in the quarter and $1.3 million year to date, primarily due to the stronger U.S. dollar against the British pound, euro, Australian dollar, Canadian dollar and Japanese yen.
- Cash flow was affected by lower deferred revenues, bonus and commission payments, and higher accounts receivable. Stock-based compensation was $25.5 million for the six-month period, up from $21.3 million.
Outlook, Commentary, Risks and Unusual Items
- Management expects license and maintenance revenue to continue growing, while services revenue is expected to decline as a percentage of total revenue as system integrator partners perform more implementation work.
- Management expects research and development, sales and marketing, and general and administrative expenses to increase in absolute dollars as the company expands products, international operations and infrastructure.
- Revenue and cash flow are seasonal and volatile. Orders are generally higher in the second and fourth fiscal quarters, while revenue recognition depends on payment timing, contractual terms, annual billings, perpetual license sales and perpetual buyout rights.
- Sales cycles for new customers generally take one to two years, and implementations typically take six to 24 months or longer. Delays can defer revenue and increase service costs.
- Principal risks include intense competition, reliance on a relatively small number of large insurance customers, customer renewals and expansions, system-integrator execution, product development, cybersecurity and privacy incidents, intellectual-property claims, international expansion, foreign-exchange volatility, economic conditions and employee retention.
- The company had no material pending legal proceeding expected to have a material adverse effect, and no material indemnification claims were outstanding. Two unsecured letters of credit totaled approximately $3.5 million, with no amounts drawn.
- The company recorded no other-than-temporary impairment on investments. Available-for-sale securities had $68,000 of unrealized losses, which management attributed primarily to interest-rate movements.
- New revenue-recognition guidance under ASU 2014-09 becomes effective for the company beginning August 1, 2017. The company was evaluating its impact and had not selected a transition method.
- Management concluded that disclosure controls and procedures were effective as of January 31, 2015, with no material changes in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether license growth, recurring revenue and international expansion continue after adjusting for invoicing timing, early payments and other revenue-recognition effects.
- Whether services revenue declines as expected without weakening customer implementation quality, renewals or overall gross margin.
- Whether operating-expense growth and substantial stock-based compensation remain consistent with revenue growth and sustainable profitability.
- Cash conversion, accounts-receivable collections and deferred-revenue trends, given the decline in six-month operating cash flow.
- The potential impact of foreign-exchange movements, particularly on international revenue and operating expenses.
- The eventual effect and transition method of the new revenue-recognition standard beginning in fiscal 2018.
- Customer concentration, renewal and expansion rates, competitive conditions, system-integrator performance, cybersecurity exposure and implementation delays.