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Guidewire Upgraded to Strong Buy on Encouraging Q4 Results

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On Sep 12, Guidewire Software, Inc. (GWRE - Free Report) was upgraded to a Zacks Rank #1 (Strong Buy).

Why the Upgrade?

Guidewire posted impressive fiscal fourth-quarter fiscal 2017 results, which were better than the  guided range.

For the fourth-quarter, non-GAAP earnings were 59 cents per share, beating the Zacks Consensus Estimate of 39 cents and increasing 51.3% year over year. Revenues for the quarter were $181.1 million, an increase of 28% from the year-ago quarter. The figure also beat the Zacks Consensus Estimate of $168 million.

ISCS, which the company acquired in February 2017 and later renamed as InsuranceNow, contributed $16.2 million in hosting revenues for fiscal 2017. This along with customer addition, higher service activities and certain advance payments from term licenses boosted the company’s top line. Shares of Guidewire have gained 60.2% year to date, significantly outperforming the industry’s 28% rally.

Growth Catalysts in Detail

Management noted that nine new customers were added during the fourth quarter, with five for the company’s core offering InsuranceSuite and one for InsuranceNow. Moreover, 27 existing customers expanded their relationship with the company during the quarter.
Notably, while the integration of ISCS is going on, Guidewire’s other acquisitions have contributed to the company’s growth. The company’s product suite, which has been enriched by the acquisition of FirstBest, now called Guidewire Underwriting Management; EagleEye Analytics, now Guidewire Predictive Analytics and InsuranceNow is experiencing benefits from cross-selling of the products.

The company benefitted particularly from $6.1 million of advance payment from term licenses in the fourth quarter. This will however have a negative impact on fiscal 2018 license revenues, growth and margins, as the costs related to the payment will be incurred in the following quarter.

Guidewire is slowly shifting from a term license based model to a subscription based model. This will hamper the top line for some time as cloud based or subscription based revenues are a bit delayed compared to license based early payments. Margins are also anticipated to be affected by the investments for the cloud transition. However, we believe, this step will be beneficial for the company in the long run as the industry is moving toward cloud-based infrastructure at a steady pace. This is reflected in the company’s expectation of a rise of 20% to 30% in subscription sales in fiscal 2018 from 6% in fiscal 2017.

Zacks Rank and Key Picks

Guidewire sports a Zacks Rank #1 (Strong Buy).

Other stocks worth considering in the broader industry are Lam Research Corporation (LRCX - Free Report) and Applied Materials, Inc. (AMAT - Free Report) , both sporting a Zacks Rank #1, and MSCI Inc (MSCI - Free Report) , with a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The long-term earnings growth rate for MSCI, Lam Research and Applied Materials are projected to be 10%, 17.2% and 17.1% respectively.

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