It has been about a month since the last earnings report for Guidewire Software (GWRE - Free Report) . Shares have lost about 1.6% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Guidewire Software due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Guidewire Software delivered fourth-quarter fiscal 2018 non-GAAP earnings of 81 cents per share, outpacing the Zacks Consensus Estimate by 5 cents. Moreover, the figure grew 37.3% year over year and came ahead of the management’s guided range of 72-77 cents per share.
The company reported revenues of $248.6 million, which also increased 37.3% from the year-ago quarter. The figure comfortably surpassed the Zacks Consensus Estimate of $239 million and was above the higher end of management’s guided range of $234-$240 million. The increase can primarily be attributed to growth in Services revenues and License revenues.Further, strong adoption of several cloud-based products remained a key catalyst.
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.
Shares of Guidewire declined 4.3% on Sep 5. Moreover, the shares are down almost 8.2% in the after-hours trading, owing to a tepid fiscal 2019 revenue outlook.
Quarter in Detail
The company has three main segments namely Maintenance, License, and Other and Services.
Maintenance revenues amounted to $20.5 million, up 10.1% year over year.
However, growth of the Maintenance revenues along with subscription contracts is anticipated to slow down, going forward. This is primarily due to the ongoing change in the company’s business model toward subscription based products.
License and Other revenues surged 37.7% from the year-ago quarter to $151.1 million. The impact of significant recurring payment from one of the company’s Tier 1 customers, which was realized in third quarter last year, positively impacted the segment. Transition to cloud-based subscription sales is expected to impact license and other revenues.
Perpetual revenues in the fourth quarter came in at $3.2 million, down 52.9% year over year.
Further, Services revenues increased approximately 46% from the year-ago quarter to nearly $77 million. Robust sales activity, comprising cloud and Europe-based projects along with two non-recurring elements drove year-over-year growth.
Guidewire Digital reported 29 new and existing customer wins.
Additionally, management remains optimistic about Cyence buyout primarily due to strength in cyber risk capabilities. Notably, Cyence determines the economic impact of a cybercrime via a software platform, which is built on cyber-security related data science. Cyence raked in five new customer wins, much ahead of management’s expectation.
2018 at a Glance
In fiscal 2018, revenues increased 28.5% over 2017 to $661.1 million. The figure was better than management’s guided range of $647-$653 million. Earnings of $1.14 per share grew 8.6% over 2017 and were better than management’s guidance of $1.05-$1.11 per share.
A substantial portion of fiscal 2018 revenues were from subscription based products, accounting for approximately 36% of new sales. It is a considerable improvement over 6% reported in 2017.
Perpetual revenue in fiscal 2018 came in at $11.8 million, higher than management’s anticipated $8-$10 million range, due to new Direct Written Premium (“DWP”) customer wins. However, the reported figure was down from $13.1 million in 2017.
At the end of fiscal 2018, Guidewire had a total of 380 customers, compared with 328 in 2017. Robust adoption of InsuranceNow, broad based adoption across Europe, Asia Pacific and Americas remain positives. The company ended 2018 with 127 customers having one or more digital products.
In fourth-quarter 2018, non-GAAP gross profit came in at $168.6 million, up 27% from a year-ago quarter. Non-GAAP gross margin was 68% compared with 73% in the year-ago quarter. The decrease was owing to higher investments to support cloud operations and shift to subscription revenues.
Total non-GAAP operating expenses came in at $84.8 million during the quarter, up 23% year over year. The increase can primarily be attributed to higher research and development expenses. Costs pertaining to Cyence buyout and new internal projects comprising Configure Price Quote (“CPQ”), ERP and other revenue management systems led to the surge in expenses.
Non-GAAP operating income came in at $83.7 million, up 30.9% from the year-ago quarter. Non-GAAP operating margin was 33.7%, contracting 160 basis points (bps) from the year-ago quarter.
Balance Sheet& Cash Flow
The company had cash and cash equivalents and short-term investments of $1.07 billion as on Jul 31, 2018 as compared with $994.3 million at the end of the previous quarter.
Cash flow from operations in the fourth quarter and fiscal 2018 was $102.1 million and $140.5 million, respectively.
Free cash flow in the fourth quarter and 2018 was $98.4 million and $128.4 million, respectively.
For first-quarter 2019, revenues are expected to be in the range of $159-$163 million.
License and other revenues are expected to be in the range of $73-$77 million. Maintenance revenue is anticipated to be in the range of $19-$20 million. Services revenues are projected to be in the range of $65-$68 million.
Non-GAAP operating income is expected to be between $14.5 million and $18.5 million, while non-GAAP net income is anticipated to be within $14.5-$17.6 million.
Non-GAAP net income per share is expected to be between 18-22 cents.
Guidewire will adopt ASC 606 from fiscal 2019. The company expects total revenues to be in the range of $740.5-$752.5 million.
Perpetual licenses revenues are anticipated to be less than $10 million in 2019. Backed by strong performance of subscription products, management continues to expect subscription sales in the range of 40-60% for 2019.
Non-GAAP operating income is now expected to be between $104.5 million and $116.5 million.
Non-GAAP net income is projected to be between $1.15 cents and $1.26 per share.
Free cash flow for 2019 is expected in the band of $115-$130 million.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 90.98% due to these changes.
At this time, Guidewire Software has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. 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 C. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Guidewire Software has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.