It has been about a month since the last earnings report for Guidewire Software (GWRE). Shares have lost about 7.6% 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 drivers.
Guidewire Q1 Earnings & Revenues Beat, Down Y/Y
Guidewire Software, Inc. reported first-quarter fiscal 2020 non-GAAP earnings of 13 cents per share, outpacing the Zacks Consensus Estimate of 3 cents. The figure also came ahead of management’s guided range of 1-5 cents per share. However, the bottom line declined 65.8% from the year-ago quarter’s figure.
The company reported revenues of $157 million, surpassing the Zacks Consensus Estimate by 3.8%. Further, the bottom line came slightly above the higher end of management’s guided range of $149-$153 million. However, the top line decreased 13% from the year-ago quarter. The decrease can primarily be attributed to lower License and Services revenues.
Nonetheless, management remains optimistic on growing clout of its several cloud-based products and InsuranceSuite Cloud deal wins.
Quarter in Detail
License and subscription revenues (52.5% of total revenues) decreased 12.9% from the year-ago quarter to $82.4 million, on decline in term license revenues, partially offset by growth in subscription revenues.
Term license revenues declined 31.7% year ago quarter to $54.2 million. Management attributes the decline to two term license deals worth $23.6 million in first-quarter fiscal 2019.
Subscription revenues soared 83.8% year over year to $28.2 million on solid adoption of InsuranceSuite cloud. In the fiscal first quarter, 43% of new software sales were subscription-based, compared with 26% in the year-ago quarter.
Perpetual license revenues came in at $49 million.
Maintenance revenues (13.4%) amounted to approximately $21 million, almost flat year over year.
Services revenues (34.1%) decreased almost 17% from the year-ago quarter to $53.6 million, primarily owing to the closure and timing of customer projects.
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 roll out of latest InsuranceNow GO offering that accelerates implementation of the solution in a cost-effective manner.
Annual recurring revenue (or ARR) was $463 million as of Oct 31, 2019, compared with $460 million as of Jul 31, 2019.
Non-GAAP gross margin contracted 510 bps on a year-over-year basis to 56.2%, on lower term license revenue base and ongoing shift to subscription-based solutions, and increasing investments to enhance Guidewire cloud capabilities.
Non-GAAP gross margin for Maintenance and Service expanded 40 bps and 90 bps, to 84.5% and 10.4%, respectively. Meanwhile, non-GAAP gross margin for License came in at 78.8%, compared with 91.5% reported in the year-ago quarter.
Total operating expenses climbed 4.8% year over year to $100.8 million.
Non-GAAP operating income came in at $7.1 million during the quarter, down 78.5% year over year. Non-GAAP operating margin during the quarter came in at 4.5% compared with 18.4% reported in the year-ago period.
Balance Sheet & Cash Flow
As on Oct 31, 2019 cash and cash equivalents and short-term investments came in at $1.011 billion, compared with $1.124 billion at the end of the previous quarter.
The company utilized cash from operating activities worth $18.1 million in the fiscal first quarter, compared with $102.9 million generated in the prior quarter.
During fiscal first quarter, the company reported negative free cash flow of $29.1 million.
For fiscal second-quarter 2020, revenues are expected to be in the range of $162-$166 million.
License and subscription are expected to be in the range of $92-$96 million. Maintenance revenue is anticipated to be in the range of $20-$20.5 million. Services revenues are projected between $48 million and $51 million.
Non-GAAP operating income is expected to lie between $5 million and $9 million.
Management noted that Guidewire’s latest digital experience framework, Jutro, which facilitates design and development of digital apps, is slated to be available in Guidewire Cloud in fiscal third quarter and to self-managed customers in the fiscal fourth quarter.
The company is focused on enhancing Guidewire Cloud platform with new capabilities including digital frameworks, automation, tooling, and other cloud services and leverage Guidewire data platform.
Guidewire maintained fiscal 2020 outlook. The company continues to expect total revenues to be in the range of $759-$771 million.
License and subscription are expected to be in the range of $443-$455 million. Maintenance revenues are anticipated to be in the range of $85-$87 million. Services revenues are projected in the range of $224-$236 million.
Management continues to expect 55 of new sales to be subscription-based.
The company anticipates non-GAAP operating income in the range of $96 million and $108 million.
The company did not divulge guidance on non-GAAP net income per share as it is assessing the impact of base erosion and anti-abuse tax ("BEAT") regulations, issued recently.
How Have Estimates Been Moving Since Then?
Estimates review followed a downward path over the past two months. The consensus estimate has shifted -261.54% due to these changes.
At this time, Guidewire Software has a poor Growth Score of F, a grade with the same score on the momentum front. Following the exact same course, the stock was allocated a grade of F on the value side, putting it in the lowest 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.
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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