Summary
Guidewire closed eight cloud transactions in the second quarter of fiscal 2023. Total revenue was $232.6 million, up 13.7% from the prior-year quarter. Gross profit was $123.5 million, up 20.8%. Gross margin was 53.1%, up 3.1 percentage points. Operating margin was negative 10.0%, up 9.3 percentage points. The company reported an operating loss of $23.2 million, a net loss of $9.2 million, and a diluted loss per share of $0.11. Each of those losses narrowed from the prior-year quarter. On a non-GAAP basis, income from operations was $15.1 million, compared with $3.0 million in the prior-year quarter. Non-GAAP net loss was $17.4 million, or $0.21 per share, compared with a non-GAAP net loss of $4.8 million, or $0.06 per share, in the prior-year quarter. Annual recurring revenue was $707 million as of January 31, 2023, compared with $664 million as of July 31, 2022. CEO Mike Rosenbaum said the company improved operating efficiency and saw strong top-line growth.
Cash generation was mixed. Operating cash flow was $1.22 million in the quarter, up from the prior-year quarter. For the six months ended January 31, 2023, operating cash flow was negative $86.2 million, an improvement from the prior-year period. Capital expenditures were $1.33 million in the quarter, down 63.5% from the prior-year quarter. Deferred revenue was $151.98 million, up 17.9%. Remaining performance obligations were $1.20 billion, up 32.2%. Free cash flow for the six months was negative $94.3 million, compared with negative $123.2 million in the prior-year period.
Guidance for the third quarter of fiscal 2023 includes ARR between $715 million and $720 million and a non-GAAP operating loss between $20 million and $16 million. For the full fiscal year 2023, the company guides ARR between $745 million and $760 million and a non-GAAP operating loss between $17 million and $7 million. Management also expects positive operating cash flow for the full fiscal year. The company notes seasonality, with significantly increased orders in the fourth fiscal quarter ending July 31. Because subscription revenue is recognized ratably, new orders in that quarter do not fully appear in revenue until the following fiscal year.
Risks remain substantial. Guidewire cites lengthy sales cycles, reliance on a relatively small number of large customers, the transition to cloud offerings, data security breaches, competition, and weakened global economic conditions. Inflation, the COVID-19 pandemic, the Russia-Ukraine conflict, and supply chain issues have added volatility. Foreign exchange fluctuations affect results because the company operates in multiple currencies. In February 2023, Guidewire assigned its existing headquarters lease, which had remaining lease payments of about $90 million through December 2029, and subleased 78,911 square feet for about $22 million over roughly four years. The company also noted that Section 174 of the tax code now requires research and experimental expenditures to be capitalized and amortized, which may increase state cash taxes or tax expense.
Under its $400 million share repurchase program, Guidewire completed a $200 million accelerated share repurchase, repurchasing 3,229,479 shares at an average price of $61.93, and $200 million remained available as of January 31, 2023. Headcount at January 31, 2023 included 649 cloud operations and technical support employees, 804 professional services employees, 1,002 research and development employees, 470 sales and marketing employees, and 449 general and administrative employees.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q2 FY2023 | Q1 FY2023 | QoQ | Q2 FY2022 | YoY |
|---|---|---|---|---|---|
| Revenue | $232.6M | $195.3M | +19.1% | $204.6M | +13.7% |
| Gross profit | $123.5M | $72.2M | +71.1% | $96.6M | +27.7% |
| Gross margin | 53.1% | 37.0% | +16.1 pp | 47.2% | +5.9 pp |
| Research & development | $61.7M | $58.2M | +6.1% | $60.4M | +2.2% |
| Sales & marketing | $44.8M | $46.5M | -3.6% | $51.2M | -12.5% |
| General & administrative | $40.2M | $42.1M | -4.4% | $24.5M | +63.8% |
| Total operating expenses | $146.7M | $146.7M | -0.0% | $136.1M | +7.8% |
| Operating income (loss) | -$23.2M | -$74.6M | +68.9% | -$39.5M | +41.2% |
| Operating margin | -10.0% | -38.2% | +28.2 pp | -19.3% | +9.3 pp |
| Net income (loss) | -$9.2M | -$69.3M | +86.7% | -$40.7M | +77.4% |
| Net margin | -4.0% | -35.5% | +31.6 pp | -19.9% | +15.9 pp |
| Diluted EPS | -$0.11 | -$0.83 | +$0.72 | -$0.49 | +$0.38 |
Risks
Recent global events, including inflation, the ongoing Russia-Ukraine conflict, and COVID-19 disruptions, have adversely affected ARR growth rates, services revenue and margins, operating cash flow, and expenses. In Q3 FY2022, ceasing operations in Russia resulted in bad debt expense and removal of $3.1 million of ARR.
The shift to cloud-based subscription offerings requires significant investment and ratable revenue recognition, which lowers initial revenue and pressures margins. MD&A discusses the shift to cloud subscriptions and notes that customers are migrating from term licenses to subscription services.
MD&A highlights investments in customer cloud transitions, lower average billing rates, and fixed fee or capped arrangements that pressure services margins. The company expects services gross margin to improve as it lowers reliance on subcontractors and enters into fewer fixed fee arrangements.
Sales and implementation cycles are lengthy and variable, often lasting six to 24 months or longer, and can be extended by customer cloud evaluations. MD&A states that sales cycles have increased and new orders have been delayed, lengthening the time between incurring expenses and generating revenue.
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 26% of total ARR at July 31, 2022, so loss or deferral by a major customer could significantly harm results.
The company faces intense competition for skilled personnel, particularly in the San Francisco Bay Area, and recent global events have increased attrition and decreased available candidates. MD&A notes higher employee attrition and challenges in hiring and onboarding necessary personnel.
The market for P&C insurance software is intensely competitive, with insurtech entrants and larger competitors able to devote greater resources. Customers with entrenched legacy systems may prefer maintaining them, and cloud-focused competitors may emerge with lower-cost architectures.
As of January 31, 2023, $400.0 million principal amount of 1.25% Convertible Senior Notes due 2025 was outstanding. Conversion or fundamental change repurchase obligations could require significant cash, and adoption of ASU 2020-06 requires the if-converted method, which is expected to negatively affect reported diluted EPS in periods of net income.
The Tax Cuts and Jobs Act amended IRC Section 174 to require capitalization and amortization of research and experimental expenditures beginning in fiscal year 2023. If not modified, the company may need to utilize federal and state tax attributes and may face increases in state cash taxes or tax expense.
The company entered a new agreement with a cloud infrastructure services provider for a total obligation of $600 million over five years. This significant commitment increases fixed costs and could pressure margins if cloud demand or usage does not grow as expected.
Guidewire Cloud offerings rely on third-party hosting services, primarily Amazon Web Services. Any material disruption or slowdown in these services could cause outages or delays and harm reputation and results.
The transition to a hybrid in-person and remote workforce increases cybersecurity and data loss risks because remote security systems may be less secure and employees may work from jurisdictions with uncertain intellectual property laws. The company also faces risks from computer viruses and unauthorized tampering such as the Log4j vulnerability.
Customers are P&C insurers exposed to losses from natural catastrophes and terrorism, and climate change is increasing erratic weather patterns. Such events may cause customers to postpone purchases or discontinue projects, reducing demand for Guidewire's platform.
In September 2022, the board authorized a $400.0 million share repurchase program and the company entered into a $200.0 million accelerated share repurchase agreement. As of January 31, 2023, $200.0 million remained available; the program may be suspended or discontinued and could diminish cash reserves.
SaaS KPIs
All quarters →ARR
Free Cash Flow
Non-GAAP Income from Operations
Summary, forecast, risks and KPIs are extracted from Guidewire Software, Inc.'s SEC filings for Q2 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.