Guidewire Software, Inc. — Fiscal 2022 Form 10-K 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 systems, digital engagement, analytics and artificial intelligence. Most new sales and implementations are for InsuranceSuite Cloud. This filing covers the fiscal year ended July 31, 2022; the source does not provide a separate fiscal fourth-quarter financial statement.
At July 31, 2022, Guidewire had approximately 520 customers and 3,376 employees. The company operates as one reportable segment and generated revenue in the Americas, EMEA and APAC.
Key financial metrics
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Total revenue | $812.6 million | $743.3 million | +9% |
| Subscription and support revenue | $343.7 million | $252.4 million | +36% |
| License revenue | $258.6 million | $303.8 million | -15% |
| Services revenue | $210.3 million | $187.1 million | +12% |
| Gross profit | $352.2 million | $368.2 million | -4% |
| Gross margin | 43% | 50% | -7 percentage points |
| Operating loss | $199.4 million | $105.6 million | Loss increased |
| Net loss | $180.4 million | $66.5 million | Loss increased |
| Diluted loss per share | $2.16 | $0.79 | Loss increased |
| Operating cash flow | $(37.9) million | $111.6 million | Decreased |
| Free cash flow | $(59.7) million | $82.7 million | Decreased |
| ARR at year-end | $664 million | Not clearly provided | +14% reported; +17% constant currency |
Subscription revenue rose 54% to $259.2 million, while support revenue was broadly flat at $84.5 million. Subscription and support represented 42% of total revenue versus 34% in the prior year. Services gross profit was negative $28.1 million, or a negative 13% margin, compared with negative $12.4 million, or negative 7%, in FY2021.
Cash, cash equivalents and investments totaled $1.164 billion at July 31, 2022, compared with $1.347 billion a year earlier. Working capital was $915.2 million. Cash and cash equivalents were $606.3 million, excluding restricted cash. Management stated that existing liquidity should fund operations for at least the next 12 months.
Debt consisted principally of $400.0 million of 1.25% convertible senior notes due March 2025, carried at $358.2 million net. Total contractual obligations were approximately $654.9 million, including $415.0 million of debt principal and interest, $136.8 million of lease obligations and $98.1 million of purchase commitments.
Material changes versus the prior comparable period
- Revenue increased $69.3 million, primarily from cloud subscription growth and larger subscription implementation and migration projects.
- License revenue declined $45.2 million, reflecting fewer large multi-year term license renewals and new term-license transactions as customers migrated to subscriptions.
- Gross margin declined because subscription and support revenue carries lower margins than license revenue and because the company continued investing in cloud operations and customer migrations.
- Operating expenses increased 16% to $551.7 million, including higher research and development, sales and marketing, and general and administrative spending. Stock-based compensation increased to $137.0 million from $115.0 million.
- Operating cash flow and free cash flow turned negative. Cash flow was affected by $69.1 million of payments for the prior-year corporate bonus and accrued vacation balances.
- Guidewire ceased operations in Russia, canceled related contracts and removed $3.1 million of ARR. It recorded $3.0 million of bad-debt expense related to the termination.
- Guidewire acquired HazardHub in August 2021 for approximately $53 million of net cash consideration, adding property-risk data and analytics capabilities and approximately $31.3 million of goodwill.
- The $200 million share-repurchase authorization was completed in the second quarter of FY2022. FY2022 repurchases totaled $37.5 million. In September 2022, the board authorized a new repurchase program of up to $400 million.
Guidance, outlook, commentary and risks
The filing does not provide clear numerical FY2023 guidance. Management expects subscriptions to comprise a majority of new arrangements, with near-term reported revenue growth affected by ratable subscription recognition and the seasonal concentration of new orders in the fourth fiscal quarter. Management expects continued investment in cloud operations, research and development, sales and marketing, cybersecurity and customer migrations.
Management expects subscription gross margins to improve over several years as scale and operating efficiencies develop, but expects overall gross margins to decline in the short term because of revenue mix. Services margins may remain pressured by lower billing rates, fixed-fee or capped arrangements, implementation investments, hiring constraints, COVID-19 effects and inflation.
Principal risks include execution of the transition from term licenses to cloud subscriptions; lengthy and unpredictable sales and implementation cycles; customer concentration and renewal risk; intense competition; dependence on AWS and other third parties; cybersecurity and data-privacy compliance; inflation, foreign-exchange volatility, COVID-19 and geopolitical events; employee retention; acquisition integration; and the ability to meet service levels and contractual implementation commitments.
Effective August 1, 2022, Guidewire adopted ASU 2020-06 for convertible debt. The company expected this to increase the reported carrying amount of the notes by approximately $37 million, reduce additional paid-in capital by approximately $68 million, reduce accumulated deficit by approximately $40 million and lower future interest expense. The new standard is also expected to adversely affect diluted earnings per share through the use of the if-converted method.
There were no material pending legal proceedings identified, and management and KPMG concluded that internal control over financial reporting was effective as of July 31, 2022. KPMG issued an unqualified audit opinion.
Most important facts for investors to verify
- Whether subscription ARR and revenue growth are sustained as term-license revenue continues to decline.
- The pace at which subscription and services gross margins improve, including the effect of cloud infrastructure and implementation costs.
- Conversion of negative FY2022 operating cash flow and free cash flow back to positive levels.
- Liquidity planning for the $400 million convertible notes due in 2025, including potential cash settlement or equity dilution.
- The financial effect and execution status of the new $400 million share-repurchase program.
- Customer renewal, expansion and concentration trends, particularly because the ten largest customers represented 23% of FY2022 revenue and 26% of ARR at year-end.
- Potential effects of the ASU 2020-06 adoption on diluted share count, earnings per share and reported debt.
- Exposure to cybersecurity incidents, privacy regulation, AWS availability, foreign exchange, inflation and further geopolitical disruptions.