The wide-moat firm plans to spend more to meet demand for its software, which may dent short-term profitability.
By Rodney Nelson | 09-08-16 | 09:15 AM | Email Article

 Guidewire’s fourth-quarter results were modestly ahead of our expectations, as the firm outperformed our term license expectations while delivering solid profitability. Management’s 2017 guidance was somewhat convoluted, as the company expects a modest re-ramping of investment to meet demand for the firm’s products. While these developments will create a drag on next year’s profitability, we think this serves as a strong signal for long-term license revenue growth, particularly as tier one insurance companies evaluate Guidewire’s comprehensive suite across multiple business lines. We do not anticipate making a material change to our $67 fair value estimate, and we maintain our wide economic moat rating.

Rodney Nelson is a senior equity analyst for Morningstar.

Fourth-quarter sales rose 12% versus the prior-year period to $141 million, driven by more than 20% growth from the firm’s two most important revenue buckets: licenses and maintenance. License revenue growth eclipsed management’s internal goal of 20% growth, reaching $88 million in the quarter. We expect license growth to maintain a similar level of growth in fiscal 2017 as insurers increasingly turn to software innovation as a means of smoother operations and increased cost savings. Despite increased hiring in the quarter, Guidewire delivered GAAP operating margin of 16.6%, more than 200 basis points ahead of the high end of the firm’s prior fourth-quarter guidance.

Guidewire’s customers are increasingly evaluating multiple products in varying delivery models (including cloud), creating both opportunity and a need for increased investment to meet customer needs. Management highlighted an expanding greenfield opportunity leveraging cloud and digital services that necessitated increased investment in the quarter ahead of implementation for next year. While deals of this magnitude could necessitate a heightened level of investment in headcount, we think Guidewire will continue to win market share as a result. 

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