Duck Creek Technologies, Inc. (NASDAQ:DCT) is the leading cloud-based SaaS provider of core systems for the global property and casualty (P&C) insurance industry. The company has established its dominance by combining over two decades of deep domain expertise with the differentiated SaaS capabilities and low-code configurability of its technology platform.

Business Overview

Duck Creek's product portfolio is built on its modern technology foundation, the Duck Creek Platform, and works cohesively to improve the operational efficiency of carriers' core processes (policy administration, claims management and billing) as well as other critical functions. The Duck Creek Platform enables customers to be agile and rapidly capitalize on market opportunities, while reducing their total cost of technology ownership.

The company's deep understanding of the P&C insurance industry has enabled it to develop a single, unified suite of insurance software products that address the key challenges faced by carriers. Duck Creek's solutions promote carriers' nimbleness by enabling rapid integration and streamlining the ability to capture, access and utilize data more effectively.

The Duck Creek Suite includes several products that support the P&C insurance process lifecycle, such as Duck Creek Policy, Duck Creek Billing, Duck Creek Claims, Duck Creek Rating, Duck Creek Insights, Duck Creek Digital Engagement, Duck Creek Distribution Management, Duck Creek Reinsurance Management, Duck Creek Anywhere Managed Integrations and Duck Creek Industry Content. These solutions provide additional features and functionalities that further help customers meet the increasing and evolving demands of the P&C industry.

Customers purchase and deploy Duck Creek OnDemand, the company's SaaS solution, either individually or as a suite. Duck Creek sells its SaaS solutions through recurring fee arrangements where revenue is recognized on a monthly basis following deployment to the customer, which the company refers to as subscription revenue. Substantially all of Duck Creek's new bookings come from the sale of SaaS subscriptions of Duck Creek OnDemand. For the three months ended November 30, 2022, SaaS ACV bookings represented 99% of the company's total ACV bookings.

Historically, Duck Creek has also sold its products through perpetual and term license arrangements, most commonly installed on-premise, where license revenue is typically recognized in full upon delivery of the software to the customer. The company generally prices its SaaS and license arrangements at individually negotiated rates based on the amount of a customer's direct written premium (DWP) that will be managed by its solutions with pre-determined fee adjustments as the customer's DWP increases over the term of the contract, which typically ranges from three to seven years for its SaaS arrangements.

Financials

For the fiscal year ended August 31, 2022, Duck Creek reported annual revenue of $302,917,000, annual net income of -$8,332,000, annual operating cash flow of $10,727,000, and annual free cash flow of $7,600,000.

In the latest quarter ended November 30, 2022, the company generated revenue of $80,586,000, a 10% increase compared to the prior year period. Subscription revenue, which accounted for 83% of software revenue, grew 23% year-over-year to $43,790,000. License revenue decreased 7% to $1,782,000, while maintenance and support revenue increased 14% to $7,159,000. Professional services revenue declined 6% to $27,855,000.

Gross margin for the quarter was 54%, compared to 58% in the prior year period. The decrease was primarily due to a higher mix of subscription revenue, which carries lower gross margins than the company's license business. Operating expenses increased 23% year-over-year, driven by investments in research and development, sales and marketing, and general and administrative functions to support the company's growth initiatives.

The company reported a net loss of $5,161,000 for the quarter, compared to net income of $692,000 in the prior year period. Free cash flow was negative $7,358,000, compared to negative $25,509,000 in the prior year quarter, as the company continued to invest in its cloud infrastructure and working capital.

Liquidity

As of November 30, 2022, Duck Creek had $255,456,000 in cash and cash equivalents, no outstanding borrowings under its $45,000,000 revolving credit facility, and $44,300,000 of principal borrowing availability. The company believes its existing cash, cash flow from operations, and available credit facility will be sufficient to meet its operating and capital expenditure requirements over the next twelve months.

Risks and Challenges

Duck Creek faces several risks and challenges that could impact its future performance. These include its history of losses, the success of its growth strategy focused on SaaS solutions, its ability to manage its expanding operations, intense competition in the market, potential intellectual property disputes, and the significant influence of its major shareholders, Apax and Accenture, on the company's business and policies.

Outlook

The company has not provided specific financial guidance for the current fiscal year. However, management has emphasized its commitment to continued investment in research and development, sales and marketing, and cloud infrastructure to drive long-term growth and maintain its market leadership position.

Conclusion

Duck Creek Technologies is the undisputed leader in the cloud-based SaaS solutions for the global P&C insurance industry. The company's deep domain expertise, innovative technology platform, and strong customer relationships have positioned it for long-term success. While the company faces some near-term challenges, such as the transition to a higher mix of subscription revenue and increased operating expenses, its solid financial position and strategic initiatives suggest it is well-equipped to navigate the evolving industry landscape and deliver value to its shareholders over the long term.