Guidewire Software, Inc. — Fiscal 2022 Third-Quarter Form 10-Q
Business context and reporting period
Guidewire provides core insurance operations, digital engagement, analytics, and artificial-intelligence applications primarily to property and casualty insurers. Its offerings include cloud-based subscriptions and self-managed software licenses, supported by implementation and other professional services. This unaudited report covers the three and nine months ended April 30, 2022, compared with the prior-year periods.
Key financial metrics
| Metric | Three months ended April 30, 2022 | Three months ended April 30, 2021 | Nine months ended April 30, 2022 | Nine months ended April 30, 2021 |
|---|---|---|---|---|
| Total revenue | $197.4 million | $164.0 million | $568.0 million | $513.8 million |
| Subscription and support revenue | $86.9 million | $64.8 million | $250.1 million | $182.4 million |
| License revenue | $53.9 million | $50.9 million | $163.8 million | $194.1 million |
| Services revenue | $56.7 million | $48.2 million | $154.0 million | $137.3 million |
| Gross profit | $77.0 million | $71.9 million | $236.4 million | $238.9 million |
| Gross margin | 39% | 44% | 42% | 46% |
| Operating loss | $62.4 million | $46.8 million | $167.2 million | $105.5 million |
| Net loss | $57.4 million | $36.6 million | $149.4 million | $65.5 million |
| GAAP loss per share | $0.69 | $0.44 | $1.79 | $0.78 |
- Third-quarter revenue increased 20%, led by a 49% increase in subscription revenue and an 18% increase in services revenue. Nine-month revenue increased 11%.
- Subscription and support represented 44% of nine-month revenue, compared with 35% in the prior-year period; license revenue declined to 29% from 38%.
- Third-quarter subscription and support gross margin was 37%, license gross margin was 96%, and services gross margin was negative 12%. Services gross margin deteriorated from negative 1% in the prior-year quarter.
- Operating expenses increased 17% in both the quarter and nine-month period, reflecting higher research and development, sales and marketing, and general and administrative spending.
- Stock-based compensation was $32.9 million for the quarter and $103.0 million for the nine-month period.
- For the nine months, net cash used in operating activities was $121.5 million versus $3.2 million of cash provided in the prior-year period. Free cash flow was negative $138.7 million versus negative $16.8 million.
- Cash, cash equivalents, and investments totaled $1.089 billion at April 30, 2022, versus $1.347 billion at July 31, 2021. Working capital was $819.2 million versus $1.055 billion.
- The company had $400.0 million principal amount of 1.25% convertible senior notes due 2025, carried at a net amount of $354.5 million. Total lease liabilities were $117.1 million.
Material changes versus the prior comparable period
- The business continued shifting from upfront term-license revenue toward ratable cloud-subscription revenue. Subscription revenue grew substantially, while nine-month term-license revenue fell $30.1 million, primarily because of fewer multi-year renewals.
- Overall gross margin declined five percentage points in both the quarter and nine-month period because subscription revenue carries lower margins than licenses and services investments remained elevated.
- Operating losses widened to $62.4 million for the quarter and $167.2 million for the nine-month period, compared with $46.8 million and $105.5 million, respectively.
- Foreign exchange and investment-related factors contributed to other expense of $6.9 million for the quarter and $13.8 million for the nine-month period, compared with other income in the prior-year periods.
- ARR was $637 million at April 30, 2022, compared with $582 million at July 31, 2021. The company terminated its Russian customer contracts, reducing ARR by $3.1 million and resulting in approximately $3.0 million of bad-debt expense and a $3.0 million write-off of unbilled receivables.
- Guidewire acquired HazardHub in August 2021 for approximately $53 million of net cash consideration, including an $8.3 million holdback subject to service conditions. The preliminary allocation included $31.3 million of goodwill.
- The $200 million share-repurchase program was completed in the second fiscal quarter. Nine-month repurchases totaled $37.5 million for 322,545 shares.
Guidance, outlook, commentary, and risks
- The filing does not provide clear quantitative revenue, earnings, margin, or cash-flow guidance.
- Management expects subscriptions to remain the majority of new arrangements and expects cloud migration to support longer-term growth. However, ratable subscription recognition is expected to delay reported revenue growth relative to bookings and ARR.
- Management expects subscription and support gross margins to improve over several years as cloud operations scale, but expects overall gross margins to decline in the short term because of revenue mix. Services margins may remain pressured through at least the remainder of fiscal 2022 and fiscal 2023.
- Management expects research and development, sales and marketing, and general and administrative expenses to increase in absolute dollars as it invests in cloud operations, product development, personnel, international expansion, and infrastructure.
- The company expects positive operating cash flow on an annual basis but cautions that quarterly cash flow can fluctuate significantly. Management believes existing liquidity is sufficient to fund operations for at least the next 12 months.
- Key risks include lengthy and variable sales and implementation cycles; customer concentration and renewal risk; intense competition; cloud migration execution and service-level obligations; cybersecurity and data-privacy compliance; reliance on third-party infrastructure; employee hiring and retention; inflation, foreign exchange, COVID-19 effects, and geopolitical events including the Russia-Ukraine conflict.
- ASU 2020-06 will be adopted on August 1, 2022. Management expects the required if-converted method for convertible notes could adversely affect diluted EPS, while removal of the debt-equity separation model is expected to reduce interest expense.
- The filing reports no material pending legal proceedings and no accrued legal contingencies. Disclosure controls and procedures were assessed as effective, with no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether subscription growth and ARR continue to offset declining term-license revenue under ratable revenue recognition.
- The pace and economics of cloud migrations, including subscription gross-margin improvement and services-margin recovery.
- Operating cash-flow and free-cash-flow trends after the unusually large bonus and accrued-vacation payments made in the first fiscal quarter.
- Customer concentration, renewal and expansion rates, and the effect of the Russian contract cancellations.
- The effect of ASU 2020-06 on diluted share counts, interest expense, and reported EPS beginning in fiscal 2023.
- Liquidity available to fund ongoing losses, cloud investments, acquisitions, lease obligations, and potential cash settlement or repurchase obligations related to the convertible notes.