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Guidewire Software (GWRE) Up 6.7% Since Last Earnings Report: Can It Continue?

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A month has gone by since the last earnings report for Guidewire Software (GWRE - Free Report) . Shares have added about 6.7% 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 the most recent earnings report in order to get a better handle on the important catalysts.

Guidewire Q3 Earnings & Revenues Top Estimates

Guidewire Software, Inc. reported third-quarter fiscal 2020 non-GAAP earnings of 9 cents per share, against the Zacks Consensus Estimate pegged at loss of 6 cents. However, the bottom line declined 50% from the year-ago quarter’s figure.

The company reported revenues of $168.2 million, which surpassed the Zacks Consensus Estimate by 10.3%. Further, the top line surpassed the higher end of management’s guidance of $153-$157 million. Moreover, the top line increased 3% from the year-ago quarter’s figure.

The growth can primarily be attributed to higher License and subscription revenues.

Further, management is optimistic on growing clout of its several cloud-based products and InsuranceSuite Cloud deal wins.

Quarter in Detail

License and subscription revenues (55.4% of total revenues) improved 22% from the year-ago quarter’s level to $93.2 million, driven by growth in subscription revenues.

Subscription revenues soared 105% year over year to $30.1 million on solid adoption of InsuranceSuite cloud.

In the fiscal third quarter, 61% of new software sales were subscription-based compared with 63% in the last reported quarter.

During the reported quarter, new and existing customers selected multiple components of Guidewire InsurancePlatform, which included InsuranceSuite, digital, data and analytics.

Management is banking on adoption of InsuranceNow to increase with the implementation of latest InsuranceSuite 10 and InsuranceSuite Cloud offerings.

Maintenance revenues (12.3%) amounted to $20.7 million, down 3% year over year.

Services revenues (32.3%) fell 17% from the year-ago quarter’s figure to $54.3 million.

Annual recurring revenues (or ARR) were $483 million as of Apr 30, 2020, compared with $474 million as of Jan 31, 2020.

Margin Details

Non-GAAP gross margin contracted 200 basis points (bps) on a year-over-year basis to 56%, on increasing investments to enhance cloud capabilities that more than offset growth in license and subscription revenues and ongoing shift to subscription-based solutions.

Non-GAAP gross margin for Licensing and subscription contracted from 87% reported in the prior-year quarter to 76%. Meanwhile, non-GAAP gross margin for Services contracted 400 bps to 12%.

Total operating expenses on a non-GAAP basis, climbed 8% year over year to $88.5 million.

Non-GAAP operating income came in at $5.8 million during the reported quarter, down 54% year over year.

Non-GAAP operating margin (as a percentage of total revenues) during the quarter contracted 430 bps from the year-ago quarter’s tally to 3.4%.

Balance Sheet & Cash Flow

As of Apr 30, 2020, cash and cash equivalents and short-term investments came in at $1.034 billion, compared with 1.055 billion as of Jan 31, 2020.

The company generated cash from operating activities of $4.6 million compared with $19.5 million reported in the fiscal second quarter. During fiscal third quarter, free cash flow came in at $1 million compared with $16.7 million reported in the fiscal second quarter.

Guidance

For the fiscal fourth quarter, revenues are expected in the range of $204.9-$212.9 million.

License and subscription are expected in the range of $138.4-$146.4 million. Maintenance revenue is anticipated in the range of $20.2-$21.2 million. Services revenues are projected between $42.7 million and $48.7 million.

Non-GAAP operating income is anticipated between $36.7 million and $44.7 million.

The company projects non-GAAP earnings of 41-49 cents per share in fourth quarter of fiscal 2020.

Guidewire updated fiscal 2020 outlook on increasing cloud implementations and higher allegiance of customers to adopt subscription-based services. The company now expects total revenues between $703.5 million and $711.5 million compared with prior guidance of $702-$714 million.

The company anticipates non-GAAP earnings of 84-92 cents per share in fiscal 2020 compared with prior range of 82-94 cents.

For fiscal 2020, License and subscription are now in the range of $419-$427 million compared with prior guided range of $415-$425 million. Services revenues are now anticipated between $198 million and $204 million compared with the prior range of $202-$208 million. Nevertheless, management continues to project Maintenance revenues in the band of $83-$84 million.

Management now expects new subscription-based sales to be at the lower end of the previous range of 70-80%.

The company is focused on enhancing Guidewire Cloud platform with new capabilities including digital frameworks, automation, tooling and other cloud services.

The company now anticipates non-GAAP operating income in the band of $65-$73 million compared with prior range of $61-$73 million.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision. The consensus estimate has shifted -17.61% due to these changes.

VGM Scores

At this time, Guidewire Software has a subpar Growth Score of D, however its Momentum Score is doing a bit better with a C. However, the stock was allocated a grade of F on the value side, putting it in the bottom 20% 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 #3 (Hold). We expect an in-line return from the stock in the next few months.


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