Guidewire Software, Inc. — Form 10-Q Summary
Business context and reporting period
Guidewire provides cloud-based and self-managed software for property and casualty insurers, including core policy, billing and claims applications, digital engagement, analytics and artificial intelligence. The filing covers the fiscal quarter and six months ended January 31, 2022; the comparable periods ended January 31, 2021. The financial statements are unaudited and prepared under U.S. GAAP.
Key financial metrics
| Metric | Three months ended Jan. 31, 2022 | Six months ended Jan. 31, 2022 |
|---|---|---|
| Total revenue | $204.6 million, up 14% | $370.6 million, up 6% |
| Subscription and support revenue | $84.3 million, up 42% | $163.3 million, up 39% |
| License revenue | $69.8 million, down 10% | $110.0 million, down 23% |
| Services revenue | $50.5 million, up 19% | $97.3 million, up 9% |
| Gross profit | $96.6 million | $159.4 million |
| Gross margin | 47%, versus 49% | 43%, versus 48% |
| Operating loss | $39.5 million | $104.8 million |
| Net loss | $40.7 million, or $0.49 per diluted share | $92.0 million, or $1.10 per diluted share |
| Operating cash flow | Not separately provided in the filing summary | $(110.1) million, versus $(2.4) million |
| Free cash flow | Not separately provided in the filing summary | $(123.2) million, versus $(12.8) million |
Operating expenses for the quarter were $136.1 million, up 18%, including research and development of $60.4 million, sales and marketing of $51.2 million, and general and administrative expense of $24.5 million. Six-month operating expenses were $264.2 million, up 17%.
Subscription and support gross margin improved to 40% for the quarter and 38% for the six months, while services remained loss-making at negative 9% gross margin for both periods. License gross margin was approximately 97% for the quarter and 96% for the six months.
Annual recurring revenue was $620 million at January 31, 2022, compared with $582 million at July 31, 2021. Remaining performance obligations were approximately $908 million.
Balance sheet, debt and liquidity
- Cash, cash equivalents and investments totaled $1.114 billion at January 31, 2022, compared with $1.347 billion at July 31, 2021.
- Working capital was $846.4 million, compared with $1.055 billion at July 31, 2021.
- The company had $400 million principal amount of 1.25% convertible senior notes due March 2025, carried at $350.9 million net of discount and issuance costs.
- Total lease liabilities were $120.2 million, including $11.2 million current and $108.9 million non-current.
- Management stated that existing cash, cash equivalents and liquidity sources should be sufficient to fund operations for at least the next 12 months.
Material changes versus the prior comparable period
- Revenue growth was driven by cloud subscription expansion, while license revenue declined because the prior-year periods benefited from larger multi-year term-license renewals.
- Subscription revenue increased 64% in the quarter and 59% for the six months; term-license revenue declined 10% and 23%, respectively.
- Gross margin declined because subscription and support revenue carries lower margins than license revenue and became a larger share of the mix.
- Operating losses widened as the company continued investing in cloud operations, research and development, sales and marketing, and customer implementations.
- Operating cash flow deteriorated substantially, partly because of a $69.1 million payment of fiscal 2021 bonuses and accrued vacation balances, as well as the larger net loss and working-capital movements.
- On August 18, 2021, Guidewire acquired HazardHub for approximately $53 million of net cash consideration, including an $8.3 million holdback subject to service conditions. Preliminary goodwill recorded was $31.2 million.
- The company invested $10.5 million in strategic investments during the second quarter and completed its $200 million share-repurchase program as of January 31, 2022. Six-month repurchases totaled $37.5 million.
- Other expense was $8.0 million for the quarter and $6.9 million for the six months, compared with other income in the prior-year periods, primarily because of foreign-currency fluctuations.
Guidance, outlook, management commentary and risks
- The filing does not provide a clear formal quarterly or full-year revenue or earnings guidance range.
- Management expects subscription arrangements to represent a majority of new sales and expects cloud migration to continue reducing the near-term rate of reported revenue growth because subscription revenue is recognized ratably.
- Management expects subscription and support gross margins to improve over time as cloud operations scale, but expects overall gross margins to decline in the short term because of revenue mix and continued cloud investment.
- Management expects operating expenses to increase in absolute dollars as the company invests in product development, cloud infrastructure, sales and marketing, personnel and international expansion.
- Management expects to generate positive operating cash flow on an annual basis, although quarterly cash flow may fluctuate materially.
- COVID-19, inflation, remote and hybrid work, hiring challenges and longer sales and implementation cycles continued to affect services revenue, margins, customer implementations and forecasting.
- Key risks include execution of the transition from term licenses to cloud subscriptions, cloud infrastructure costs and service-level obligations, cybersecurity and data privacy compliance, customer concentration and renewals, competition, foreign-currency volatility, reliance on systems integrators and third-party hosting providers, and the ability to fund or settle the convertible notes.
- A 100-basis-point increase in interest rates was estimated to reduce the market value of available-for-sale securities by approximately $5.4 million. A hypothetical 10% foreign-exchange movement was estimated to produce an approximately $23.2 million transaction gain or loss.
- ASU 2020-06 was expected to become effective for Guidewire on August 1, 2022. Management believed the required change from the treasury-stock method to the if-converted method could adversely affect diluted earnings per share.
- Management reported effective disclosure controls and procedures and no material changes in internal control over financial reporting. No material pending legal proceedings were disclosed.
Important facts for investors to verify
- Whether ARR growth converts into recognized revenue and sustainable cash flow as subscription contracts mature.
- The pace and economics of customer migration to Guidewire Cloud, including subscription gross-margin improvement and implementation costs.
- The drivers of the large six-month operating cash outflow and the timing of a return to positive operating cash flow.
- HazardHub’s integration progress, final purchase-price allocation and contribution to revenue or profitability.
- The company’s ability to manage the $400 million convertible notes due in 2025, including potential cash settlement or dilution.
- Foreign-currency exposure, cybersecurity and privacy compliance, service-level obligations, and reliance on AWS and systems-integrator partners.
- Future effects of ASU 2020-06 on diluted share counts and earnings per share.