Guidewire Software, Inc. GWRE recently announced its intent to acquire Cyence for approximately $275 million, or $265 million net of $10 million cash on hand, which is subject to certain transaction-related adjustments.
Cyence determines the economic impact of a cybercrime via a software platform that is built on cybersecurity related data science. We anticipate this acquisition to enrich Guidewire’s product portfolio, which is meant for Property and Casualty insurers.
Given the growing rate of cybercrime related monetary losses, this is expected to be a valuable addition for Guidewire. Recently, in an article, IDG Communications quoted Cybersecurity Ventures stating that worldwide spending related to cybersecurity is projected to cross $1 trillion during 2017 to 2021. We believe the enhancement of the portfolio with cyber risk analytics solutions will be a positive for Guidewire in the long run.
Shares of Guidewire have gained 59.2% year to date, outperforming the 27.3% rally of the industry it belongs to.
Guidewire’s Inorganic Growth Trajectory
We note that Guidewire’s acquisition strategy has boosted the company’s top line. The company’s acquisition of ISCS in February 2017, now called InsuranceNow, added around $16.2 million in hosting revenues in fiscal 2017.
FirstBest (now called Guidewire Underwriting Management) and EagleEye Analytics (now known as Guidewire Predictive Analytics), which were acquired in 2016, and GuidewireNow (previously called ISCS) are a few prominent segments of the company.
The cross-selling of the product suites has increased customer base and revenue generation. Guidewire’s customer base has expanded consistently as evident from the addition of nine new customers in fourth-quarter 2017.
Guidewire Software, Inc. Revenue (TTM)
Guidewire Software, Inc. Revenue (TTM) | Guidewire Software, Inc. Quote
Other Strategic Initiatives
Guidewire is slowly shifting from the term-license based model to subscription base. This will be beneficial for the company in the long run as the majority of the enterprises are expected to lean toward cloud-based infrastructure going forward. The company expects subscription sales to rise to 20% to 30% in fiscal 2018 from 6% in fiscal 2017.
Guidewire’s cloud deployment partner, Amazon’s AMZN Web Services is also gaining momentum and this bodes well for it. According to Gartner, the global Software-as-a-Service (SaaS) market is expected to increase at a four-year CAGR of 18.4% over 2016–2020 time frame. This is also a positive for the company.
However, the fact that its total addressable market (TAM) is limited only to the insurance sector is a headwind for the company in our view. Additionally, the transition from a term-license to a cloud-based model will negatively impact the top line in the short haul.
Zacks Rank and Key Picks
Guidewire currently has a Zacks Rank #3 (Hold).
Better-ranked stocks in the broader technology space include Applied Materials, Inc. AMAT and Micron Technology, Inc. MU, both sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The long-term earnings growth rate for Applied Materials and Micron is 17.1% and 10%, respectively.
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