Summary
Guidewire's fiscal third quarter delivered strong top-line growth but wider losses. Total revenue was $197.4 million, up 20.4% from the prior-year quarter. Year-to-date revenue was $568.02 million, up 10.5%. Gross profit was $76.96 million, up 7.0%, while gross margin slipped to 39.0%, down 4.9 percentage points. Year-to-date gross profit was $236.36 million, down 1.1%, and year-to-date gross margin was 41.6%, down 4.9 percentage points. The company reported a GAAP operating loss of $62.4 million, and the loss widened from the prior-year quarter. Operating margin was -31.6%, down 3.0 percentage points. GAAP net loss was $57.4 million, and diluted EPS was -$0.69. On a year-to-date basis, the operating loss was $167.24 million, the net loss was $149.40 million, and diluted EPS was -$1.79. Year-to-date operating margin was -29.4%, down 8.9 percentage points.
Cash generation weakened. Operating cash flow was -$11.48 million for the quarter, down 304.6% from the prior-year quarter. For the first nine months, operating cash flow was -$121.53 million, down 3859.1%. Capital expenditures were $0.99 million in the quarter, down 85.7%, and $7.98 million year to date, down 35.7%. Free cash flow, a non-GAAP measure, was -$138.7 million for the first nine months. Deferred revenue was $115.49 million, up 21.7% from the prior-year quarter. Remaining performance obligations, or RPO, reached $942 million, up 58.1%.
Operational momentum centered on the cloud transition. Annual recurring revenue, or ARR, was $637 million as of April 30, 2022, compared to $582 million as of July 31, 2021. Guidewire closed eight cloud deals in the quarter. The company removed $3.1 million in ARR after deciding to stop doing business in Russia and terminating all customer contracts there. Non-GAAP loss from operations was $24.9 million, compared with $16.3 million in the prior-year quarter. Non-GAAP net loss was $21.8 million, compared with $13.2 million. Non-GAAP net loss per share was $0.26, compared with $0.16.
Guidewire continued to invest in cloud operations and go-to-market capacity. Cloud operations and technical support headcount was 689 at April 30, 2022, compared with 562 a year earlier. Professional services headcount was 699, compared with 658. Research and development headcount was 888, compared with 802. Sales and marketing headcount was 474, compared with 423. General and administrative headcount was 458, compared with 371.
Guidance points to continued cloud-driven growth while GAAP profitability stays negative. For the fourth quarter of fiscal year 2022, Guidewire guided ARR to $668 million to $674 million and non-GAAP operating income (loss) to $(2) million to $4 million. For the full fiscal year 2022, the company guided ARR to $668 million to $674 million and non-GAAP operating loss to $(53) million to $(47) million. The company also said it expects to generate positive cash flows from operations on an annual basis, although that figure can fluctuate significantly by quarter.
Risks remain substantial. Management cited COVID-19, inflation, and the conflict between Russia and Ukraine as factors that could affect employees, customers, system integrator partners, and vendors. The Russia exit led to a contract termination and bad debt expense. Guidewire also faces lengthy sales cycles, reliance on a relatively small number of large customers, and the challenge of migrating customers from term licenses to cloud subscriptions. Services revenue produces lower gross margins than license, subscription, and support revenue, and the company expects gross margins to decline in the short term because of the mix shift. Competition, data security breaches, and the need to hire and retain key employees are additional risks.
Forecast
Reported figures
GAAP, from SEC filings| Metric | Q3 FY2022 | Q2 FY2022 | QoQ | Q3 FY2021 | YoY |
|---|---|---|---|---|---|
| Revenue | $197.4M | $204.6M | -3.5% | $164.0M | +20.4% |
| Gross profit | $77.0M | $96.6M | -20.4% | $71.9M | +7.0% |
| Gross margin | 39.0% | 47.2% | -8.3 pp | 43.9% | -4.9 pp |
| Research & development | $64.0M | $60.4M | +6.0% | $54.2M | +18.3% |
| Sales & marketing | $48.1M | $51.2M | -5.9% | $40.9M | +17.8% |
| General & administrative | $27.2M | $24.5M | +10.7% | $23.7M | +14.7% |
| Total operating expenses | $139.4M | $136.1M | +2.4% | $118.7M | +17.4% |
| Operating income (loss) | -$62.4M | -$39.5M | -58.2% | -$46.8M | -33.3% |
| Operating margin | -31.6% | -19.3% | -12.3 pp | -28.6% | -3.1 pp |
| Net income (loss) | -$57.4M | -$40.7M | -41.2% | -$36.6M | -56.8% |
| Net margin | -29.1% | -19.9% | -9.2 pp | -22.3% | -6.8 pp |
| Diluted EPS | -$0.69 | -$0.49 | -$0.20 | -$0.44 | -$0.25 |
Risks
The ongoing Russia-Ukraine conflict led Guidewire to cease operations in Russia and terminate all customer contracts there, resulting in $3.0 million of bad debt expense and removal of $3.1 million of ARR in the most recent quarter. Sanctions and further geopolitical instability could disrupt international sales and collections.
Inflation at levels not seen in decades, supply chain issues, and COVID-19 disruptions are magnifying economic volatility, delaying customer purchasing decisions, and may increase accounts receivable allowances or impair assets. MD&A states inflation is impacting the global economy and magnifying disruptions.
The shift to cloud-based subscription offerings requires significant investment and ratable revenue recognition, which is expected to reduce near-term revenue growth and pressure gross and operating margins. Gross margin decreased to 39% in the quarter ended April 30, 2022 from 44% in the prior-year quarter, and services gross profit was negative.
Services revenue produces lower or negative gross margin, and Guidewire is investing in customer cloud migrations, fixed fee or capped arrangements, and lower average billing rates. Services gross profit was negative $7.1 million in the quarter ended April 30, 2022, and the company expects COVID-19 and inflation to continue to negatively impact services gross margin.
Sales and implementation cycles are lengthy and variable, often 6 to 24 months or longer, and depend on customer evaluations, SI partner performance, and factors outside the company's control. COVID-19 and hybrid work may continue to lengthen cycles and delay revenue recognition.
Guidewire relies on a relatively small number of P&C insurance customers for a substantial portion of revenue and ARR. The ten largest customers accounted for 28% of fiscal year 2021 revenue and 27% of total ARR at July 31, 2021, so loss, deferral, or non-renewal by a major customer would significantly harm results.
The market for P&C insurance software and cloud services is intensely competitive, with legacy systems, insurtech entrants, horizontal software vendors, and larger competitors that may have greater resources. Competitive pressure could increase pricing pressure, sales and marketing expenses, and R&D investment.
Guidewire must attract, train, integrate, and retain highly skilled employees, especially cloud operations, sales, services, and engineering personnel. COVID-19, current global events, and recent economic conditions have increased attrition and decreased available candidates, increasing hiring time and compensation costs.
The transition to a hybrid in-person and remote workforce creates operational, cybersecurity, intellectual property, culture, collaboration, and retention risks. The company expects to incur costs to facilitate permanent remote work and update offices, and failure to manage the transition could harm the business.
Guidewire had $400.0 million principal amount of 1.25% Convertible Senior Notes due 2025 as of January 31, 2022. Holders may convert or require repurchase upon a fundamental change, and the company may not have sufficient cash, which could adversely affect liquidity and financial condition.
Revenue, results, and cash flows are subject to fluctuations in many currencies, including the Russian Ruble, and global exchange rates may be more volatile due to the Russia-Ukraine conflict. Other income (expense), net was expense of $6.9 million in the quarter ended April 30, 2022 compared to income of $5.3 million in the prior-year quarter due to foreign exchange fluctuations.
The hybrid workforce and remote access increase cybersecurity risks, and the risk factors cite the Log4j vulnerability as an example of systems being vulnerable to computer viruses, break-ins, and unauthorized tampering. A significant disruption could delay customer orders or service availability.
Customers have no obligation to renew term licenses or subscriptions, and renewals may occur on less favorable terms or be cancelled. A decline in renewals or expansions would harm future revenue and profitability.
Guidewire sees significantly increased orders in its fourth fiscal quarter, and subscription revenue is recognized ratably, which can cause significant quarterly fluctuations and make period-to-period comparisons less meaningful. The first quarter of fiscal year 2021 had a five-year term license renewal that created a challenging comparable for the first quarter of fiscal year 2022.
SaaS KPIs
All quarters →Annual Recurring Revenue (ARR)
Summary, forecast, risks and KPIs are extracted from Guidewire Software, Inc.'s SEC filings for Q3 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 1, 2026.