Guidewire(GWRE) - 2021 Q4 - Annual Report

Part I Item 1. Business Guidewire offers a leading cloud-first platform for Property and Casualty insurers, integrating core operations, digital engagement, analytics, and AI solutions - Guidewire provides a platform for P&C insurers, integrating core operations, digital engagement, analytics, and AI, delivered via cloud or self-managed software[17] - The platform supports the entire insurance lifecycle, including product definition, distribution, underwriting, policyholder services, and claims management[18] - Most new sales and implementations are for InsuranceSuite via Guidewire Cloud, which offers multiple releases annually for continuous innovation[18] - Guidewire delivers a leading platform for P&C insurers, combining core operations, digital engagement, analytics, and AI applications, available as cloud services or self-managed software[17][18] - Most new sales and implementations are for InsuranceSuite via Guidewire Cloud, a highly configurable and scalable product delivered as a service, supporting the entire insurance lifecycle[18] - The P&C insurance industry is experiencing accelerating change, driven by increased customer expectations for digital engagement, demand for cloud-delivered solutions, data-driven decision-making, and innovation to cover emerging risks[26][27] - The company sells cloud-delivered offerings through subscription services (3-5 year initial term, ratable revenue recognition) and self-managed products through term licenses (primarily 2-year initial term, upfront revenue recognition)[21][252][253] - Guidewire's sales cycles are lengthy and variable due to the critical nature of its platform to customers' businesses and the extensive evaluation process, which can be further extended by cloud-based subscriptions[20][251] Overview and Purpose - Guidewire provides a platform for P&C insurers, integrating core operations, digital engagement, analytics, and AI, delivered via cloud or self-managed software[17] - The platform supports the entire insurance lifecycle, including product definition, distribution, underwriting, policyholder services, and claims management[18] - Most new sales and implementations are for InsuranceSuite via Guidewire Cloud, which offers multiple releases annually for continuous innovation[18] Industry Background - The P&C insurance industry is large, fragmented, highly regulated, and competitive, with insurers competing on product differentiation, pricing, customer service, and marketing[24] - Key trends driving technology investment include the need for agility, digital engagement, personalized services, coverage for emerging risks (e.g., cyber, pandemic), data analytics, and leveraging new technologies like AI and IoT[26][27] - Insurers are modernizing core systems to enhance customer experience, improve efficiency, and rapidly introduce innovative services and products[25] Products - Guidewire's platform aims to help P&C insurers increase revenue, reduce costs, improve pricing, and enhance customer engagement through core operations, digital engagement, analytics, and AI applications[29] Core Operational Services and Products - Core offerings include Guidewire InsuranceSuite via Guidewire Cloud (optimized for GWCP, managed by internal team, supports multiple releases), Guidewire InsuranceNow (cloud-based for insurers with limited IT resources), and Guidewire InsuranceSuite for Self-Managed installations[30][31][37][38] - InsuranceSuite applications (PolicyCenter, BillingCenter, ClaimCenter) support the entire policy lifecycle, billing, and claims management, with embedded predictive analytics and digital engagement[32] - GWCP, built on AWS, provides specialized cloud services, including a P&C insurance-specific data repository (Guidewire Data Platform) for analytical insights[33] Guidewire InsuranceSuite: Complementary Applications - Complementary applications include Rating Management, Reinsurance Management, Client Data Management, Product Content Management, Underwriting Management, AppReader, and ClaimCenter Package for the London Market[39][40][41][42][43][44][45] Digital Engagement - Digital Engagement Applications enable digital experiences for customers, agents, vendors, and field personnel across multiple channels, unified with InsuranceSuite[46][47] - Guidewire for Salesforce integrates core systems with Salesforce for agents and service representatives, providing policy and claims information[48] Analytics and Artificial Intelligence - Analytics and AI offerings help insurers uncover opportunities and write profitable business through applications like Predictive Analytics (for claims and profitability), Risk Insights (e.g., Cyence for Cyber Risk Management), and Business Intelligence (Explore and Compare)[49][50][51][52] - Guidewire DataHub unifies and standardizes data from various sources, while InfoCenter provides business intelligence for enhanced decision-making[53][54] Guidewire Marketplace - The Guidewire Marketplace offers over 190 partner-developed integrations and hundreds of Guidewire-developed resources, helping insurers innovate and differentiate their businesses[55] Technology - The company is increasing investment in R&D to enhance its cloud platform, services, and marketplace, leveraging AWS for cloud-delivered solutions[56] - Significant focus is placed on managing, securing, and operating cloud applications, and improving scalability to handle high transaction volumes, especially during catastrophic events[56] Services - Guidewire provides implementation, cloud migration, and integration services directly and through SI partners to help customers deploy and utilize its platform[58] Employees and Human Capital Resources - As of July 31, 2021, Guidewire had 2,942 employees globally, with 1,453 in product development/operations, 657 in professional services, 426 in sales/marketing, and 406 in G&A[60] - The company focuses on attracting, developing, and retaining diverse talent through inclusive recruiting, professional education, mentoring, and leadership programs[61][62] - A positive corporate culture based on integrity, rationality, and collegiality is fostered through communication and training, with employee engagement measured every two years[63] - Health and wellness programs were expanded in response to COVID-19, and the company plans to transition to a hybrid work environment[64] Customers - Guidewire serves over 350 P&C insurers, representing more than 450 insurance brands in 34 countries, ranging from global to national/local companies[67] - Strong customer relationships are crucial due to the long-term nature of engagements and the importance of references for new sales[67] Strategic Relationships - The company maintains extensive relationships with SI, consulting, technology, and industry partners to facilitate sales, implementations, and drive broader adoption of its technology[68][69] - The PartnerConnect alliance program and Guidewire Marketplace offer over 190 partner-developed integrations, reducing implementation risk and fostering innovation[70] Sales and Marketing - Sales and marketing efforts target senior executives in the P&C insurance industry, cultivating long-term relationships through a global direct sales team and pre-sales support[71][72] - Marketing activities include competitive analysis, sales tools, industry conferences (like Connections), press publications, and analyst relations[73] Research and Development - R&D focuses on enhancing the platform, services, and products for P&C insurers, with an emphasis on cloud capabilities, operational efficiency, data analytics, security, and privacy[74] - Significant investment is made in localizing the platform for international regulatory, language, and currency requirements, with regular updates to stay current[74] Competition - The P&C insurance software market is highly competitive and fragmented, with competitors including specialized vendors (e.g., Duck Creek, SAP, Salesforce/Vlocity) and customers' internally developed solutions[75] - Key competitive factors include product functionality, performance, customer references, total cost of ownership, solution completeness, implementation track record, security, and industry knowledge[76] Intellectual Property - Guidewire relies on patents, trademarks, copyrights, and trade secret laws, as well as license agreements, to protect its proprietary technology and intellectual property[77] Information about Segment and Geographic Revenue - Segment and geographic revenue information is detailed in Note 2 and Note 12 of the Notes to Consolidated Financial Statements[79] Seasonality - The company experiences seasonal variations, with increased license and subscription orders in the fourth fiscal quarter (ending July 31) due to sales team incentives[80] - The shift to subscription services, with ratable revenue recognition, will reduce upfront revenue recognition and increase deferred revenue, impacting near-term reported revenue growth[81] - Services revenue also fluctuates seasonally, with lower billable days in the fiscal quarters ending January 31 and July 31, leading to lower gross margins in those periods[82] WHERE YOU CAN FIND MORE INFORMATION - SEC filings (10-K, 10-Q, 8-K, Proxy Statement) are available free of charge on the company's investor relations website (ir.guidewire.com) and the SEC's website (www.sec.gov)[84](index=84&type=chunk) - Investor relations website also provides earnings call recordings, event notifications, and corporate governance information[85] Item 1A. Risk Factors The company faces significant risks from the COVID-19 pandemic, cloud transition, market competition, data security, and substantial indebtedness - The COVID-19 pandemic has adversely affected, and may continue to affect, Guidewire's business, including ARR growth rates, services revenue, margins, and sales/implementation cycles[88] - Transitioning to a hybrid in-person and remote workforce presents operational challenges, security risks, and potential impacts on corporate culture and productivity[89][90] - Significant quarterly and annual fluctuations in results are expected due to factors like seasonal buying patterns, the mix of license and subscription revenue, and increased costs for cloud operations and product development[91][92][95] - Reliance on a relatively small number of P&C insurance customers (top 10 accounted for 28% of revenue in FY2021) makes the business vulnerable to the loss or reduced spending of these customers[105] - Intense competition from P&C software vendors, horizontal software vendors, and insurtech companies, coupled with lengthy and variable sales/implementation cycles, could negatively impact market share and profitability[108][111][114] - Data security breaches, unauthorized access to customer data, and evolving privacy regulations (e.g., GDPR, CCPA) pose significant risks, potentially leading to litigation, fines, and reputational harm[142][143][146] - Assertions of intellectual property infringement by third parties could result in significant costs, litigation, and the need to redesign services or products[154][156] - The company's $400 million Convertible Senior Notes due 2025 expose it to risks related to servicing indebtedness, potential cash settlement upon conversion, and dilution to stockholders[203][205][208] Risks Related to our Business and Industry - The COVID-19 pandemic has caused delays in services delivery, implementations, and sales/marketing activities, impacting ARR growth rates, services revenue, and margins in fiscal year 2021[88] - Transitioning to a hybrid workforce introduces operational challenges, increased security risks, potential negative impacts on corporate culture, and costs for office updates[89][90] - Quarterly and annual results may fluctuate significantly due to factors like seasonal buying patterns, the mix of license vs. subscription revenue, changes in contract durations, and increased costs for cloud operations and product development[91][92][95] - The company's business model transition to cloud-based subscription offerings requires considerable investment and carries risks related to scaling, unpredictable costs, and market acceptance[99][101][103] Top 10 Customers' Revenue Contribution | Fiscal Year | % of Total Revenue | % of Total ARR (as of July 31) | | :------------ | :----------------- | :----------------------------- | | 2019 | 31% | N/A | | 2020 | 27% | N/A | | 2021 | 28% | 27% | - Failure to develop new and enhanced versions of services and products, or to migrate products to the cloud, could lead to a competitive disadvantage and market share decline[123][124] - International sales and operations expose the company to risks such as increased compliance costs, currency fluctuations, and political/economic instability[132][133] Risks Related to Data Security and Privacy, Intellectual Property, and Information Technology - Data security breaches in products or cloud services, including unauthorized access to customer data, could lead to loss of customers, significant liabilities, and reputational harm[142] - Evolving privacy regulations (e.g., GDPR, CCPA, CPRA, VCDPA, CPA) impose additional costs, liabilities, and may limit the use of information, adversely affecting business[143][144][146][148] - Assertions of intellectual property infringement by third parties, including patent holding companies, could result in costly litigation, damages, and the need to redesign products[154][156] - Real or perceived errors or failures in services and products, including implementation services, can damage reputation, reduce sales/renewals, and lead to liability claims[157][158][160] - Reliance on third-party technology and intellectual property (e.g., AWS hosting) means loss of these rights or service disruptions could limit functionality and disrupt business[167][168] - Obligation to disclose proprietary source code to customers (via escrow or direct access) may limit IP protection and reduce support service renewals[169][170] - Use of 'open source' software may restrict how services are used or distributed, potentially requiring the release of proprietary source code under certain licenses[171][172] Risks Related to Legal, Regulatory, Accounting, and Tax Matters - Application of GAAP requires significant management estimates and assumptions, particularly for revenue recognition, which can lead to volatility in reported results and potential misinterpretation by investors[174][176][177][178] - Failure to maintain effective internal control over financial reporting or identify material weaknesses could adversely affect financial reporting accuracy, investor confidence, and stock price[179][182] - Changes in tax laws (e.g., Tax Act, CARES Act) or adverse outcomes from tax return examinations could negatively impact results of operations and effective tax rates[183][184] Risks Related to Ownership of Our Common Stock - The market price of common stock may be volatile due to various factors, including general economic conditions, market fluctuations, and research analyst coverage, potentially leading to securities class action litigation[187][188][189] - The company does not intend to pay dividends, meaning returns on investment depend solely on stock price appreciation[190][191] - Certain provisions in the company's certificate of incorporation, bylaws, and Delaware law could prevent or delay takeovers and reduce the market price of the stock[192][194][195] - Bylaw provisions designating specific courts as exclusive forums for certain litigation may limit stockholders' ability to choose a favorable judicial forum and could impose additional litigation costs[196][198][199][200] - The share repurchase program, authorized for up to $200 million, may not be fully consummated, could affect stock price volatility, and diminish cash reserves[201] Risks Related to Our Indebtedness - Servicing the $400.0 million Convertible Senior Notes due 2025 requires significant cash flow, and the company may lack sufficient funds for cash conversions or repurchases upon a fundamental change, potentially leading to default[203][205][206] - The conditional conversion feature of the Convertible Senior Notes, if triggered, could adversely affect liquidity by requiring cash payments and potentially reclassifying debt as a current liability[207] - Conversion of Convertible Senior Notes could dilute existing stockholders' ownership interests, and hedging activities by option counterparties may affect common stock value[208][209][210] - Accounting for convertible debt (ASC 470-20) results in non-cash interest expense from debt discount amortization, potentially lowering reported net income[211][212] - The company is exposed to counterparty credit risk with respect to capped call transactions, which could lead to adverse tax consequences and increased dilution if a counterparty defaults[215] General Risks - Weakened global economic conditions, political transitions (e.g., Brexit), and industry consolidation may cause customers to defer or forego purchases, impacting revenue and operations[217][219][220] - Inability to attract, train, integrate, and retain skilled personnel (executive officers, sales, professional services, cloud operations, software engineers) could hinder goal achievement and harm business[221][222][223][227] - Factors outside of control, such as natural catastrophes (hurricanes, earthquakes, pandemics) and terrorism, can adversely impact the P&C insurance industry and, consequently, Guidewire's customer base and revenue[228][229] - Revenue, results of operations, and cash flows are subject to fluctuations due to changes in foreign currency exchange rates, particularly for currencies like the Argentine Peso, Euro, and Canadian Dollar[230] Item 1B. Unresolved Staff Comments The company has no unresolved staff comments to report - No unresolved staff comments are applicable[231] Item 2. Properties Guidewire operates from leased corporate and European headquarters, plus global facilities, adapting its real estate strategy for a hybrid workforce - Corporate headquarters: San Mateo, California (approx. 189,000 sq ft, leased through Dec 2029)[232] - European headquarters: Dublin, Ireland (approx. 85,000 sq ft, leased through Mar 2032)[232] - Additional facilities are leased globally for sales, services, development, operations, and administration in locations including Bedford, Birmingham, Columbia, Edina, Exton, San Diego, San Jose, Chennai, Krakow, Kuala Lumpur, London, Madrid, Mississauga, Paris, Sydney, and Tokyo[232] - The company is evaluating its real estate strategy due to the COVID-19 pandemic and the shift to a hybrid workforce, anticipating future expansion and associated expenses[233] Item 3. Legal Proceedings Guidewire is occasionally involved in legal proceedings arising from normal business activities but is not currently involved in any proceedings expected to have a material adverse effect on its business or financial position - The company is not currently involved in any legal proceedings deemed to have a material adverse effect on its business or financial position[235] - Legal fees are expensed in the period incurred[234] Item 4. Mine Safety Disclosures Mine safety disclosures are not applicable to Guidewire's operations - Mine safety disclosures are not applicable[236] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Guidewire's common stock trades on NYSE, with no dividends planned, and a $200 million share repurchase program partially utilized - Common stock is listed on the New York Stock Exchange under the symbol 'GWRE'[3] - As of July 31, 2021, there were 38 holders of record and 83,076,348 shares of common stock outstanding[5][239] - The company does not plan to declare or pay cash dividends on its common stock in the foreseeable future[190][191][240] Purchases of Equity Securities by the Issuer - In October 2020, the board authorized a share repurchase program of up to $200.0 million[241] Equity Repurchases (Fiscal Quarter Ended July 31, 2021) | Period | Total Shares Purchased | Average Price Paid per Share | | :------------------------- | :--------------------- | :--------------------------- | | May 1, 2021 – May 31, 2021 | 126,688 | $97.08 | | June 1, 2021 – June 30, 2021 | 123,950 | $109.15 | | July 1, 2021 – July 31, 2021 | 115,012 | $112.28 | - As of July 31, 2021, approximately $37.5 million remained available under the share repurchase program[241] Performance Graph Cumulative Total Return (July 31, 2016 - July 31, 2021) | Index | 7/31/2016 | 7/31/2017 | 7/31/2018 | 7/31/2019 | 7/31/2020 | 7/31/2021 | | :------------------------------------- | :-------- | :-------- | :-------- | :-------- | :-------- | :-------- | | Guidewire Software, Inc. | $100.00 | $117.39 | $140.23 | $166.06 | $191.41 | $187.41 | | NASDAQ Composite-Total Return Index | $100.00 | $124.41 | $151.94 | $163.71 | $217.38 | $298.96 | | S&P Software & Services Select Industry Index | $100.00 | $120.03 | $155.22 | $188.17 | $222.75 | $329.61 | - Guidewire's common stock performance lagged both the NASDAQ Composite-Total Return Index and the S&P Software & Services Select Industry Index over the five-year period[244] Unregistered Sales of Equity Securities and Use of Proceeds from Registered Securities - No unregistered sales of equity securities or use of proceeds from registered securities to report[245] Item 6. [Reserved] This item is reserved and contains no information Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes Guidewire's financial condition, operations, and liquidity, covering business overview, COVID-19 impact, key metrics, and critical accounting policies - Guidewire's platform combines core operations, digital engagement, analytics, and AI applications for P&C insurers, with a strategic shift towards cloud-based subscription services[248][249][254] - The COVID-19 pandemic has impacted ARR growth rates, services revenue and margins, and operating cash flow, leading to delayed sales activities and rescheduled implementations[261][262] Key Business Metrics (Fiscal Year Ended July 31, 2021) | Metric | Value (2021) | | :-------------- | :----------- | | ARR | $582 million | | ARR Growth (YoY)| 13% | | Free Cash Flow | $82,733 thousand | - Revenue recognition requires significant judgment, especially for non-standard contract terms and allocation of transaction price to multiple performance obligations[270][272][273] - The company adopted new SEC disclosure standards for Regulation S-K Items 101, 103, and 105 (human capital, legal proceedings, risk factors) and Release No. 33-10890 (MD&A, selected financial data)[275][276] Consolidated Statements of Operations Summary (in thousands) | Metric (Fiscal Year Ended July 31) | 2021 | 2020 | | :--------------------------------- | :-------- | :-------- | | Total Revenue | $743,267 | $742,307 | | Total Cost of Revenue | $375,054 | $338,015 | | Total Gross Profit | $368,213 | $404,292 | | Total Operating Expenses | $473,797 | $428,178 | | Income (Loss) from Operations | $(105,584) | $(23,886) | | Net Income (Loss) | $(66,507) | $(27,198) | - Net cash provided by operating activities decreased by $1.5 million in fiscal year 2021 compared to 2020, primarily due to an increase in net loss, partially offset by an increase in cash from working capital[344] Overview - Guidewire provides a leading platform for P&C insurers, integrating core operations, digital engagement, analytics, and AI, delivered as cloud services or self-managed software[248][249] - The company's core offerings include InsuranceSuite via Guidewire Cloud (most new sales), InsuranceNow (for insurers with limited IT resources), and InsuranceSuite for self-managed installations[249] - Sales cycles are lengthy due to the platform's critical nature and extensive customer evaluation, further lengthened by cloud-based subscriptions and COVID-19[251] - Revenue is generated from cloud subscription services (ratable recognition) and self-managed term licenses (upfront recognition), generally priced on Direct Written Premium (DWP)[252][253] - Continued investment in product development and cloud operations is critical for technology leadership, operational efficiency, and competitive advantage[255] COVID-19 Impact - The COVID-19 pandemic has adversely impacted Guidewire's business and financial results since Q3 2020, including decreases in ARR growth rates, services revenue and margins, and operating cash flow[261] - New sales activities are being delayed, not cancelled, and implementation engagements are being rescheduled or extended, with marketing events shifting to virtual formats[262] - The company received approximately $3 million in Canada Emergency Wage Subsidy (CEWS) in fiscal year 2021, reducing compensation expense[263] Key Business Metrics - Annual Recurring Revenue (ARR) quantifies the annualized recurring value of active customer contracts, excluding non-recurring components like perpetual licenses and professional services[265] Annual Recurring Revenue (ARR) | Metric | July 31, 2021 | July 31, 2020 | | :----- | :------------ | :------------ | | ARR | $582 million | $575 million | | ARR Growth (YoY) | 13% | N/A | | ARR Growth (Constant Currency) | 12% | N/A | - Free Cash Flow is a key measure of overall business performance, adjusting operating cash flow for capital expenditures (property, equipment, capitalized software development)[268] Free Cash Flow (in thousands) | Metric | Fiscal Year 2021 | Fiscal Year 2020 | | :-------------------------------------- | :--------------- | :--------------- | | Net cash provided by (used in) operating activities | $111,587 | $113,066 | | Purchases of property and equipment | $(19,008) | $(21,377) | | Capitalized software development costs | $(9,846) | $(4,283) | | Free Cash Flow | $82,733 | $87,406 | Critical Accounting Policies and Estimates - Revenue recognition is a critical accounting policy, requiring significant judgment and estimates, especially for non-standard contract terms and allocation of transaction price to performance obligations[269][270][272] - The majority of contracts contain multiple performance obligations, requiring allocation of transaction price based on standalone selling price (SSP), using the residual method when SSP is highly variable or uncertain for term licenses[273][274] Changes from Prior Periodic Reports - The company revised disclosures to comply with SEC Release No. 33-10825 (Modernization of Regulation S-K Items 101, 103, and 105), including human capital resources and restructured risk factor disclosures[275] - Early adopted SEC Release No. 33-10890, eliminating selected financial data and the contractual obligations table from MD&A[276][277] Recent Accounting Pronouncements - Details on recent accounting pronouncements adopted are provided in Note 1 to the consolidated financial statements[278] Results of Operations Consolidated Statements of Operations Summary (in thousands) | Metric (Fiscal Year Ended July 31) | 2021 | 2020 | | :--------------------------------- | :-------- | :-------- | | Total Revenue | $743,267 | $742,307 | | Total Cost of Revenue | $375,054 | $338,015 | | Total Gross Profit | $368,213 | $404,292 | | Total Operating Expenses | $473,797 | $428,178 | | Income (Loss) from Operations | $(105,584) | $(23,886) | | Net Income (Loss) | $(66,507) | $(27,198) | Comparison of the Fiscal Years Ended July 31, 2021 and 2020 Revenue Revenue by Type (in thousands) | Revenue Type (Fiscal Year Ended July 31) | 2021 | % of Total Revenue (2021) | 2020 | % of Total Revenue (2020) | Change ($) | Change (%) | | :--------------------------------------- | :-------- | :------------------------ | :-------- | :------------------------ | :--------- | :--------- | | Subscription and support | $252,358 | 34% | $203,473 | 27% | $48,885 | 24% | | License | $303,792 | 41% | $331,554 | 45% | $(27,762) | (8)% | | Services | $187,117 | 25% | $207,280 | 28% | $(20,163) | (10)% | | Total Revenue | $743,267 | 100% | $742,307 | 100% | $960 | 0% | Subscription and Support - Subscription revenue increased by $49.0 million (41%) in fiscal year 2021, primarily due to new subscription services agreements for InsuranceSuite via Guidewire Cloud[287][289] - Support revenue was flat year-over-year. The shift to subscription arrangements is expected to reduce growth in, or lower, future support revenue as support is bundled with subscriptions[287][290] - Subscription revenue is recognized ratably over the 3-5 year term, while support revenue is recognized ratably over the committed support term[282][283] License - Term license revenue decreased by $25.2 million (8%) in fiscal year 2021, driven by lower revenue from new term licenses and renewals, and a lower impact from non-standard contract durations[287][292] - Perpetual license revenue decreased by $2.6 million (84%) and accounted for less than 1% of total revenue in fiscal year 2021, expected to remain a small and potentially volatile percentage[287][293] - License revenue for committed terms is generally recognized upfront upon software delivery or at the beginning of the renewal term[284][285] Services - Services revenue decreased by $20.2 million (10%) in fiscal year 2021, primarily due to lower average billing rates, increased investments in cloud transition implementations, and a $6.8 million reduction in billable travel costs due to COVID-19[287][294] - Services revenue is primarily billed and recognized on a time and materials basis upon providing services[286] - Future services revenue may see higher variability and potential decreases as the company leverages SI partners for implementations and continues to invest in customer migrations[295] Cost of Revenue and Gross Profit Cost of Revenue (in thousands) | Cost of Revenue (Fiscal Year Ended July 31) | 2021 | % of Total Revenue (2021) | 2020 | % of Total Revenue (2020) | Change ($) | Change (%) | | :------------------------------------------ | :-------- | :------------------------ | :-------- | :------------------------ | :--------- | :--------- | | Subscription and support | $164,983 | 22% | $117,158 | 16% | $47,825 | 41% | | License | $10,569 | 1% | $11,566 | 2% | $(997) | (9)% | | Services | $199,502 | 27% | $209,291 | 28% | $(9,789) | (5)% | | Total Cost of Revenue | $375,054 | 50% | $338,015 | 46% | $37,039 | 11% | - Cost of subscription and support revenue increased by $47.8 million (41%), driven by $33.1 million in personnel costs for cloud operations and $16.3 million in cloud infrastructure costs[298] - Cost of services revenue decreased by $9.8 million (5%), mainly due to lower subcontractor expenses and travel costs (COVID-19), partially offset by higher personnel-related costs[301] Gross Profit (in thousands) | Gross Profit (Fiscal Year Ended July 31) | 2021 | Margin % (2021) | 2020 | Margin % (2020) | Change ($) | Change (%) | | :--------------------------------------- | :-------- | :-------------- | :-------- | :-------------- | :--------- | :--------- | | Subscription and support | $87,375 | 35% | $86,315 | 42% | $1,060 | 1% | | License | $293,223 | 97% | $319,988 | 97% | $(26,765) | (8)% | | Services | $(12,385) | (7)% | $(2,011) | (1)% | $(10,374) | 516% | | Total Gross Profit | $368,213 | 50% | $404,292 | 54% | $(36,079) | (9)% | - Overall gross profit decreased by $36.1 million (9%), and gross margin decreased to 50% in fiscal year 2021 from 54% in 2020, primarily due to lower subscription and support gross margins (increased cloud investments) and lower services gross margin[303][304] Operating Expenses Operating Expenses (in thousands) | Operating Expense (Fiscal Year Ended July 31) | 2021 | % of Total Revenue (2021) | 2020 | % of Total Revenue (2020) | Change ($) | Change (%) | | :-------------------------------------------- | :-------- | :------------------------ | :-------- | :------------------------ | :--------- | :--------- | | Research and development | $219,494 | 30% | $200,575 | 27% | $18,919 | 9% | | Sales and marketing | $160,544 | 22% | $142,420 | 19% | $18,124 | 13% | | General and administrative | $93,759 | 13% | $85,183 | 11% | $8,576 | 10% | | Total Operating Expenses | $473,797 | 65% | $428,178 | 57% | $45,619 | 11% | Research and Development - R&D expenses increased by $18.9 million (9%), primarily due to a $17.6 million increase in personnel costs (higher headcount and bonus attainment) and $2.6 million in cloud infrastructure costs for development environments[307][309] - R&D headcount increased to 853 as of July 31, 2021, from 809 in the prior year[310] - R&D expenses are expected to continue increasing in absolute dollars due to ongoing investment in solution development, cloud migration, and potential acquisitions[310] Sales and Marketing - Sales and marketing expenses increased by $18.1 million (13%), mainly due to a $23.0 million increase in personnel costs (higher headcount, commissions) and $1.0 million in professional services[307][312] - Sales and marketing headcount increased to 426 as of July 31, 2021, from 399 in the prior year[313] - Expenses are expected to continue increasing in absolute dollars to support business growth, including anticipated in-person marketing events[313] General and Administrative - General and administrative expenses increased by $8.6 million (10%), primarily due to a $7.0 million increase in personnel-related costs (higher headcount, bonus attainment) and $1.3 million in software and professional services[307][315] - G&A headcount increased to 406 as of July 31, 2021, from 346 in the prior year[316] - G&A expenses are expected to increase in absolute dollars to support strategic initiatives, business growth, and compliance obligations[317] Other Income (Expense) Other Income (Expense) (in thousands) | Metric (Fiscal Year Ended July 31) | 2021 | 2020 | Change ($) | Change (%) | | :--------------------------------- | :-------- | :-------- | :--------- | :--------- | | Interest income | $7,395 | $24,705 | $(17,310) | (70)% | | Interest expense | $(18,711) | $(17,945) | $(766) | 4% | | Other income (expense), net | $12,619 | $(7,205) | $19,824 | 275% | Interest Income - Interest income decreased by $17.3 million (70%) in fiscal year 2021, primarily due to lower yields on invested funds and reduced funds available for investment due to the share repurchase program[318][319] Interest Expense - Interest expense increased by $0.8 million (4%) in fiscal year 2021, consisting of $13.6 million in non-cash amortization of debt discount and issuance costs and $5.0 million in stated interest for Convertible Senior Notes[318][320][321] Other Income (Expense), Net - Other income (expense), net, shifted from an expense of $7.2 million in FY2020 to income of $12.6 million in FY2021, an increase of $19.8 million[318][323] - The increase was primarily due to gains from exchange rate movements on monetary assets and liabilities, and the absence of a $10.7 million reduction in fair value of a strategic investment recorded in FY2020[323] Provision for (benefit from) Income Taxes Provision for (benefit from) Income Taxes (in thousands) | Metric (Fiscal Year Ended July 31) | 2021 | 2020 | Change ($) | Change (%) | | :--------------------------------- | :---------- | :-------- | :---------- | :--------- | | Provision for (benefit from) income taxes | $(37,774) | $2,867 | $(40,641) | (1,418)% | | Effective tax rate | 36% | (12)% | N/A | N/A | - The company recognized an income tax benefit of $37.8 million in fiscal year 2021, compared to a provision of $2.9 million in 2020[325] - The increase in tax benefit was mainly due to an increased pre-tax net loss, the release of an uncertain tax position reserve, and the tax status change of foreign subsidiaries, partially offset by an increased valuation allowance[325] Comparison of the Fiscal Years Ended July 31, 2020 and 2019 - Discussion for the comparison of fiscal years 2020 and 2019 is available in the company's 10-K filing for the fiscal year ended July 31, 2020[328] Quarterly Results of Operations - Quarterly results of operations may fluctuate significantly due to various factors, making them variable and difficult to predict[329] - Sequential quarterly comparisons may not be meaningful and should not be relied upon as an indication of future performance[329] Non-GAAP Financial Measures - Non-GAAP financial measures (e.g., non-GAAP gross profit, operating income, net income, EPS) are used by management and investors to evaluate business performance and trends, excluding items like stock-based compensation and amortization of intangibles[330][331] Non-GAAP Financial Measures Reconciliation (in thousands, except per share) | Metric (Fiscal Year Ended July 31) | 2021 | 2020 | | :--------------------------------- | :-------- | :-------- | | GAAP gross profit | $368,213 | $404,292 | | Non-GAAP gross profit | $413,223 | $452,673 | | GAAP income (loss) from operations | $(105,584) | $(23,886) | | Non-GAAP income (loss) from operations | $25,994 | $104,765 | | GAAP net income (loss) | $(66,507) | $(27,198) | | Non-GAAP net income (loss) | $41,309 | $105,768 | | GAAP net income (loss) per share – diluted | $(0.79) | $(0.33) | | Non-GAAP net income (loss) per share – diluted | $0.49 | $1.26 | Liquidity and Capital Resources Liquidity Summary (in thousands) | Metric | July 31, 2021 | July 31, 2020 | | :-------------------------- | :------------ | :------------ | | Cash, cash equivalents, and investments | $1,346,591 | $1,434,267 | | Working capital | $1,054,971 | $1,118,020 | - Approximately $58.7 million of cash and cash equivalents were domiciled in foreign jurisdictions as of July 31, 2021[338] - The company believes existing cash, cash equivalents, and liquidity sources will be sufficient to fund operations for at least the next 12 months[342] Cash, Cash Equivalents, and Investments - Cash equivalents include commercial paper and money market funds; investments include corporate debt, U.S. government/agency debt, and non-U.S. government securities[337] Share Repurchase Program - During fiscal year 2021, the company repurchased 1,488,991 shares of common stock for $162.5 million at an average price of $109.17 per share[339][340] - As of July 31, 2021, $37.5 million remained available for future repurchases under the $200.0 million program[340] Cash Flows Summary of Cash Flows (in thousands) | Cash Flow Type (Fiscal Year Ended July 31) | 2021 | 2020 | | :----------------------------------------- | :---------- | :-------- | | Net cash provided by (used in) operating activities | $111,587 | $113,066 | | Net cash provided by (used in) investing activities | $64,191 | $(5,801) | | Net cash provided by (used in) financing activities | $(159,387) | $4,955 | - Net cash from operating activities decreased by $1.5 million in FY2021, primarily due to a $55.7 million increase in net loss, partially offset by a $54.2 million increase in cash from working capital[344] - Net cash from investing activities increased by $70.0 million, driven by higher net cash from marketable securities transactions and lower office build-out costs, offset by increased capitalized software development costs[345] - Net cash used in financing activities increased by $164.3 million, mainly due to $161.3 million in common stock repurchases and a decrease in proceeds from option exercises[346] Contractual Obligations - Estimated future obligations include leases, royalties, purchase obligations, and debt, with details provided in Note 8 and Note 10 to the consolidated financial statements[346] Off-Balance Sheet Arrangements - As of July 31, 2021, the company had no relationships with unconsolidated entities or financial partnerships for off-balance sheet arrangements[347] Item 7A. Quantitative and Qualitative Disclosures About Market Risk Guidewire is exposed to market risks from interest rate fluctuations and foreign currency exchange rates, but does not use derivatives for speculative trading - Market risk exposure primarily stems from fluctuations in interest rates and foreign currency exchange rates[348] - The company does not hold or issue financial instruments for trading purposes[348] Interest Rate Sensitivity - Cash, cash equivalents, and investments totaled $1,346.6 million as of July 31, 2021, primarily consisting of liquid investments[349] - A hypothetical 100 basis point increase in interest rates would have decreased the market value of available-for-sale securities by $5.2 million as of July 31, 2021[349] Foreign Currency Exchange Risk - Results of operations and cash flows are subject to fluctuations from changes in foreign currency exchange rates, particularly for the Argentine Peso, Australian Dollar, Brazilian Real, British Pound, Canadian Dollar, Danish Kroner, Euro, Indian Rupee, Japanese Yen, Malaysian Ringgit, New Zealand Dollar, Polish Zloty, Russian Ruble, and Swiss Franc[350] - A hypothetical ten percent change in foreign exchange rates could result in an approximate $18.9 million transaction gain or loss[350] Fair Value of Financial Instruments - The company has no material exposure to market risk from financial instruments, as investments are highly liquid with maturities of three years or less[351] - Strategic investments in privately held equity and convertible debt securities are subject to risk of partial or total loss of invested capital, as their value depends on liquidity events[352][353] Item 8. Financial Statements and Supplementary Data This section presents Guidewire's audited consolidated financial statements, including balance sheets, income statements, cash flows, and detailed notes, with the independent auditor's report - The consolidated financial statements include balance sheets, statements of operations, comprehensive income (loss), stockholders' equity, and cash flows for the fiscal years ended July 31, 2021, 2020, and 2019[355][369][371][373][375][377] - KPMG LLP provided an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting as of July 31, 2021[357][358] - Revenue is disaggregated by license or service type and by geography, showing a shift towards subscription revenue and significant revenue from the United States[440][441] - The company's Convertible Senior Notes, with a principal amount of $400.0 million due 2025, are accounted for with separate liability and equity components, impacting interest expense[396][469][473] - Total unrecognized stock-based compensation expense as of July 31, 2021, was $220.3 million, to be recognized over a weighted average period of 2.4 years[486] - The company recognized an income tax benefit of $37.8 million in fiscal year 2021, primarily due to an increased pre-tax net loss and the release of an uncertain tax position reserve[325][496] Report of Independent Registered Public Accounting Firm - KPMG LLP issued an unqualified opinion on Guidewire's consolidated financial statements and the effectiveness of its internal control over financial reporting as of July 31, 2021[357][358] - A critical audit matter identified was the evaluation of revenue from software licensing arrangements and cloud subscriptions with non-standard terms, requiring significant auditor judgment[365][366] Notes to Consolidated Financial Statements 1. The Company and Summary of Significant Accounting Policies and Estimates - Guidewire provides a technology platform for P&C insurers, combining core operations, digital engagement, analytics, and AI applications[380] - Financial statements are prepared in accordance with GAAP, requiring management estimates for revenue recognition, asset useful lives, tax assets, stock-based compensation, and fair value measurements[381][383] - The company capitalizes software development costs for cloud-based applications when specific criteria are met, amortizing them over 3-5 years to cost of revenue[390] - Goodwill is tested for impairment annually in Q4, or sooner if circumstances indicate, using qualitative factors[395] - The company adopted ASU 2018-15 (cloud computing implementation costs) and ASU 2016-13 (credit losses) in August 2020, with no material impact[435][437] - ASU 2020-06 (convertible instruments) will be effective August 1, 2022, and is expected to negatively impact earnings per share calculations by requiring the if-converted method[438] 2. Revenue Revenue by License or Service Type (in thousands) | Revenue Type (Fiscal Year Ended July 31) | 2021 | 2020 | 2019 | | :--------------------------------------- | :-------- | :-------- | :-------- | | Subscription | $168,649 | $119,658 | $65,050 | | Support | $83,709 | $83,815 | $85,424 | | Term license | $303,309 | $328,489 | $318,142 | | Perpetual license | $483 | $3,065 | $2,130 | | Services | $187,117 | $207,280 | $248,768 | | Total Revenue | $743,267 | $742,307 | $719,514 | Revenue by Geographic Region (in thousands, FY2021) | Region | Subscription and support | License | Services | Total | | :------------- | :----------------------- | :-------- | :-------- | :-------- | | United States | $167,920 | $180,742 | $123,498 | $472,160 | | Canada | $35,465 | $26,214 | $13,464 | $75,143 | | Other Americas | $4,234 | $4,651 | $5,307 | $14,192 | | Total Americas | $207,619 | $211,607 | $142,269 | $561,495 | | United Kingdom | $6,911 | $21,032 | $4,333 | $32,276 | | Other EMEA | $20,449 | $39,553 | $29,574 | $89,576 | | Total EMEA | $27,360 | $60,585 | $33,907 | $121,852 | | Total APAC | $17,379 | $31,600 | $10,941 | $59,920 | | Total Revenue | $252,358 | $303,792 | $187,117 | $743,267 | - Unbilled accounts receivable, net, increased to $103.4 million in FY2021, primarily due to new term license deals and multi-year renewals, and cloud subscription orders with ramped billing schedules[442][443] - Remaining performance obligations, representing contracted but unrecognized revenue, totaled approximately $844.0 million as of July 31, 2021, excluding time and materials professional services[447] 3. Fair Value of Financial Instruments Available-for-Sale Investments (in thousands, July 31, 2021) | Investment Type | Amortized Cost | Unrealized Gains | Unrealized Losses | Estimated Fair Value | | :------------------------------ | :------------- | :--------------- | :---------------- | :------------------- | | U.S. Government agency securities | $85,165 | $15 | $— | $85,180 | | Commercial paper | $389,837 | $— | $— | $389,837 | | Corporate bonds | $371,374 | $623 | $(37) | $371,960 | | U.S. Government bonds | $64,401 | $62 | $(1) | $64,462 | | Asset-backed securities | $47,925 | $29 | $(7) | $47,947 | | Foreign government bonds | $33,177 | $10 | $(2) | $33,185 | | Municipal bonds | $1,685 | $— | $— | $1,685 | | Certificates of deposit | $82,250 | $— | $— | $82,250 | | Money market funds | $125,118 | $— | $— | $125,118 | | Strategic convertible debt investment | $1,000 | $— | $— | $1,000 | | Total | $1,201,932 | $739 | $(47) | $1,202,624 | - The company classifies investments as available-for-sale, recorded at fair value with unrealized gains/losses in OCI[387][450] - Fair value measurements use a three-level hierarchy, with most available-for-sale investments classified as Level 2 (observable inputs)[452][453][454] - The fair value of Convertible Senior Notes was $452.0 million at July 31, 2021, estimated using Level 2 market-based risk measurements[456] 4. Balance Sheet Components Accounts Receivable, Net (in thousands) | Metric | July 31, 2021 | July 31, 2020 | | :------------------------ | :------------ | :------------ | | Accounts receivable | $105,125 | $115,518 | | Allowance for credit losses and revenue reserves | $(1,057) | $(1,276) | | Accounts receivable, net | $104,068 | $114,242 | - The allowance for credit losses and revenue reserves decreased from $1,276 thousand in FY2020 to $1,057 thousand in FY2021[459] Property and Equipment, Net (in thousands) | Asset Type | July 31, 2021 | July 31, 2020 | | :------------------------------ | :------------ | :------------ | | Computer hardware | $19,256 | $16,791 | | Purchased software | $6,002 | $5,445 | | Capitalized software development costs | $24,025 | $11,620 | | Eq