Guidewire Software Announces Second Quarter Fiscal 2018 Financial Results

FOSTER CITY, Calif.--(BUSINESS WIRE)--Guidewire Software, Inc. (NYSE: GWRE), a provider of software products to Property and Casualty insurers, today announced its financial results for the fiscal quarter ended January 31, 2018.

“The breadth of Guidewire InsurancePlatform contributed to a successful second quarter in which we exceeded our guidance for revenue and non-GAAP profitability,” said Marcus Ryu, chief executive officer, Guidewire Software. “We continue to benefit from the enduring demand for legacy core system replacement in all our major markets, as well as adoption of our complementary offerings for digital engagement, data management and visualization, and advanced analytics.”

Ryu continued, “By continuing to invest in new products, distribution in international markets, and delivery of InsurancePlatform in the cloud, we are enabling P&C insurers to adapt their products and operations to a time of rapid industry change.”

Second Quarter Fiscal 2018 Financial Highlights

Revenue

• Total revenue for the second quarter of fiscal 2018 was $163.8 million, an increase of 42% from the same quarter in fiscal 2017. License and other revenue was $84.2 million, an increase of 31%, services revenue was $60.5 million, an increase of 73%, and maintenance revenue was $19.1 million, an increase of 15%. License and other revenue benefited from approximately $4.6 million of payments received in the quarter in advance of their due date.
• Rolling four-quarter recurring revenue was $345.9 million for the period ended January 31, 2018, an increase of 21% compared to the same metric for the period ended January 31, 2017.

Profitability

• GAAP loss from operations was $0.7 million for the second quarter of fiscal 2018, compared with income of $8.2 million in the comparable period in fiscal 2017.
• Non-GAAP income from operations was $32.0 million for the second quarter of fiscal 2018, compared with income of $28.4 million in the comparable period in fiscal 2017.
• GAAP net loss, adversely impacted by a net tax expense of $28.6 million, driven primarily by the effects of the provisions of The Tax and Jobs Act passed in December 2017, was $45.6 million for the second quarter of fiscal 2018, compared with a net income of $4.0 million for the comparable period in fiscal 2017. GAAP net loss per share was $0.59, based on diluted weighted average shares outstanding of 76.9 million, compared with $0.05 net income per share for the comparable period in fiscal 2017, based on diluted weighted average shares outstanding of 74.8 million. The net tax expense of $28.6 million resulted from the remeasurement of deferred tax assets and liabilities required by the passage of the Tax Cuts and Jobs Act which lowered the Company’s U.S. statutory tax rate.
• Non-GAAP net income was $25.5 million for the second quarter of fiscal 2018, compared with a net income of $20.6 million in the comparable period in fiscal 2017. Non-GAAP net income per diluted share was $0.33, based on diluted weighted average shares outstanding of 78.3 million, compared with net income per diluted share of $0.28 in the comparable period in fiscal 2017, based on diluted weighted average shares outstanding of 74.8 million.

Liquidity

• The Company had $569.5 million in cash, cash equivalents and investments at January 31, 2018, compared with $687.8 million at July 31, 2017. The decline was due to the use of approximately $130.1 million of cash in connection with the acquisition of Cyence, offset by approximately $47.7 million of cash generated from operations in the second quarter of fiscal 2018, compared to $42.6 million cash from operations in the second quarter of fiscal 2017.

Business Outlook

Guidewire is issuing the following outlook for the third quarter and fiscal 2018, based on current expectations:

(in $ millions, except per share outlook)	Third Quarter Fiscal 2018			Full Year Fiscal 2018
Revenue	135.0	-	139.0	644.0	-	650.0
License and other revenue	47.0	-	49.0	304.0	-	312.0
Maintenance revenue	18.5	-	19.0	75.0	-	77.0
Services revenue	69.0	-	71.0	260.0	-	266.0
GAAP operating loss	(38.5)	-	(34.5)	(27.7)	-	(21.7)
Non-GAAP operating income (loss)	(5.0)	-	(1.0)	97.0	-	103.0
GAAP net loss	(39.7)	-	(35.4)	(44.6)	-	(38.6)
GAAP net loss per share	(0.51)	-	(0.46)	(0.58)	-	(0.51)
Non-GAAP net income (loss)	(2.6)	-	0.3	76.3	-	80.6
Non-GAAP net income (loss) per share	(0.03)	-	0.0	0.98	-	1.04

Non-GAAP operating income (loss) and non-GAAP net income (loss) exclude stock-based compensation expense and amortization of intangible assets. The GAAP and non-GAAP estimated annual tax rates used to compute net income and EPS exclude discrete items such as forecasted tax benefits related to stock-based compensation, and are impacted by the passage of the Tax Cuts and Jobs Act.

Conference Call Information
What:	Guidewire Software Second Quarter Fiscal 2018 Financial Results Conference Call
When:	Tuesday, March 6, 2018
Time:	2:00 p.m. PT (5:00 p.m. ET)
Live Call:	[phone], Domestic [phone], International
Replay:	[phone], Passcode 3804361, Domestic [phone], Passcode 3804361, International
Webcast:	http://ir.guidewire.com (live and replay)

The webcast will be archived on Guidewire’s website (www.guidewire.com) for a period of three months.

Non-GAAP Financial Measures

This press release contains the following non-GAAP financial measures: Non-GAAP operating income, Non-GAAP net income (loss), Non-GAAP income tax provision (benefit), and Non-GAAP net income (loss) per share. These Non-GAAP financial measures exclude stock-based compensation and amortization of intangibles, and the tax effect of these adjustments for Non-GAAP net income (loss) and Non-GAAP net income (loss) per share.

Guidewire believes that these non-GAAP measures of financial results provide useful information to management and investors regarding certain financial and business trends relating to Guidewire’s financial condition and results of operations. The Company’s management uses these non-GAAP measures to compare the Company’s performance to that of prior periods for trend analysis, for purposes of determining executive and senior management incentive compensation and for budgeting and planning purposes. The Company believes that the use of these non-GAAP financial measures provides an additional tool for investors to use in evaluating ongoing operating results and trends and in comparing the Company’s financial measures with other software companies, many of which present similar non-GAAP financial measures to investors.

Management of the Company does not consider these non-GAAP measures in isolation or as an alternative to financial measures determined in accordance with GAAP. The principal limitation of these non-GAAP financial measures is that they exclude significant expenses and income that are required by GAAP to be recorded in the Company’s financial statements. In addition, they are subject to inherent limitations as they reflect the exercise of judgment by management about which expenses and income are excluded or included in determining these non-GAAP financial measures. Guidewire urges investors to review the reconciliation of its non-GAAP financial measures to the comparable GAAP financial measures, which it includes in press releases announcing quarterly financial results, including this press release, and not to rely on any single financial measure to evaluate the Company’s business.

Reconciliation tables of the most comparable GAAP financial measures to the non-GAAP financial measures used in this press release are included with the financial tables at the end of this release.

About Guidewire Software
Guidewire delivers the software that Property and Casualty (P&C) insurers need to adapt and succeed in a time of rapid industry change. We combine three elements -- core operations, data and analytics, and digital engagement -- into an insurance platform that enhances insurers’ ability to engage and empower their customers and employees. More than 300 P&C insurers around the world have selected Guidewire. For more information, please visit www.guidewire.com. Follow us on twitter: @Guidewire_PandC.

NOTE: For information about Guidewire’s trademarks, visit https://www.guidewire.com/legal-notices.

Cautionary Language Concerning Forward-Looking Statements

This press release contains “forward-looking statements” within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, including but not limited to, statements regarding our financial outlook, market positioning and future investments. These forward-looking statements are made as of the date they were first issued and were based on current expectations, estimates, forecasts and projections as well as the beliefs and assumptions of management. Words such as “expect,” “anticipate,” “should,” “believe,” “hope,” “target,” “project,” “goals,” “estimate,” “potential,” “predict,” “may,” “will,” “might,” “could,” “intend,” variations of these terms or the negative of these terms and similar expressions are intended to identify these forward-looking statements. Forward-looking statements are subject to a number of risks and uncertainties, many of which involve factors or circumstances that are beyond Guidewire’s control. Guidewire’s actual results could differ materially from those stated or implied in forward-looking statements due to a number of factors, including but not limited to, risks detailed in Guidewire’s most recent Forms 10-K and 10-Q filed with the Securities and Exchange Commission as well as other documents that may be filed by the Company from time to time with the Securities and Exchange Commission. In particular, the following factors, among others, could cause results to differ materially from those expressed or implied by such forward-looking statements: the market for our software may develop more slowly than expected or than it has in the past; quarterly and annual operating results may fluctuate more than expected; seasonal and other variations related to our revenue recognition may cause significant fluctuations in our results of operations and cash flows; our reliance on sales to and renewals from a relatively small number of large customers for a substantial portion of our revenues; our services revenues produce lower gross margins than our license and maintenance revenues; assertions by third parties that we violate their intellectual property rights could substantially harm our business; we face intense competition in our market; weakened global economic conditions may adversely affect the P&C insurance industry including the rate of information technology spending; our product development and sales cycles are lengthy; the risk of losing key employees; changes in foreign exchange rates; general political or destabilizing events, including war, conflict or acts of terrorism; and other risks and uncertainties. Past performance is not necessarily indicative of future results. The forward-looking statements included in this press release represent Guidewire’s views as of the date of this press release. The Company anticipates that subsequent events and developments will cause its views to change. Guidewire undertakes no intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. These forward-looking statements should not be relied upon as representing Guidewire’s views as of any date subsequent to the date of this press release.

GUIDEWIRE SOFTWARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited, in thousands)
	January 31, 2018			July 31, 2017
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	205,287		$	263,176
Short-term investments	299,891			310,027
Accounts receivable	100,046			79,433
Prepaid expenses and other current assets	33,714			26,604
Total current assets	638,938			679,240
Long-term investments	64,273			114,585
Property and equipment, net	16,205			14,376
Intangible assets, net	110,671			71,315
Deferred tax assets, net	89,701			37,430
Goodwill	343,248			141,851
Other assets	20,658			20,104
TOTAL ASSETS	$	1,283,694		$	1,078,901
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	18,570		$	13,416
Accrued employee compensation	33,681			48,882
Deferred revenues, current	109,047			91,243
Other current liabilities	11,431			10,075
Total current liabilities	172,729			163,616
Deferred revenues, non-current	21,845			19,892
Other liabilities	1,631			2,112
Total liabilities	196,205			185,620
STOCKHOLDERS’ EQUITY:
Common stock	8			8
Additional paid-in capital	993,559			830,014
Accumulated other comprehensive loss	(4,778		)	(5,796		)
Retained earnings	98,700			69,055
Total stockholders’ equity	1,087,489			893,281
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	1,283,694		$	1,078,901

GUIDEWIRE SOFTWARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited, in thousands except share and per share data)
	Three Months Ended January 31,					Six Months Ended January 31,
	2018			2017		2018			2017
Revenues:
License and other	$	84,221		$	64,075	$	114,314		$	102,796
Maintenance	19,110			16,582		38,040			33,114
Services	60,457			34,964		119,605			73,838
Total revenues	163,788			115,621		271,959			209,748
Cost of revenues: ^(1)
License and other	9,040			2,781		15,755			5,211
Maintenance	3,593			3,079		7,060			6,404
Services	55,136			34,951		107,848			71,215
Total cost of revenues	67,769			40,811		130,663			82,830
Gross profit:
License and other	75,181			61,294		98,559			97,585
Maintenance	15,517			13,503		30,980			26,710
Services	5,321			13		11,757			2,623
Total gross profit	96,019			74,810		141,296			126,918
Operating expenses: ^(1)
Research and development	43,657			30,025		79,368			60,775
Sales and marketing	31,961			23,520		55,571			49,020
General and administrative	21,066			13,060		39,737			27,220
Total operating expenses	96,684			66,605		174,676			137,015
Income (loss) from operations	(665		)	8,205		(33,380		)	(10,097		)
Interest income	1,566			1,544		3,474			2,886
Other income (expense), net	1,658			335		1,396			(346		)
Income (loss) before income taxes	2,559			10,084		(28,510		)	(7,557		)
Provision for (benefit from) income taxes	48,114			6,110		25,959			(3,673		)
Net income (loss)	$	(45,555	)	$	3,974	$	(54,469	)	$	(3,884	)
Net income (loss) per share:
Basic	$	(0.59	)	$	0.05	$	(0.72	)	$	(0.05	)
Diluted	$	(0.59	)	$	0.05	$	(0.72	)	$	(0.05	)
Shares used in computing net income (loss) per share:
Basic	76,859,040			73,738,810		76,023,237			73,516,140
Diluted	76,859,040			74,793,240		76,023,237			73,516,140

⁽¹⁾ Amounts include stock-based compensation expense as follows:

	Three Months Ended January 31,				Six Months Ended January 31,
	2018		2017		2018		2017
	(unaudited, in thousands)
Stock-based compensation expense:
Cost of license revenue	$	258	$	90	$	432	$	141
Cost of maintenance revenues	481		436		936		849
Cost of services revenues	5,446		4,815		10,672		9,510
Research and development	7,697		4,650		12,609		9,117
Marketing and sales	5,024		4,283		9,241		8,506
General and administrative	6,126		4,313		10,765		8,341
Total stock-based compensation expense	$	25,032	$	18,587	$	44,655	$	36,464

GUIDEWIRE SOFTWARE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited, in thousands)
	Three Months Ended January 31,						Six Months Ended January 31,
	2018			2017			2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	(45,555		)	3,974			$	(54,469	)	$	(3,884	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	9,681			3,309			16,315			6,383
Stock-based compensation	25,032			18,587			44,655			36,464
Deferred income tax	47,995			4,885			24,287			(5,617		)
Amortization of premium on available-for-sale securities, and other non-cash items	151			401			361			868
Changes in operating assets and liabilities:
Accounts receivable	(17,200		)	(9,505		)	(16,345		)	(823		)
Prepaid expenses and other assets	436			(3,880		)	(3,139		)	(3,689		)
Accounts payable	2,966			(2,617		)	4,834			(1,715		)
Accrued employee compensation	6,406			6,216			(17,547		)	(15,084		)
Other liabilities	1,160			636			804			(615		)
Deferred revenues	16,622			20,553			16,690			17,361
Net cash provided by operating activities	47,694			42,559			16,446			29,649
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of available-for-sale securities	(43,977		)	(90,718		)	(110,820		)	(291,611		)
Sales of available-for-sale securities	77,277			141,508			170,316			298,671
Purchases of property and equipment	(2,721		)	(143		)	(4,620		)	(2,617		)
Capitalized software development costs	(252		)	—			(769		)	—
Acquisitions of business, net of acquired cash	(130,376		)	59			(130,376		)	(33,534		)
Net cash provided by (used in) investing activities	(100,049		)	50,706			(76,269		)	(29,091		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock upon exercise of stock options	362			922			727			2,034
Net cash provided by financing activities	362			922			727			2,034
Effect of foreign exchange rate changes on cash and cash equivalents	1,881			113			1,207			(811		)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	(50,112		)	94,300			(57,889		)	1,781
CASH AND CASH EQUIVALENTS—Beginning of period	255,399			131,063			263,176			223,582
CASH AND CASH EQUIVALENTS—End of period	$	205,287		$	225,363		$	205,287		$	225,363

GUIDEWIRE SOFTWARE, INC. AND SUBSIDIARIES Reconciliation of GAAP to Non-GAAP Financial Measures (unaudited, in thousands except share and per share data))
The following tables reconcile the specific items excluded from GAAP in the calculation of non-GAAP financial measures for the periods indicated below:
	Three Months Ended January 31,						Six Months Ended January 31,
	2018			2017			2018			2017
Income (loss) from operations reconciliation:
GAAP income (loss) from operations	$	(665	)	$	8,205		$	(33,380	)	$	(10,097	)
Non-GAAP adjustments:
Stock-based compensation ^(1)	25,032			18,587			44,655			36,464
Amortization of intangibles ^(1)	7,669			1,656			12,445			3,094
Non-GAAP income from operations	$	32,036		$	28,448		$	23,720		$	29,461
Net income (loss) reconciliation:
GAAP net income (loss)	$	(45,555	)	$	3,974		$	(54,469	)	$	(3,884	)
Non-GAAP adjustments:
Stock-based compensation ^(1)	25,032			18,587			44,655			36,464
Amortization of intangibles ^(1)	7,669			1,656			12,445			3,094
Tax impact on non-GAAP adjustments ^(2)	38,364			(3,591		)	18,081			(13,927		)
Non-GAAP net income	$	25,510		$	20,626		$	20,712		$	21,747
Tax provision (benefit) reconciliation:
GAAP tax provision (benefit)	$	48,114		$	6,110		$	25,959		$	(3,673	)
Non-GAAP adjustments:
Stock-based compensation	6,721			5,948			13,191			11,669
Amortization of intangibles	2,060			530			3,635			990
Other income tax effects and adjustments	(47,145		)	(2,887		)	(34,907		)	1,268
Non-GAAP tax provision	$	9,750		$	9,701		$	7,878		$	10,254
Earnings (loss) per share reconciliation:
GAAP earnings (loss) per share - Diluted	$	(0.59	)	$	0.05		$	(0.72	)	$	(0.05	)
Stock-based compensation	0.33			0.25			0.59			0.49
Amortization of intangibles acquired in business combinations	0.10			0.02			0.16			0.04
Tax impact of non-GAAP adjustments	0.49			(0.04		)	0.23			(0.18		)
Non-GAAP dilutive shares excluded from GAAP earnings (loss) per share calculation ^(3)	—			—			—			0.01
Non-GAAP earnings per share - Diluted	$	0.33		$	0.28		$	0.26		$	0.31
Shares used in computing non-GAAP per share amounts:
GAAP weighted average shares - Diluted	76,859,040			74,793,240			76,023,237			73,516,140
Non-GAAP dilutive shares excluded from GAAP earnings (loss) per share calculation^(3)	1,460,188			—			1,429,707			1,258,762
Pro forma weighted average shares - Diluted	78,319,228			74,793,240			77,452,944			74,774,902

(1) Adjustments relate to amortization of acquired intangibles and stock-based compensation recognized during the period for GAAP purposes.
(2) Adjustment reflects the tax benefit (provision) resulting from all non-GAAP adjustments.
(3) Due to the occurrence of a net loss on a GAAP basis, potentially dilutive securities were excluded from the calculation of GAAP earnings per share, as they would have an anti-dilutive effect. However, as net income was earned on a non-GAAP basis, these shares have a dilutive effect on a Non-GAAP earnings per share and are included here.

GUIDEWIRE SOFTWARE, INC. AND SUBSIDIARIES Reconciliation of GAAP to Non-GAAP Outlook
The following tables reconcile the specific items excluded from GAAP in the calculation of non-GAAP outlook for the periods indicated below:
(in $ millions)	Third Quarter Fiscal 2018			Full Year Fiscal 2018
Outlook reconciliation: GAAP and non-GAAP operating income (loss)
GAAP operating loss	(38.5)	-	(34.5)	(27.7)	-	(21.7)
Non-GAAP adjustments:
Stock-based compensation	25.0	-	26.0	95.3	-	98.3
Amortization of intangibles	7.8	-	8.3	27.3	-	28.3
Non-GAAP operating income (loss)	(5.0)	-	(1.0)	97.0	-	103.0
Outlook reconciliation: GAAP and non-GAAP net income (loss)
GAAP net loss	(39.7)	-	(35.4)	(44.6)	-	(38.6)
Non-GAAP adjustments:
Stock-based compensation	25.0	-	26.0	95.3	-	98.3
Amortization of intangibles	7.8	-	8.3	27.3	-	28.3
Non-GAAP tax impact	3.6	-	2.2	(3.8)	-	(5.4)
Non-GAAP net income (loss)	(2.6)	-	0.3	76.3	-	80.6