Summary
Guidewire Software closed its fiscal third quarter with a smaller top line and a wider loss. Total revenue for the quarter ended April 30, 2021 was $163.97 million, down 2.5% from $168.16 million a year earlier. Gross profit fell 12.8% to $71.90 million. Gross margin dropped to 43.9% from 49.0%. The operating loss widened 82.9% to $46.83 million, and the operating margin slipped to -28.6% from -15.2%. Net loss widened 18.0% to $36.63 million. Diluted loss per share was $0.44, compared with $0.37 in the prior-year quarter.
The nine-month picture differs on revenue. Revenue for the year to date ended April 30, 2021 was $513.83 million, up 3.0% from $498.63 million. Profitability went the other way. The nine-month operating loss of $105.50 million was 54.6% wider than a year earlier. The nine-month net loss was $65.48 million. Diluted loss per share for the year to date was $0.78, and gross margin fell to 46.5% from 49.8%.
The mix keeps rotating toward cloud subscriptions. Subscription and support revenue rose in the quarter while license and services revenue declined, a shift management ties to customers moving from term licenses to cloud subscriptions. Annual recurring revenue was $538 million as of April 30, 2021, up from $514 million as of July 31, 2020. Remaining performance obligations rose 49.8% year over year to $596.00 million, even as deferred revenue fell 10.5% to $94.92 million from $106.10 million. Chief executive Mike Rosenbaum pointed to eight cloud wins in the quarter and the Cortina release of the Guidewire Cloud Platform.
Costs explain much of the swing. Cloud operations and technical support headcount reached 562 at April 30, 2021, against 335 a year earlier, and research and development headcount rose to 802 from 749. A $3.3 million benefit from the Canada Emergency Wage Subsidy, booked over the nine months ended April 30, 2021, softened expenses. Non-GAAP results weakened too. Non-GAAP loss from operations was $16.3 million for the quarter, compared with non-GAAP income of $5.8 million a year earlier, and non-GAAP net loss was $13.2 million against non-GAAP net income of $7.7 million.
Cash generation stayed thin. Operating cash flow was $5.61 million for the quarter, up 22.8% from $4.57 million a year earlier, but fell 45.3% to $3.23 million for the nine months. Capital expenditures were $6.90 million for the quarter, down 10.6%. Free cash flow, a separate measure that also deducts property and equipment purchases and capitalized software development costs, was negative $16.8 million for the nine months. The company held $1.3 billion in cash, cash equivalents, and investments at April 30, 2021, and used $79.9 million to repurchase 0.8 million shares of common stock during the quarter.
Guidance is split between the next quarter and the full fiscal year. For the fourth quarter of fiscal 2021, management guides to annual recurring revenue of $562 million to $569 million, a GAAP operating loss, and positive non-GAAP operating income. For the full fiscal year 2021, the outlook carries the same ARR range, a GAAP operating loss, positive non-GAAP operating income, and positive operating cash flow. Fiscal fourth quarters have historically carried the largest share of orders, so the year turns on the current quarter.
Risks are the familiar ones. Sales cycles are long, a relatively small number of large customers supplies a substantial portion of revenue, and competition in the property and casualty software market is intense. The subscription transition pushes revenue recognition into later periods and holds back reported growth. Management expects COVID-19 challenges to keep pressuring services gross margins through fiscal 2021 and possibly longer, and says new sales activity has been delayed rather than cancelled. Foreign exchange moves have been volatile. The company carries $400.0 million of convertible notes due in 2025, and impairment risk on lease assets, investments, long-lived assets, and goodwill remains.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q3 FY2021 | Q2 FY2021 | QoQ | Q3 FY2020 | YoY |
|---|---|---|---|---|---|
| Revenue | $164.0M | $180.1M | -8.9% | $168.2M | -2.5% |
| Gross profit | $71.9M | $88.2M | -18.4% | $82.4M | -12.8% |
| Gross margin | 43.9% | 49.0% | -5.1 pp | 49.0% | -5.2 pp |
| Research & development | $54.2M | $53.2M | +1.8% | $51.9M | +4.4% |
| Sales & marketing | $40.9M | $39.2M | +4.2% | $35.2M | +16.0% |
| General & administrative | $23.7M | $22.8M | +3.8% | $20.9M | +13.5% |
| Total operating expenses | $118.7M | $115.2M | +3.0% | $108.0M | +9.9% |
| Operating income (loss) | -$46.8M | -$27.1M | -73.0% | -$25.6M | -82.9% |
| Operating margin | -28.6% | -15.0% | -13.5 pp | -15.2% | -13.3 pp |
| Net income (loss) | -$36.6M | -$8.7M | -323.4% | -$31.0M | -18.0% |
| Net margin | -22.3% | -4.8% | -17.5 pp | -18.5% | -3.9 pp |
| Diluted EPS | -$0.44 | -$0.10 | -$0.34 | -$0.37 | -$0.07 |
Risks
The COVID-19 pandemic and related containment measures have lengthened sales and implementation cycles, delayed new orders and services engagements, and reduced services revenue and margins. MD&A states ARR and revenue, especially services revenue, for the first nine months of fiscal 2021 continued to be impacted, and free cash flow was negative $16.8 million for the nine months ended April 30, 2021.
The shift to cloud-based subscription offerings requires significant investment and ratable revenue recognition, which can lower near-term revenue and pressure margins. In FY2021 Q3, gross margin decreased 5.2 percentage points to 43.9% and operating margin decreased 13.3 percentage points to -28.6%, while subscription and support gross margin was 36% versus 40% in the prior-year quarter.
Revenue and ARR depend on a relatively small number of P&C insurance customers. The ten largest customers accounted for 31% of revenue in each of fiscal years 2020, 2019, and 2018, and 29% of total ARR in fiscal year 2020; loss, deferral, or subscription transition by one of these customers could cause significant quarterly and annual fluctuations.
Sales and implementation cycles are lengthy and variable, typically lasting 6 to 24 months or longer, and COVID-19 caused them to lengthen. The company also faces seasonal sales concentration in the fourth fiscal quarter and ASC 606 upfront recognition, and the first quarter of fiscal 2021 included a five-year license renewal that creates a challenging comparable for the first quarter of fiscal 2022.
Services revenue produces lower gross margin than license or subscription revenue, and services gross margin was negative 1% in FY2021 Q3 and negative 8% for the nine months ended April 30, 2021. Services revenue decreased 11% in the quarter and 12% year to date, driven by lower average billing rates, increased implementation investments, and reduced billable travel due to COVID-19.
The market for P&C insurance software is intensely competitive, with insurtech entrants and cloud-native competitors that can develop solutions without maintaining legacy systems. Competition may increase pricing pressure, sales and marketing expenses, and R&D investment, and could reduce market share.
Future success depends on attracting, training, integrating, and retaining highly skilled employees, particularly cloud operations personnel, software engineers, and sales staff. Competition for qualified personnel is intense in the San Francisco Bay Area, and remote work during COVID-19 adds management challenges.
As of April 30, 2021, $400.0 million principal amount of 1.25% Convertible Senior Notes due 2025 was outstanding. Holders may convert under certain circumstances, requiring cash settlement or repurchase upon a fundamental change, and ASU 2020-06's if-converted method could adversely affect diluted earnings per share.
The cloud transition increases the storage and transmission of customer data, including personal data, and a security breach could result in litigation, breach of contract claims, indemnity obligations, reputational harm, and liabilities. Privacy concerns could also lead to regulatory changes and additional costs.
Large P&C insurer customers have substantial negotiating leverage and may require terms that increase cost of revenue, decrease revenue, and lower average selling prices and gross margins. The company has been required and may continue to be required to reduce average selling prices.
Customers have no obligation to renew term licenses or subscriptions, and renewals may occur on less favorable terms. Some customers can exercise a perpetual buyout of term licenses, which would eliminate future term license revenue; a decline in renewals or expansions could harm future results.
Customers are P&C insurers that have experienced and will likely experience losses from catastrophes or terrorism. Such events may cause customers to postpone purchases and professional service engagements or discontinue projects, preventing expansion or maintenance of the customer base.
In October 2020, the board authorized a share repurchase program of up to $200.0 million. During the nine months ended April 30, 2021, the company repurchased 1,123,341 shares for $123.8 million, leaving $76.2 million available; the program may not enhance stockholder value and could affect the stock price and diminish cash reserves.
SaaS KPIs
All quarters →ARR
Summary, forecast, risks and KPIs are extracted from Guidewire Software, Inc.'s SEC filings for Q3 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.