Summary
Guidewire Software reported fiscal 2021 second-quarter revenue of $180.06 million, up 3.8% from a year earlier. Gross profit was $88.16 million, down 1.9%, and gross margin slipped to 49.0%, down 2.8 percentage points. The GAAP operating loss was $27.07 million, and the loss widened from a year earlier. Operating margin was negative 15.0%, down 4.6 percentage points. The net loss narrowed to $8.65 million, and diluted EPS was negative $0.10. Margin pressure came from heavier spending on cloud operations and negative services margins, the MD&A said. The cloud transition keeps weighing on reported profitability even as the top line grows.
For the first six months of fiscal 2021, revenue rose 5.9% to $349.86 million. Gross profit was $167.00 million, up 0.6%. The year-to-date GAAP operating loss widened to $58.67 million. The net loss narrowed to $28.84 million, and diluted EPS was negative $0.34. The gap between the operating loss and the net loss reflects a large income tax benefit in the period.
Cash generation was uneven. Operating cash flow for the quarter was $13.33 million, down 31.6% from a year earlier. Capital expenditures were $3.61 million, up 121.6%. For the six months, operating cash flow was negative $2.38 million, down 278.0%, and capital expenditures were $5.52 million, down 51.0%. Deferred revenue was $108.58 million, flat against a year earlier. Remaining performance obligations were $588.00 million, up 53.1%. The RPO gain points to a bigger contracted backlog, though revenue timing depends on contract terms and delivery.
ARR was $520 million as of January 31, 2021, compared with $514 million as of July 31, 2020. ARR for interim quarters is based on currency rates at the end of fiscal 2020 held constant through the year. Management pointed to a new Tier 1 customer in Europe, six cloud deals (five InsuranceSuite and one InsuranceNow), and five standalone wins for data and analytics. Non-GAAP income from operations was $7.5 million, compared with $15.4 million a year earlier. Non-GAAP net income was $9.0 million, or $0.11 per diluted share, compared with $17.6 million, or $0.21 per diluted share. The quarter also included a $1.7 million benefit from the Canada Emergency Wage Subsidy. Free cash flow was negative $12.8 million for the six months ended January 31, 2021, compared with negative $12.1 million a year earlier. Headcount tells the story of the pivot: cloud operations and technical support employees grew to 519 from 282, professional services employees fell to 675 from 749, and research and development headcount rose to 806 from 725.
For the third quarter of fiscal 2021, management guided ARR to $533 million to $536 million and a non-GAAP operating loss between negative $29 million and negative $25 million. For the full fiscal year 2021, the company guided ARR to $560 million to $571 million and non-GAAP operating income between $2 million and $10 million. Management said the outlook reflects current expectations. The plan points to a year of cloud transition, with orders historically concentrated in the quarter ending July 31.
COVID-19 remains a live drag. The MD&A says the pandemic has delayed new orders and services engagements, cut billable travel, and pressured services revenue and margins, and management expects those conditions to last through fiscal year 2021 or longer. New sales are delayed rather than cancelled, and implementations are being rescheduled or stretched out. Other named risks include long sales cycles, reliance on a relatively small number of large customers, intense competition, rising cloud operations costs, foreign exchange swings, and possible impairment of lease assets, investments, or goodwill. The shift to subscriptions also slows near-term reported revenue growth because subscription revenue is recognized ratably.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q2 FY2021 | Q1 FY2021 | QoQ | Q2 FY2020 | YoY |
|---|---|---|---|---|---|
| Revenue | $180.1M | $169.8M | +6.0% | $173.5M | +3.8% |
| Gross profit | $88.2M | $78.8M | +11.8% | $89.9M | -1.9% |
| Gross margin | 49.0% | 46.4% | +2.5 pp | 51.8% | -2.9 pp |
| Research & development | $53.2M | $52.6M | +1.1% | $50.0M | +6.5% |
| Sales & marketing | $39.2M | $36.6M | +7.0% | $37.3M | +5.0% |
| General & administrative | $22.8M | $21.2M | +7.7% | $20.6M | +10.8% |
| Total operating expenses | $115.2M | $110.4M | +4.3% | $107.9M | +6.8% |
| Operating income (loss) | -$27.1M | -$31.6M | +14.3% | -$18.0M | -50.1% |
| Operating margin | -15.0% | -18.6% | +3.6 pp | -10.4% | -4.6 pp |
| Net income (loss) | -$8.7M | -$20.2M | +57.1% | -$19.9M | +56.6% |
| Net margin | -4.8% | -11.9% | +7.1 pp | -11.5% | +6.7 pp |
| Diluted EPS | -$0.10 | -$0.24 | +$0.14 | -$0.24 | +$0.14 |
Risks
The filing states the pandemic and containment measures have impacted GWRE since Q3 FY2020 and continued to pressure ARR growth rates, services revenue and margins, and operating cash flow in the first half of FY2021; sales and implementations are delayed or rescheduled rather than cancelled, but the durations remain uncertain. Operating cash flow was -$2.38 million for the six months ended January 31, 2021 versus $1.34 million in the prior-year YTD, down $3.71 million or 278.0%.
GWRE is moving new and existing customers to cloud-based subscription offerings, which delays revenue recognition and raises cloud operations costs; management says subscriptions should be a majority of new sales and this shift will continue to pressure reported revenue growth and margins. Total gross margin was 49.0% in FY2021 Q2, down 2.8 pp from 51.8% in FY2020 Q2, and 47.7% YTD, down 2.5 pp from 50.2% in the prior-year YTD.
The filing warns that subscription and support revenue has lower gross margin than license revenue and services revenue has lower gross margin than either, so a greater mix of cloud and services can reduce overall gross and operating margins. Subscription and support gross margin was 42% in FY2020, while services gross margin was less than 3% in both FY2020 and FY2019.
A relatively small number of P&C insurance customers drive a substantial portion of revenue and ARR; the ten largest customers accounted for 31% of revenue in each of FY2020, FY2019, and FY2018, and 29% of total ARR in FY2020. Loss, deferral, or subscription transition by any of these customers could cause significant quarterly and annual fluctuations.
The market for P&C insurance software and cloud services is intensely competitive, with pressure from small independent firms, horizontal software vendors, consulting firms, and insurtech entrants; capital invested in current and potential competitors has increased significantly in recent years. GWRE expects competition to remain high and may need greater R&D, sales, and marketing investment, which could hurt profitability.
GWRE's sales and implementation cycles are lengthy and variable, often 6 to 24 months or longer for implementation, and COVID-19 has lengthened cycles and delayed new orders and services engagements. The filing says these delays can push revenue further from incurred expenses and make forecasting difficult.
Future success depends on attracting and retaining highly skilled cloud operations, sales, services, and engineering personnel, and competition is particularly intense in the San Francisco Bay Area; failure to hire and integrate sufficient personnel could impede the cloud transition and growth. The filing also notes significant time and resources required to train new hires.
GWRE's cloud services store and transmit customer data, including personal data, and a security breach could lead to litigation, breach of contract claims, indemnity obligations, regulatory fines, and customer loss. The filing notes reliance on third-party systems such as AWS and that security techniques change frequently.
GWRE had $400.0 million aggregate principal amount of 1.25% Convertible Senior Notes due 2025 outstanding as of January 31, 2021, and may need significant cash to settle conversions or repurchase notes upon a fundamental change. A default or inability to refinance could materially harm liquidity and results.
GWRE sees significantly increased orders in its fiscal fourth quarter, and upfront recognition of multi-year term licenses can cause large quarterly swings; the first quarter of FY2021 included a five-year license renewal that management says overshadowed the usual Q2 seasonal impact and creates a challenging comparable for Q1 FY2022.
In October 2020 the board authorized up to $200 million of common stock repurchases; during the six months ended January 31, 2021 the company repurchased $43.9 million and had $156.1 million remaining. The program may be suspended or discontinued and could diminish cash reserves or increase stock volatility.
SaaS KPIs
All quarters →Non-GAAP Income from Operations
Annual Recurring Revenue (ARR)
Summary, forecast, risks and KPIs are extracted from Guidewire Software, Inc.'s SEC filings for Q2 FY2021 (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 2, 2026.