Guidewire Earnings: Another Speed Bump in a Long and Complex Model Transition

Wide-moat Guidewire GWRE had been on a roll in terms of quarterly results, but that came to an end with a messy report for its fiscal third quarter. The company reported revenue and profitability shortfalls, while offering mixed guidance. On the positive side, we see clear signs of momentum, with eight go-lives, bigger deals being signed, and an emerging dynamic where the company is starting to see newer systems come up for bid in a desire to move to the cloud. During the quarter the company repurchased 855,000 shares including its normal and accelerated programs. Based on results and guidance, we modestly reduced our growth estimates and are therefore lowering our fair value estimate to $88 per share from $95 previously. We continue to see Guidewire as the primary winner as the property-casualty, or P&C, insurance industry continues to modernize and see consistent momentum in Tier-1 insurers selecting the platform.

Third-quarter revenue grew 5% year over year as reported to $207 million, compared with FactSet consensus of $214 million. With subscriptions and license revenue lines nearly exactly in line with our model, we see a relatively stable demand environment. The shortfall was driven by professional services, which has sometimes been a thorn in the side of the company’s quarterly results over the last decade. Services were light because of a change in two Guidewire-led programs that hit the timing of revenue recognition, as well as increased scrutiny from clients on statements of work. Guidewire continues to work toward de-emphasizing professional services and pushing more of this work to system integration partners.

Guidewire remains a model transition story so our focus is on subscriptions and support, which grew 24% year over year, with subscriptions growing 34% to $89 million. Annual recurring revenue grew 17% in constant currency year over year to $722 million.