Guidewire Software, Inc. — Fiscal 2022 First Quarter 10-Q Summary
Business context and reporting period
Guidewire provides cloud and self-managed software, analytics, digital engagement, and AI applications primarily to property and casualty insurers. The filing covers the three months ended October 31, 2021, compared with the three months ended October 31, 2020. Financial statements are unaudited and prepared under U.S. GAAP.
Key financial metrics
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Total revenue | $165.9 million | $169.8 million | Down 2% |
| Subscription and support revenue | $79.0 million | $58.0 million | Up 36% |
| License revenue | $40.2 million | $65.3 million | Down 39% |
| Services revenue | $46.8 million | $46.6 million | Up 1% |
| GAAP gross profit | $62.8 million | $78.8 million | Down 20% |
| GAAP gross margin | 38% | 46% | Down 8 percentage points |
| Loss from operations | $(65.4) million | $(31.6) million | Loss increased |
| Net loss | $(51.3) million | $(20.2) million | Loss increased |
| Diluted net loss per share | $(0.62) | $(0.24) | Less favorable |
| Operating cash flow | $(107.0) million | $(15.7) million | Use increased |
| Free cash flow | $(114.2) million | $(20.2) million | Use increased |
Subscription and support gross margin was 36%, license gross margin was 94%, and services gross margin was negative 8%. Operating expenses increased 16% to $128.1 million, including research and development of $59.9 million, sales and marketing of $43.6 million, and general and administrative expense of $24.6 million.
As of October 31, 2021, cash, cash equivalents, and investments totaled $1.14 billion, down from $1.35 billion at July 31, 2021. Working capital was $876.5 million. The company had $400.0 million principal amount of 1.25% convertible senior notes due 2025, carried at $347.3 million net, and total lease liabilities of $123.6 million.
Annual recurring revenue was $594 million at October 31, 2021, compared with $582 million at July 31, 2021. Remaining performance obligations were approximately $881 million. No customer represented at least 10% of revenue in the quarter, although one customer represented at least 10% of accounts receivable at October 31, 2021.
Material changes versus the prior comparable period
- Subscription revenue increased $19.9 million, primarily from new and migrated Guidewire Cloud arrangements.
- Term license revenue decreased $25.1 million, primarily because the prior-year quarter included a large multi-year term-license renewal and $15.4 million of revenue from arrangements with longer-than-usual terms.
- Revenue mix shifted toward lower-margin subscription and support revenue, reducing total gross margin from 46% to 38%.
- Cloud operations and infrastructure investments increased subscription and support costs by $13.3 million. Management expects these costs to grow as the cloud customer base expands, although it expects longer-term economies of scale.
- Research and development, sales and marketing, and general and administrative expenses increased by $7.3 million, $7.0 million, and $3.4 million, respectively.
- Operating cash flow declined primarily because the company paid $69.1 million of fiscal 2021 bonuses and accrued vacation balances, in addition to the larger GAAP net loss.
- The company completed its acquisition of HazardHub, Inc. on August 18, 2021. Cash consideration was approximately $53 million, subject to customary adjustments, including an approximately $8 million holdback subject to service conditions. The preliminary purchase price allocation included $31.2 million of goodwill and $15.7 million of acquired intangible assets.
- The company repurchased 226,172 shares for $26.3 million during the quarter. Approximately $11.2 million remained available under the $200 million authorization at October 31, 2021.
Guidance, outlook, commentary, and risks
The filing does not provide a clear quantitative quarterly or annual revenue or earnings outlook. Management expects subscription arrangements to represent a majority of new sales and expects the transition from term licenses to cloud subscriptions to continue. Because subscription revenue is recognized ratably, management expects near-term reported revenue growth to lag order growth and expects deferred revenue to increase.
Management expects overall gross margins to decline in the short term because of the revenue mix shift toward subscription services, continued cloud investment, customer migration costs, and services-margin pressure. It expects subscription margins to improve over time as scale and operational efficiencies develop. Research and development, sales and marketing, and general and administrative expenses are expected to increase in absolute dollars as the company invests in product development, cloud operations, sales capacity, infrastructure, and international expansion.
Management expects annual operating cash flow to be positive but notes that quarterly cash flow can fluctuate substantially, particularly in the first fiscal quarter because of annual bonus payments and commissions. The company believes existing liquidity will fund operations for at least the next 12 months.
Principal risks include the ongoing COVID-19 pandemic and hybrid-work transition; lengthy and unpredictable sales and implementation cycles; customer concentration and renewal risk; competition; execution of the cloud migration strategy; cloud infrastructure costs and service-level commitments; cybersecurity and data privacy obligations; foreign exchange volatility; acquisition integration; employee retention; and the potential cash or dilution effects of the convertible notes.
The company recorded no material legal accruals and stated that no pending legal proceeding was expected to have a material adverse effect. Management concluded that disclosure controls and procedures were effective and reported no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether subscription and support growth and ARR expansion can offset the loss of upfront term-license revenue.
- Whether cloud operations investment produces the expected improvement in subscription gross margin.
- The sustainability of negative operating and free cash flow after the first-quarter bonus and vacation payments.
- The final purchase accounting for HazardHub, including goodwill, intangible assets, holdback obligations, and integration costs.
- The company’s ability to fund or refinance the $400 million convertible notes at maturity or upon conversion or a fundamental change.
- The effect of adopting ASU 2020-06, including the required change to the if-converted method for diluted earnings per share beginning August 1, 2022.
- Progress on cloud implementations, customer renewals, services utilization, and the effects of COVID-19-related delays.
- Exposure to cybersecurity incidents, privacy regulation, foreign currency movements, interest-rate changes, and customer or infrastructure-provider concentration.