The small ISCS deal gives the wide-moat firm greater flexibility and optionality when approaching insurers.
By Rodney Nelson | 12-19-16 | 06:02 PM | Email Article

On Dec. 19,  Guidewire  announced it had reach a definitive agreement to pay $160 million to acquire ISCS, a software company that also serves the property and casualty insurance industry. Unlike Guidewire, ISCS focuses primarily on delivering its claims, policy, and billings management software via the cloud, while Guidewire has primarily focused on delivering its products on-premise to date. We believe this acquisition follows the same blueprint of past buys: a small deal that gives the firm greater flexibility and optionality when approaching insurers. We do not believe this deal will have a material impact on our expectations, and we are maintaining our wide moat rating and $67 fair value estimate.

Rodney Nelson is an equity analyst for Morningstar.

ISCS provides insurers with an all-in-one solution to handle many of the same core functionalities included in Guidewire’s InsuranceSuite platform, though ISCS primarily delivers this software via the cloud. Further, ISCS' solutions are primarily targeted at smaller insurers, while Guidewire traditionally targets Tier 1 and 2 insurers with several billion dollars of direct written premiums each year. ISCS' offering is hosted on Amazon Web Services, providing smaller insurance companies with a cloud-ready, hosted solution. ISCS' trailing-twelve-month revenue stood at just over $41 million as of Sept. 30, 2016. Moving forward, Guidewire will work to integrate its add-on features around digital and data into ISCS' products, as well as converting ISCS' products to a term license sales model (from perpetual previously). In conjunction with this shift, there will be some near-term margin headwinds to the tune of 200 to 250 basis points, as Guidewire will be deferring ISCS' remaining perpetual licenses as they are collected over the next two years. The company will still collect the cash up front, however, and the acquisition should be neutral to operating cash flow in fiscal 2017, accretive to operating cash flow in 2018, and earnings accretive in 2019.

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