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Guidewire Software (GWRE) Up 5.8% Since Last Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for Guidewire Software (GWRE - Free Report) . Shares have added about 5.8% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Guidewire Software due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.

Guidewire Q1 Earnings and Revenues Top Estimates

Guidewire Software, Inc. reported first-quarter fiscal 2021 non-GAAP earnings of 17 cents per share against the Zacks Consensus Estimate of a loss per share of 6 cents. Also, earnings improved 30.8% on a year-over-year basis.

The company reported revenues of $169.8 million, which beat the Zacks Consensus Estimate by 3.2% and increased 8.2% on a year-over-year basis. The top line also came above the higher end of management’s guidance of $162-$166 million.

Improvement in the revenues was driven by higher license and subscription revenues. Further, management is optimistic regarding robust adoption of several cloud-based products and InsuranceSuite Cloud deal wins.

Guidewire is well positioned to gain from transition to subscription-based services model. The company is enhancing Guidewire Cloud platform with additional capabilities including automation, digital frameworks, tooling and other cloud services.

Guidewire is upbeat about its recently launched Banff service for its cloud platform. Banff adds on to Aspen cloud service (introduced in June 2020) and Guidewire Cloud platform. Aspen and Banff will create a closed-loop analytics platform to assist insurance professionals in decision-making. Banff service includes capabilities like CloudDirect as well as developer.guidewire.com along with new InsuranceSuite Cloud API and InsuranceNow API.

Quarter in Detail

The company realigned reporting segments into Subscription and support, and License and Services, beginning fourth-quarter fiscal 2020.

For the fiscal first quarter, Subscription and support revenues (34.2% of total revenues) increased 18.2% from the year-ago quarter’s level to $58 million, driven by higher subscription revenues (up 32.7% year over year to $37.2 million).

License revenues (38.4%) increased 20% year over year to $65.3 million on higher term license bookings.

Services revenues (27.4%) fell 13.2% from the year-ago quarter’s figure to $46.6 million. The downside was mainly due to delays in some projects, thanks to the coronavirus crisis and lower billable travel expenses as all the professional services are being delivered virtually.

Annual recurring revenues (or ARR) were $513 million as of Oct 31, 2020 compared with $514 million as of Jul 31, 2020.

Operating Details

Non-GAAP gross margin contracted 220 basis points (bps) on a year-over-year basis to 54%, mainly due to decline in gross margin from the Subscription and support and the Services segments.

Non-GAAP gross margin for Subscription and support contracted from 61.7% reported in the prior-year quarter to 47.8%. Gross margin for Subscription and support segment declined mainly due to increased headcount for managing cloud operations. Non-GAAP gross margin for License expanded 10 bps to 96.5%. Meanwhile, non-GAAP gross margin for Services contracted 810 bps to 2.3%.

Total operating expenses climbed 9.6% year over year to $110.4 million. Non-GAAP operating income came in at $2.8 million during the reported quarter, down 60.7% year over year.

Balance Sheet

Cash and cash equivalents and short-term investments came in at $1.15 billion compared with $1.133 billion as of Jul 31, 2020.

The company utilized cash from operating activities of $15.7 million compared with cash generated from operations of $107.2 million reported in the fiscal fourth quarter of 2020. During fiscal first quarter, free cash outflow came in at $20.2 million.

Guidance

For second-quarter fiscal 2021, revenues are expected in the range of $168-$172 million. Subscription revenues are expected to be approximately $38 million, while Services revenues are projected to be $42 million. ARR is projected between $518 million and $521 million.

Operating loss is expected between $37 million and $41 million for fiscal second quarter, while non-GAAP operating loss is projected in the range of $1-$5 million.

For fiscal 2021, the company continues to expect total revenues between $723 million and $733 million. Subscription revenues are expected to be approximately $165 million. ARR is projected between $560 million and $571 million. However, Services segment’s revenues are now anticipated to be approximately $185 million compared with revenues of $190 million projected earlier.

For fiscal 2021, cash flow from operations is projected in the range of $60-$70 million.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month.

VGM Scores

Currently, Guidewire Software has a subpar Growth Score of D, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of F on the value side, putting it in the fifth quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Guidewire Software has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.


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