Guidewire Software, Inc. — Q3 FY2021 Form 10-Q Summary
Business Context and Reporting Period
Guidewire provides software and cloud services for property and casualty insurers, including core policy, billing, claims, digital engagement, analytics, and artificial intelligence applications. The company is transitioning customers from self-managed term licenses toward cloud-based subscription arrangements.
The filing covers the three and nine months ended April 30, 2021, Guidewire’s fiscal third quarter and first nine months of fiscal 2021. Financial statements are unaudited and presented in accordance with U.S. GAAP.
Key Financial Metrics
| Metric | Three Months Ended April 30, 2021 | Three Months Ended April 30, 2020 | Nine Months Ended April 30, 2021 | Nine Months Ended April 30, 2020 |
|---|---|---|---|---|
| Total revenue | $164.0 million | $168.2 million | $513.8 million | $498.6 million |
| Subscription and support revenue | $64.8 million | $50.8 million | $182.4 million | $149.4 million |
| License revenue | $50.9 million | $63.1 million | $194.1 million | $194.0 million |
| Services revenue | $48.2 million | $54.3 million | $137.3 million | $155.3 million |
| Gross profit | $71.9 million | $82.4 million | $238.9 million | $248.4 million |
| Gross margin | 44% | 49% | 46% | 50% |
| Loss from operations | $(46.8) million | $(25.6) million | $(105.5) million | $(68.2) million |
| Net loss | $(36.6) million | $(31.0) million | $(65.5) million | $(66.0) million |
| Diluted loss per share | $(0.44) | $(0.37) | $(0.78) | $(0.80) |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $3.2 million | $5.9 million |
| Free cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $(16.8) million | $(16.3) million |
- Quarterly revenue decreased 2%, while nine-month revenue increased 3% year over year.
- Quarterly subscription revenue increased 48%; nine-month subscription revenue increased 39%. Subscription and support represented 40% of quarterly revenue and 35% of nine-month revenue, versus 30% and 30%, respectively, in the comparable periods.
- Quarterly license revenue declined 19%, primarily due to lower new term-license and renewal revenue. Nine-month license revenue was approximately flat.
- Services revenue declined 11% for the quarter and 12% for the nine-month period, reflecting lower billing rates, implementation investments, and COVID-19-related travel restrictions.
- Operating expenses increased 10% in the quarter and 9% for the nine-month period, driven by higher research and development, sales and marketing, and general and administrative spending.
- Stock-based compensation was $28.2 million for the quarter and $86.2 million for the nine-month period, compared with $24.8 million and $76.1 million, respectively.
Balance Sheet, Debt, and Liquidity
- Cash, cash equivalents, and investments totaled $1.289 billion at April 30, 2021, compared with $1.434 billion at July 31, 2020. Working capital was $1.094 billion.
- Cash and cash equivalents were $284.4 million; short-term investments were $803.9 million; and long-term investments were $200.5 million.
- The company had $400.0 million principal amount of 1.25% convertible senior notes due 2025, carried at a net amount of $340.4 million. The notes had an estimated fair value of $460.0 million.
- Operating lease liabilities totaled $130.4 million, including $11.5 million current and $118.9 million non-current.
- Management stated that existing cash, cash equivalents, and liquidity sources should fund operations for at least the next 12 months.
- Under a $200.0 million repurchase authorization, the company repurchased 1.1 million shares for $123.8 million during the nine-month period. Approximately $76.2 million remained authorized at April 30, 2021.
Material Changes Versus the Prior Comparable Period
- The revenue mix continued shifting toward subscriptions: subscription revenue rose $14.5 million in the quarter and $33.5 million for the nine-month period.
- Gross margin declined from 49% to 44% for the quarter and from 50% to 46% for the nine-month period. Subscription and support margin declined to 36% from 40% in the quarter and to 35% from 44% for nine months.
- Services gross profit became negative: $(0.6) million for the quarter and $(11.4) million for nine months, compared with positive gross profit of $1.6 million and $3.2 million, respectively.
- Operating losses widened due to increased investment in cloud operations, research and development, sales and marketing, and implementation resources.
- Other income improved by $17.6 million in the quarter and $27.4 million for nine months, primarily because of foreign-exchange gains compared with prior-year losses and the absence of the prior-year strategic-investment impairment.
- Interest income declined substantially because of lower yields on invested funds.
- Cash used in financing activities increased to $120.7 million, primarily because of share repurchases, compared with $3.1 million of cash provided in the prior-year period.
Guidance, Outlook, Commentary, and Risks
The filing does not provide clear numerical revenue, earnings, or margin guidance. Management expects subscription arrangements to represent a majority of new sales and expects reported revenue growth to lag subscription bookings because subscription revenue is recognized ratably over multi-year terms.
- Management expects subscription and support gross margins to fluctuate while cloud operations scale, with improvement over time as efficiencies and customer volumes increase.
- Services revenue and margins are expected to remain pressured through fiscal 2021 and potentially longer by COVID-19 disruptions, lower billing rates, implementation investments, travel restrictions, and greater use of system-integrator partners.
- Research and development, sales and marketing, and general and administrative expenses are expected to increase in absolute dollars as the company invests in cloud migration, product development, sales capacity, infrastructure, and compliance.
- COVID-19 continued to delay sales and implementation cycles, affect services activity, and create risks related to customer payment capacity, demand, collections, asset impairments, and forecasting. The company recorded approximately $3.3 million of Canadian Emergency Wage Subsidy benefits during the nine-month period.
- Annual recurring revenue was $538 million at April 30, 2021, compared with $514 million at July 31, 2020.
- Remaining performance obligations were approximately $596 million at April 30, 2021. Professional-services contracts billed on a time-and-materials basis are excluded from this amount.
- Principal risks include execution of the cloud transition, lower subscription and services margins, lengthy and seasonal sales cycles, customer concentration, competition, cybersecurity and privacy compliance, reliance on third-party infrastructure such as AWS, foreign-exchange volatility, implementation performance, and retention of personnel and system-integrator partners.
- The California Franchise Tax Board was examining state income tax returns for fiscal years 2017 and 2018. Unrecognized tax benefits were $11.8 million at April 30, 2021.
- The company adopted ASU 2018-15 and ASU 2016-13 without a material impact. It was evaluating ASU 2020-06, which is expected to require the if-converted method for convertible-note dilution and could adversely affect diluted earnings per share.
- Management reported effective disclosure controls and procedures and no material changes in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether subscription bookings and ARR growth are converting into sustained revenue growth as ratable recognition creates a timing lag.
- Whether cloud operations achieve the expected scale efficiencies and restore subscription gross margins.
- Whether services revenue and gross margins recover after COVID-19 disruptions and implementation investments.
- The effect of continued share repurchases on liquidity, share count, and capital allocation.
- The company’s ability to fund or cash-settle the $400.0 million convertible notes, including potential conversion or fundamental-change obligations.
- Customer concentration, renewal and expansion rates, sales-cycle duration, and the impact of large or unusual license transactions.
- Cybersecurity, privacy, data-transfer, AWS availability, service-level, and indemnification exposures.
- The impact of foreign-exchange movements, tax audits, uncertain tax positions, and future adoption of ASU 2020-06.