Summary
Guidewire reported total revenue of $204.63 million for the second quarter of fiscal year 2022, an increase of 13.6% from the same quarter a year earlier. The mix tilted further toward recurring business. Subscription revenue rose 64%, services revenue rose 19%, and license revenue fell 10%. Annual recurring revenue reached $620 million as of January 31, 2022, up from $582 million as of July 31, 2021. Management counted 11 cloud deals in the quarter, a blend of existing customer migrations and new customers starting core modernizations. That pipeline matters because subscription arrangements spread revenue recognition across the contract term, so order growth shows up in reported revenue slowly.
Profitability moved the other way. Gross profit was $96.65 million for the quarter, up 9.6%, yet gross margin slipped to 47.2% from 49.0% a year earlier, a decline of 1.7 percentage points. The drag comes from mix, since subscription and support revenue carries a lower margin than license revenue. Operating loss widened to $39.46 million from $27.07 million, and operating margin fell to negative 19.3% from negative 15.0%. Net loss was $40.68 million, or $0.49 per diluted share, compared with $8.65 million, or $0.10 per diluted share, in the prior-year quarter. Non-GAAP income from operations was $3.0 million against $7.5 million a year earlier, and non-GAAP net loss per share was $0.06.
Backlog looked healthy. Remaining performance obligations were $908.00 million, up 54.4% from $588.00 million a year earlier, and deferred revenue rose 18.7% to $128.89 million. Cash generation did not keep pace. Operating cash flow was negative $3.01 million for the quarter, down from $13.33 million generated in the prior-year quarter, and negative $110.05 million for the six months ended January 31, 2022, compared with negative $2.38 million a year earlier. The first half included a $69.1 million payment of fiscal year 2021 bonuses and accrued vacation. Capital expenditures were $3.66 million in the quarter. Cash, cash equivalents, and investments totaled $1.1 billion at January 31, 2022, down from $1.3 billion at July 31, 2021, after $43.8 million paid for the Hazard Hub acquisition in the first quarter and $11.2 million spent repurchasing shares in the second quarter, which completed the $200 million authorization.
Guidance for the third quarter of fiscal year 2022 puts ARR between $632 million and $635 million and a non-GAAP operating loss between $29 million and $25 million. For the full fiscal year 2022, management guided to ARR between $664 million and $670 million and a non-GAAP operating loss between $50 million and $42 million. The company also issued GAAP operating loss ranges for the third quarter and for the full year. Those ranges point to continued spending through the second half of the fiscal year.
Headcount keeps rising. Cloud operations and technical support staff reached 666 at January 31, 2022, up from 519 a year earlier; research and development headcount was 875 versus 806; sales and marketing grew to 463 from 423; and general and administrative headcount rose to 435 from 365. Sales and marketing expense increased 30% in the quarter, helped along by a hybrid Connections Reimagined event and the return of in-person client travel. The risk list is familiar. Sales cycles are long and lengthened during the pandemic, and services still runs at a negative gross margin while the company absorbs lower average billing rates on some migration contracts. Foreign exchange swings pushed other income to an expense of $8.0 million from income of $6.8 million a year earlier. Guidewire also warns that subscriptions now make up a majority of new sales, that fourth-quarter seasonality concentrates orders in a period whose revenue lands in the next fiscal year, and that inflation and COVID-19 disruption could still affect customers, partners, and hiring.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q2 FY2022 | Q1 FY2022 | QoQ | Q2 FY2021 | YoY |
|---|---|---|---|---|---|
| Revenue | $204.6M | $165.9M | +23.3% | $180.1M | +13.6% |
| Gross profit | $96.6M | $62.8M | +54.0% | $88.2M | +9.6% |
| Gross margin | 47.2% | 37.8% | +9.4 pp | 49.0% | -1.7 pp |
| Research & development | $60.4M | $59.9M | +0.8% | $53.2M | +13.6% |
| Sales & marketing | $51.2M | $43.6M | +17.3% | $39.2M | +30.5% |
| General & administrative | $24.5M | $24.6M | -0.2% | $22.8M | +7.5% |
| Total operating expenses | $136.1M | $128.1M | +6.2% | $115.2M | +18.1% |
| Operating income (loss) | -$39.5M | -$65.4M | +39.6% | -$27.1M | -45.8% |
| Operating margin | -19.3% | -39.4% | +20.1 pp | -15.0% | -4.3 pp |
| Net income (loss) | -$40.7M | -$51.3M | +20.7% | -$8.7M | -370.2% |
| Net margin | -19.9% | -30.9% | +11.0 pp | -4.8% | -15.1 pp |
| Diluted EPS | -$0.49 | -$0.62 | +$0.13 | -$0.10 | -$0.39 |
Risks
COVID-19 and inflation have adversely affected and may continue to affect the business, including ARR growth rates, services revenue, margins, and operating cash flow. MD&A states ARR and revenue, especially services revenue, continued to be impacted in fiscal year 2022 and inflation has magnified disruptions.
The transition to cloud-based subscription offerings requires considerable investment and increases costs, while ratable revenue recognition lowers near-term revenue and can adversely impact gross and operating margins. Subscription revenue increased 64% in FY2022 Q2, but total gross margin decreased to 47.2% from 49.0%.
Revenue mix shift toward lower-margin subscription and support and negative-margin services is eroding overall profitability. GAAP gross margin decreased to 47.2% in FY2022 Q2 from 49.0% in FY2021 Q2 and to 43.0% year to date from 47.7%, and MD&A expects gross margins to decline in the short term.
Sales and implementation cycles are lengthy and variable, typically 6 to 24 months or longer, and COVID-19 has lengthened them. Delays can lead to penalties, monetary credits, reduced fees, or revenue recognition delays.
Revenue and ARR depend on a relatively small number of P&C insurance customers. Ten largest customers accounted for 28% of fiscal year 2021 revenue and 27% of total ARR at July 31, 2021, so loss or deferral by a major customer would significantly harm results.
The market is intensely competitive, including insurtech entrants and larger vendors, and the cloud transition may attract new competitors. Competitive pressure could increase pricing pressure and R&D spending and cause market share to decline.
The transition to a hybrid workforce and a tight labor market create operational challenges, increased attrition, and difficulty hiring necessary personnel, especially in cloud operations, sales, and engineering. MD&A reports higher personnel costs and headcount increases across functions.
The August 2021 HazardHub acquisition and prior acquisitions create integration, key personnel retention, and unknown liability risks. MD&A reports $43.8 million paid as purchase consideration and $1.5 million in acquisition consideration holdback costs in the first half of FY2022.
As of January 31, 2022, $400.0 million principal of 1.25% Convertible Senior Notes due 2025 is outstanding. Conversion or a fundamental change repurchase could require significant cash, and ASU 2020-06's if-converted method could adversely affect diluted EPS.
International operations expose the company to currency fluctuations, particularly in many currencies including the Argentine Peso and Russian Ruble. Other income (expense), net was expense of $8.0 million in FY2022 Q2 versus income of $6.8 million in FY2021 Q2 due to foreign exchange fluctuations.
The hybrid and remote workforce increases security risks, including less secure home systems and the Log4j vulnerability, which could lead to data loss, business disruption, and liability.
Operating cash flow decreased to -$110.1 million for the six months ended January 31, 2022 from -$2.4 million in the prior-year period, and free cash flow was -$123.2 million versus -$12.8 million, driven by a $69.1 million fiscal year 2021 bonus payment. If cash generation remains insufficient, the company may need to delay investments or seek financing.
SaaS KPIs
All quarters →ARR
Non-GAAP Income from Operations
Summary, forecast, risks and KPIs are extracted from Guidewire Software, Inc.'s SEC filings for Q2 FY2022 (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.