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Guidewire (GWRE) Q2 Earnings & Revenues Top, Ups FY18 View

Zacks

Guidewire Software, Inc. GWRE delivered second-quarter fiscal 2018 non-GAAP earnings of 33 cents per share, outpacing the Zacks Consensus Estimate of 19 cents per share. Further, the reported figure was much higher than the year-ago figure of 28 cents per share.

The company posted revenues of $163.8 million, which increased 42% from the year-ago quarter. The figure also surpassed the Zacks Consensus Estimate of $154 million and was above the guided range. The increase was primarily owing to growth in Services revenues and License revenues.

Notably, the company is transforming to a subscription based model from a term license based one, which might hurt the top line in the near term. This is because term license revenues include advance payments and subscription-based revenues are a bit delayed.

Nevertheless, management is extremely optimistic about the several cloud-based products launched in the quarter, at a time when the P&C insurance industry is moving steadily toward adoption of cloud solutions.


Guidewire stock has gained 47.5% year over year, substantially outperforming the 37.3% rally of the industry it belongs to.

Revenue Details

The company has three main segments namely Maintenance, License and Other and Services.

Maintenance revenues amounted to $19.1 million, up 15% year over year. Further, the same from License and other increased 31% from the year-ago quarter to $84.2 million. Service revenues soared 73% from the year-ago quarter to $60.5 million.

Management stated that a substantial majority of the second-quarter’s revenues were from subscription based products (accounted for approximately 43% of total reveneus). Backed by the strong performance of subscription products, management expected increase from subscription sales were in the range of 30-40% from 20-30% for fiscal 2018.

Perpetual licenses revenues are now expected to be approximately $8 million to $10 million in fiscal 2018 primarily due to new Latin America activity.

With regard to maintenance revenues, higher perpetual revenues and the enhanced timing of sales increased the range of this segment to $75-$77 million, up $2 million at its mid-point. However, growth of the Maintenance revenues that are part of subscriptions will be negatively impacted while the change in the company’s business model is in progress, because of the delayed revenue recognition from the subscription based products.

Per management, the license revenues will have a negative impact in fiscal 2018. The sales process might be a bit elongated due to the time taken by customers to choose between on-premise and cloud delivery options. Perpetual license revenues facing a decline will be a further drag to the license and other revenues. Transition to cloud-based subscription sales will also impact license and other revenues.

Meanwhile, services revenues were better than expected in the quarter. The segment is anticipated to improve performance in the near term backed by proper implementations of InsuranceNow.

Additionally, management is optimistic about the completion of the Cyence buyout that determines the economic impact of a cybercrime via a software platform, which is built on cyber-security related data science. The integration of Cyence would imply that the company would be able to provide an entire life cycle to the insurance products starting from designing to transaction management.

Management reduced revenue contribution from Cyence in 2018 due to revised purchase price accounting conclusion. The company now expects Cyence revenues to be in the range of $6-$8 million, down $3 million from previous guidance.

Operating Details

In second-quarter fiscal 2018, non-GAAP gross profit came in at $107.5 million, up 32% from a year ago quarter. Non-GAAP gross margin was 65.6% compared with 70.3% in the year-ago quarter. The decrease was due to higher investments in lower margin services revenue and cloud operations.

Total non-GAAP operating expenses came in at $75.5 million during the quarter, up 43% year over. The increase can primarily be attributed to higher research and development and sales and marketing expenses coupled with recent acquisition of Cyence and ISCS.

Non-GAAP operating margin was 19.6% compared with 24.6% in the year-ago quarter. The decline was slight due to the negative impact of higher mix of low-margin services revenues and shift in investments to the cloud based model.

According to management, Guidewire is investing more over impressive product suite that might prove to be tailwinds for future growth. As of now, these are affecting the company’s margins.

Balance Sheet

The company had cash and cash equivalents and investments of $569.5 on Jan 31, 2018 as compared with $653.5 million in Oct 31, 2017.

Cash flow from operations in the second quarter was $47.7 million and free cash flow was $44.7 million.

Guidance

For third-quarter fiscal 2018, revenues are expected to be in the range of $135-$139 million. The Zacks Consensus estimate is pegged at $154.4 million. License and other revenues are expected to be in the range of $47-$49 million. Maintenance revenue is anticipated to be in the range of $18 million to $19 million. Services revenues are projected to be in the range of $69-$71 million.

Non-GAAP operating loss is expected to be between $5 million and $1 million, while non-GAAP net income is anticipated to be within ($2.6) million to $0.3 million.

Non-GAAP net income per share is expected to be between (3) cents and 0 cents. The Zacks Consensus estimate is pegged at 14 cents.

Guidewire raised fiscal 2018 guidance. The company now expects total revenues to be in the range of $644-$650 million (previously $631-$641 million band). The Zacks Consensus estimate is pegged at $637.9 million.

Non-GAAP net income is now expected to be between 98 cents and $1.04 per share (previously 82 cents and 90 cents per share). The Zacks Consensus estimate is pegged at 87 cents.

Our Take

The company provided stellar second-quarter results and raised fiscal 2018 guidance. Guidewire’s elaborate partnership programs and strategic collaborations are major growth drivers. The company’s Partner Connect Program has been implemented worldwide, benefiting its customers in the property and casualty insurance industry.

Guidewire’s acquisition strategies are also a major contributor to its growth. The acquisition of ISCS (now called InsuranceNow), FirstBest (now called Guidewire Underwriting Management) and EagleEye Analytics (now known as Guidewire Predictive Analytics) are not only aiding revenue growth but also helping the company to expand clientele.

Zacks Rank and Key Picks

Guidewire Software carries a Zacks Rank #3 (Hold).

Better-ranked stocks in the broader technology sector include Paycom Software, Inc. PAYC, NVIDIA Corporation NVDA and Intel Corporation INTC, all sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Paycom Software, NVIDIA and Intel have a long-term earnings growth rate of 25.75%, 10.25% and 8.42%, respectively.

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