Guidewire Software, Inc. — Form 10-Q Summary
Business context and reporting period
Guidewire provides core software platforms for property and casualty insurance carriers, including PolicyCenter, ClaimCenter and BillingCenter, together with maintenance and professional implementation services. The filing covers the three and six months ended January 31, 2012, within the fiscal year ending July 31, 2012. The company completed its initial public offering on January 30, 2012.
Financial performance and position
| Metric | Three months ended Jan. 31, 2012 | Three months ended Jan. 31, 2011 | Six months ended Jan. 31, 2012 | Six months ended Jan. 31, 2011 |
|---|---|---|---|---|
| Total revenue | $55.1 million | $42.3 million | $107.5 million | $77.0 million |
| Gross profit | $34.4 million | $25.9 million | $67.2 million | $45.4 million |
| Gross margin | 62% | 61% | 63% | 59% |
| Operating income | $5.4 million | $5.4 million | $13.5 million | $7.2 million |
| Net income | $3.7 million | $5.4 million | $8.5 million | $7.3 million |
| Diluted EPS | $0.06 | $0.11 | $0.15 | $0.14 |
| Adjusted EBITDA | $12.3 million | $7.3 million | $24.5 million | $10.3 million |
| Operating cash flow | Not separately provided for the quarter | $(12.3) million | $0.9 million |
- Quarterly revenue increased 30%; year-to-date revenue increased 40%.
- Quarterly revenue consisted of $25.7 million of license revenue, $6.8 million of maintenance revenue and $22.6 million of services revenue. Year-to-date amounts were $46.5 million, $13.9 million and $47.0 million, respectively.
- Year-to-date license revenue rose 54%, maintenance revenue rose 42% and services revenue rose 27%.
- Operating expenses increased 42% in the quarter and 41% year to date, led by higher research and development, personnel, marketing and public-company preparation costs.
- Stock-based compensation increased to $6.3 million for the quarter and $9.6 million year to date, compared with $1.5 million and $2.5 million in the comparable periods.
- Cash and cash equivalents were $169.6 million at January 31, 2012, versus $59.6 million at July 31, 2011. Including restricted cash, total cash was approximately $175.7 million.
- Current assets were $215.2 million and current liabilities were $70.8 million, implying working capital of approximately $144.4 million at January 31, 2012.
- The company reported no outstanding debt or short-term investments as of January 31, 2012. Restricted cash totaled $6.0 million.
- Deferred revenue declined from $73.8 million at July 31, 2011 to $61.4 million at January 31, 2012, primarily as previously billed license and services revenue was recognized.
Material changes versus the prior comparable period
- Term license revenue increased 51% in the quarter and 47% year to date, reflecting new orders, product adoption and recognition of prior-year orders. Perpetual license revenue declined 14% in the quarter but increased 73% year to date, highlighting significant timing variability.
- Gross margin improved year to date from 59% to 63%, primarily because of the higher proportion of high-margin license revenue. Services remained substantially lower margin than license and maintenance revenue.
- Net income declined in the quarter despite higher revenue, primarily because of increased operating expenses, income taxes and stock-based compensation. The year-to-date net income increase was more modest than the revenue increase.
- Operating cash flow shifted from $0.9 million provided to $12.3 million used year to date. Drivers included a $10.0 million litigation settlement payment, a $11.6 million increase in accounts receivable and a $11.9 million decrease in deferred revenue.
- The IPO generated approximately $123.0 million after underwriting discounts and commissions and approximately $119.3 million after offering expenses, according to different disclosures in the filing. Convertible preferred stock converted into 25.4 million common shares.
- Quarterly and year-to-date stock-based compensation increased materially following the IPO, including expense related to performance-based restricted stock units.
Guidance, outlook, commentary, risks and unusual items
- Management expects operating expenses, cost of services, research and development, sales and marketing and capital expenditures to increase in absolute dollars as the company expands.
- Management expects positive operating cash flow on an annual basis but warns that quarterly cash flow may fluctuate materially. Existing cash and expected operating cash flow were considered sufficient to fund operations for at least the next 12 months.
- Management expects seasonal strength in the second and fourth fiscal quarters. Revenue timing can be affected by annual billing, early payments, perpetual licenses, delivery of specified functionality and implementation milestones. A $2.5 million early payment from one customer accelerated revenue recognition in the quarter.
- The Accenture litigation settlement requires a potential additional payment of $20.0 million if Accenture prevails in its patent appeal. Guidewire may instead pay $15.0 million before an initial appellate determination to discharge the obligation; no additional payment would be due if Accenture is unsuccessful.
- Guidewire entered into a seven-year lease for a new Foster City headquarters commencing August 1, 2012. Total future operating lease payments were $32.6 million, partially offset by $1.2 million of contractual sublease income.
- Key risks include customer and revenue concentration, long and variable sales and implementation cycles, revenue-recognition timing, lower services margins, intense competition, intellectual-property claims, foreign-exchange exposure, economic weakness affecting insurance IT spending, rapid growth and hiring requirements, data-security risks and future dilution from equity compensation or additional financing.
- The company had no material unrecorded off-balance-sheet arrangements and stated that disclosure controls and procedures were effective as of January 31, 2012.
Most important facts for investors to verify
- Reconcile the IPO proceeds disclosures: approximately $123.0 million after underwriting discounts and commissions versus approximately $119.3 million after all stated offering expenses.
- Assess the sustainability of revenue growth given the large effect of license mix, perpetual licenses, early payments and implementation-related recognition.
- Monitor services utilization and margin performance as services represented approximately 41% of quarterly revenue and 44% of year-to-date revenue.
- Evaluate the conversion of reported profit and Adjusted EBITDA into operating cash flow, particularly after the litigation payment and changes in receivables and deferred revenue.
- Track the potential $15.0 million or $20.0 million Accenture payment and the status of the related patent appeal.
- Consider dilution from 51.3 million shares outstanding, approximately 7.4 million outstanding options, approximately 5.1 million restricted stock units and additional equity-plan capacity.
- Verify the impact of the new headquarters lease, planned hiring and public-company compliance costs on future margins and liquidity.