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Guidewire (GWRE) Q3 Earnings & Revenues Top, Ups FY18 View

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Guidewire Software, Inc. (GWRE - Free Report) delivered third-quarter fiscal 2018 non-GAAP earnings of 5 cents per share, comparing favorably with the Zacks Consensus Estimate of a loss of 1 cent per share. However, it was much lower than the year-ago figure of 16 cents per share.

The company posted revenues of $140.5 million, which increased 14% from the year-ago quarter. The figure also surpassed the Zacks Consensus Estimate of $137 million and was above the guided range. The increase can primarily be attributed to growth in Services revenues and Maintenance 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 while 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 35.2% year over year, substantially outperforming the 21.4% 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 $18.7 million, up 11% year over year. Further, the same from Service increased 50% from the year-ago quarter to $71.4 million. However, License and Other revenues decreased 15% from the year-ago quarter to $50.4 million.

Management stated that a substantial majority of second-quarter revenues were from subscription based products (accounted for approximately 50% of total revenues). Backed by the strong performance of subscription products, management continues to expect subscription sales in the range of 30-40%, for fiscal 2018.

Perpetual revenues in the third quarter came in at $5.7 million. Perpetual licenses revenues are now expected to be approximately $9-$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 $76-$77 million, up $0.5 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 stretched 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 on the back of proper implementation of InsuranceNow.

Additionally, management is optimistic about the completion of the Cyence buyout. Notably, Cyence 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.

Operating Details

In third-quarter fiscal 2018, non-GAAP gross profit came in at $77.5 million, down 4% from a year-ago quarter. Non-GAAP gross margin was 55.2% compared with 65.1% in the year-ago quarter. The decrease was owing to higher investments in lower margin services revenues and cloud operations. Further, payment shift of a Tier-1 term customer negatively impacted gross margins.

Total non-GAAP operating expenses came in at $75.2 million during the quarter, up 19% year over. The increase can primarily be attributed to higher research and development and sales and marketing expenses along with the recent acquisitions of Cyence and ISCS.

Non-GAAP operating margin was 1.6% compared with 13.8% in the year-ago quarter. The marginal decline due to the negative impact of higher mix of low-margin services revenues and shift in investments to the cloud based model.

Balance Sheet

The company had cash and cash equivalents and investments of $994.3 on Apr 30, 2018 as compared with $569.5 million in the previous quarter.

Cash flow from operations in the third quarter was $20.2 million and free cash flow was $19 million.

Guidance

For fourth-quarter fiscal 2018, revenues are expected to be in the range of $234-$240 million. The Zacks Consensus estimate is pegged at $239.6 million. License and other revenues are expected to be in the range of $141-$147 million. Maintenance revenue is anticipated to be in the range of $19-$20 million.  Services revenues are projected to be in the range of $71-$75 million.

Non-GAAP operating income is expected to be between $78 million and $84 million, while non-GAAP net income is anticipated to be within $58.8-$63.2 million.

Non-GAAP net income per share is expected to be between 72-77 cents. The Zacks Consensus estimate is pegged at 74 cents.

Guidewire raised fiscal 2018 guidance. The company now expects total revenues to be in the range of $647-$653 million (previously $644-$650 million band), representing an increase of 26- 27% year over year. The Zacks Consensus estimate is pegged at $648.9 million.

Non-GAAP operating income is now expected to be between $104 million and $110 million.

Non-GAAP net income is now projected to be between $1.05 cents and $1.11 per share (previously 98 cents and $1.04 cents per share). The Zacks Consensus estimate is pegged at $1.01 per share.

Free cash flow for fiscal 2018 is now expected in the band of $115-$125 million.

Our Take

The company provided stellar third-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 carries a Zacks Rank #3 (Hold).

Amazon.com, Inc. (AMZN - Free Report) , NVIDIA Corporation (NVDA - Free Report) and Citrix Systems, Inc. (CTXS - Free Report) are stocks worth considering in the broader technology sector. All the three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Amazon, NVIDIA and Citrix Systems is currently pegged at 30.2%, 10.3% and 9.1%, respectively.

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