Summary
Guidewire reported total revenue of $195.3 million for the first quarter of fiscal 2023, up 17.7% from $165.9 million in the same quarter a year earlier. Subscription and support revenue again outpaced the total, while license revenue slipped as customers keep moving from term licenses to cloud subscriptions. Annual recurring revenue reached $673 million as of October 31, 2022, up from $664 million as of July 31, 2022. Management credited subscription revenue growth and improved subscription and support gross margins for the quarter.
Profitability remains the sore spot. Gross profit rose 5.5% to $72.2 million, but gross margin fell to 36.9% from 41.2% a year earlier. Services gross profit was negative, and the company said it is absorbing costs to move customers to the cloud, including heavier use of subcontractors and fixed fee arrangements. GAAP operating loss widened to $74.6 million from $65.4 million. GAAP net loss widened to $69.3 million from $51.3 million, and diluted loss per share widened to $0.83 from $0.62. Operating margin was -38.2%, up from -39.4%. On a non-GAAP basis, loss from operations was $35.9 million versus $28.7 million, while non-GAAP net loss narrowed to $9.9 million from $18.1 million and non-GAAP loss per share narrowed to $0.12 from $0.21.
Cash flow improved year over year even though the quarter consumed cash. Operating cash flow was negative $87.4 million, an 18.3% improvement from negative $107.0 million. Free cash flow, a separate measure the company reports, was negative $91.7 million versus negative $114.2 million. Capital expenditures fell 81.9% to $0.60 million. Cash, cash equivalents and investments totaled $0.9 billion at October 31, 2022, down from $1.2 billion at July 31, 2022, after the company funded a $200 million accelerated share repurchase. The board authorized a $400 million buyback in September 2022, and the ASR delivered an initial 2,581,478 shares. Deferred revenue rose 24.5% to $144.7 million, and remaining performance obligations rose 24.9% to $1.10 billion.
Guidance for the second quarter of fiscal 2023 calls for ARR of $695 million to $700 million and a non-GAAP operating loss of $4 million to $0 million. For the full fiscal year 2023, Guidewire guides to ARR of $745 million to $760 million and a non-GAAP operating loss between $28 million and $18 million. ARR is not a GAAP measure, and the company measures it on a constant currency basis during the fiscal year.
Other income (expense), net swung to an expense of $13.8 million from income of $1.2 million a year earlier on foreign exchange moves. Interest income rose to $4.6 million from $0.7 million. The effective tax rate was 19%, down from 25%. Guidewire also signed a new cloud infrastructure agreement with a total obligation of $600 million over five years, a commitment that will feed cost of subscription and support revenue. The company flags lengthy sales cycles, reliance on a small number of large customers, the subscription transition, inflation, the COVID-19 pandemic, the Russia-Ukraine conflict, supply chain issues, and data security among its risks. It also noted that Section 174 now requires research and experimental expenditures to be capitalized and amortized, which could raise state cash taxes. Headcount keeps rising: 692 cloud operations and technical support employees, 790 professional services employees, 940 in research and development, 454 in sales and marketing, and 462 in general and administrative at October 31, 2022.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q1 FY2023 | Q4 FY2022 | QoQ | Q1 FY2022 | YoY |
|---|---|---|---|---|---|
| Revenue | $195.3M | $244.6M | -20.2% | $165.9M | +17.7% |
| Gross profit | $72.2M | $115.9M | -37.7% | $62.8M | +15.0% |
| Gross margin | 37.0% | 47.4% | -10.4 pp | 37.8% | -0.9 pp |
| Research & development | $58.2M | $65.3M | -10.9% | $59.9M | -2.9% |
| Sales & marketing | $46.5M | $51.7M | -10.1% | $43.6M | +6.5% |
| General & administrative | $42.1M | $31.1M | +35.2% | $24.6M | +71.2% |
| Total operating expenses | $146.7M | $148.1M | -0.9% | $128.1M | +14.5% |
| Operating income (loss) | -$74.6M | -$32.2M | -131.5% | -$65.4M | -14.0% |
| Operating margin | -38.2% | -13.2% | -25.0 pp | -39.4% | +1.2 pp |
| Net income (loss) | -$69.3M | -$31.0M | -123.4% | -$51.3M | -35.2% |
| Net margin | -35.5% | -12.7% | -22.8 pp | -30.9% | -4.6 pp |
| Diluted EPS | -$0.83 | -$0.37 | -$0.46 | -$0.62 | -$0.21 |
Risks
Recent global events including COVID-19, the Russia-Ukraine conflict, inflation, and supply chain issues have adversely affected and may continue to affect the business. MD&A states these disruptions have impacted ARR growth rates, services revenue and margins, operating cash flow, and expenses, and that sales cycles and services revenue continued to be impacted.
The shift to cloud-based subscription offerings requires significant investment and causes ratable revenue recognition, which can lower initial revenue and pressure margins. MD&A reports total gross margin decreased to 37% in the quarter ended October 31, 2022 from 42% a year earlier, and services gross margin was negative 19% versus negative 1%.
Services revenue produces lower or negative gross margin, and the company is investing in customer cloud migrations, including fixed fee or capped arrangements. MD&A reports cost of services revenue increased 39% to $65.6 million in the quarter ended October 31, 2022, driven by $13.2 million higher subcontractor expenses and $5.4 million higher personnel expenses.
Sales and implementation cycles are lengthy and variable, and recent global events have lengthened them. MD&A states sales cycles, ARR growth rates, and revenue, especially services revenue, continued to be impacted, and that remote work may extend sales cycles and delay new orders.
Revenue and ARR depend on a relatively small number of P&C insurance customers. The ten largest customers accounted for 23% of revenue in fiscal year 2022, and the ten largest customers based on ARR accounted for 26% of total ARR at July 31, 2022.
The market for software and services is intensely competitive, including from insurtech companies and vendors of cloud-based solutions. Risk factors state competitors may develop improved products or a technology breakthrough that disrupts the market, and that new cloud competitors can develop solutions without maintaining or migrating existing solutions.
Future success depends on attracting, training, integrating, and retaining highly skilled employees, especially for cloud operations, sales, and software engineering. Risk factors state COVID-19, current global events, and recent economic conditions have increased attrition and decreased available candidates, increasing time to hire.
Results are subject to fluctuations in foreign currency exchange rates, particularly the Australian Dollar, British Pound, Canadian Dollar, Euro, Indian Rupee, and Polish Zloty. MD&A reports other income (expense), net was expense of $13.8 million in the quarter ended October 31, 2022, compared to income of $1.2 million a year earlier, due to foreign currency exchange rate fluctuations.
As of July 31, 2022, $400.0 million principal amount of 1.25% Convertible Senior Notes due 2025 was outstanding. Risk factors state holders may convert under certain circumstances, requiring cash settlement, and that adoption of ASU 2020-06 is expected to negatively affect reported diluted EPS in periods with net income.
The Tax Cuts and Jobs Act amended Internal Revenue Code Section 174 to require capitalization and amortization of R&E expenditures beginning in fiscal year 2023. MD&A states if the requirement is not modified, the company may need to utilize federal and state tax attributes and may face increases to state cash taxes or tax expense.
The company relies on third-party cloud infrastructure, primarily AWS, and entered a new five-year agreement with a cloud infrastructure services provider for a total obligation of $600 million. MD&A reports cloud infrastructure expense increased $7.4 million in the quarter ended October 31, 2022 for the growing cloud customer base.
The company is transitioning to a hybrid in-person and remote workforce, which may increase cybersecurity risks, reduce collaboration and innovation, and harm retention. Risk factors state remote work security systems may be less secure and the shift may adversely affect recruiting and retention.
Complex implementations and migrations can result in delays, monetary credits, reduced fees, revenue reversals, or customer refusal to pay. Risk factors state implementation and testing typically lasts six to 24 months or longer and failures could increase services personnel costs and lower services margin.
Growth depends on system integrator partners for implementations and migrations, but the company cannot control the quality or timeliness of their resources. Risk factors state partner failures could reduce customer satisfaction and require company resources at discounted rates.
A significantly higher percentage of annual license revenue has historically been recognized in the fourth fiscal quarter, and subscription revenue is recognized ratably. MD&A states the concentration of sales in the fourth quarter increases the impact because revenue from most fourth quarter subscription sales is not realized until the following fiscal year.
In September 2022 the board authorized a share repurchase program of up to $400.0 million and the company entered into a $200.0 million accelerated share repurchase agreement. Risk factors state the program may be suspended or discontinued, could affect the price of common stock, increase volatility, and diminish cash reserves.
SaaS KPIs
All quarters →ARR
Free Cash Flow
Summary, forecast, risks and KPIs are extracted from Guidewire Software, Inc.'s SEC filings for Q1 FY2023 (10-Q / 10-K and the 8-K earnings release); GAAP figures in the summary are checked against the reported XBRL data. They can contain errors; the filings are authoritative. Processed Oct 1, 2026.