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Guidewire Looks Promising on Upbeat Q4: Should You Hold?

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Guidewire Software, Inc. GWRE shares have been rallying since fourth-quarter fiscal 2018 earnings release on Aug 5, 2018. In fact, the company has outperformed the industry in the past year.

Shares of Guidewire have gained 23.9% compared with the industry’s growth of 16.9%. Its price performance is backed by an impressive earnings surprise history. The company surpassed earnings estimates in each of the trailing four quarters, recording an average beat of 184.4%.

Guidewire delivered fourth-quarter 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 and License revenues. Further, strong adoption of several cloud-based products remained a key catalyst.

Encouraging Outlook

For first-quarter 2019, revenues are expected to be in the range of $159-$163 million. The Zacks Consensus Estimate is pegged at $134.8 million.

Non-GAAP net income per share is expected to be between 18 cents and 22 cents. The Zacks Consensus Estimate is pegged at a loss of 10 cents per share.

Growth Drivers

Guidewire’s elaborate partnership programs and strategic collaborations are major growth drivers. Its Partner Connect Program has been implemented worldwide, which is benefiting its customers in the property and casualty insurance industry.

The company’s acquisition strategies are also a major contributor to its growth. The buyout 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.

Additionally, management is optimistic about the completion of the Cyence buyout. Notably, Cyence is a company that 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 enable Guidewire to provide an entire life cycle to the insurance products, starting from designing to transaction management.

Strong Liquidity

The company had cash, cash equivalents and short-term investments of $1.07 billion as on Jul 31, 2018 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. It carries no long-term debt. Free cash flow in the fourth quarter and 2018 was $98.4 million and $128.4 million, respectively.

Last Words

A successful investor understands the importance of retaining well-performing stocks in the portfolio at the right time. Indicators of a stock's bullish run include a rise in share price and strong fundamentals. Though there may be some concerns regarding the stock but they are transitory in nature. Hence, considering these factors, investors are suggested to grasp on to this Zacks Rank #3 (Hold) stock.

Key Picks

NetApp, Inc. NTAP, Garmin Ltd. GRMN and Salesforce.com Inc. CRM 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.

NetApp, Garmin and Salesforce have a long-term EPS growth rate of 14.1%, 7.4% and 25%, respectively.

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