We’re raising our fair value estimate on the wide-moat company as it reaches key milestones in its burgeoning cloud properties.
By Rodney Nelson | 06-01-17 | 11:30 PM | Email Article

 Guidewire  delivered strong third-quarter results that were highlighted by several key milestones for the firm’s burgeoning cloud properties. The company made its first sale of its standardized all-in-one cloud solution InsuranceNow, and the firm also went live with its first cloud-based deployment of InsuranceSuite, a substantial milestone for the digital greenfield project the firm has been engaged in for several quarters. We are maintaining Guidewire’s wide economic moat rating, and we are raising our fair value estimate to $75 per share from $67 previously as we modestly lift our top-line assumptions and incorporate a lower tax rate. Still, shares have rallied nearly 40% year to date, and we would wait for a wider margin of safety before investing.

Rodney Nelson is a senior equity analyst for Morningstar.

Third-quarter revenue rose 25% versus the prior-year period to $123 million, well ahead of our estimate. The sizable revenue beat was primarily the result of an earlier-than-expected expansion with a Tier 1 customer, which drove license revenue growth of 29%, well ahead of management’s prior guidance. This customer rolled out PolicyCenter to an additional line of business, continuing the fruitful pattern of land-and-expand for Guidewire. Further, the InsuranceSuite portion of the firm’s digital greenfield project, which involves deploying most of Guidewire’s product portfolio via cloud-based delivery for MetLife. We expect this to serve as a major reference customer for Guidewire, particularly if large insurance companies increasingly choose to deploy the firm’s software in the cloud. Competitively, it should also help reinforce Guidewire’s position, as having a scalable, cloud-ready solution closes any substantial holes in the product portfolio. To this end, services revenue is expected to rise between 30% and 35% in fiscal 2018, reflecting the early success the firm is having with MetLife.

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