The wide-moat firm's results could prove lumpy in the near term as it attracts more cloud customers, but its long-term competitive positioning is as strong as ever.
09:05 PM | Email Article
reported second-quarter results that were well ahead of our expectations, as the firm continues to balance its transitioning business model well. License growth easily outstripped management’s prior guidance, and services revenue continues to see strength behind InsuranceSuite Cloud and InsuranceNow projects. Although Guidewire’s results could prove lumpy in the near term as it attracts more cloud customers, we think the firm’s long-term competitive positioning is as strong as ever. We maintain our wide moat rating, and raise our fair value estimate to $100 per share from $95 previously as we incorporate greater long-term revenue growth, the impact of which is partially offset by lower long-term margins associated with cloud revenue. Shares continue to look undervalued, in our view.
Rodney Nelson is a senior equity analyst for Morningstar.
Second-quarter revenue rose 42% versus the prior-year period to $164 million, more than 5% ahead of our prior expectations. License and other revenue rose 31% year over year, aided in part by early license payments that were pulled forward from the third quarter. When normalizing for this impact, the firm still outperformed the high end of management’s prior license and other revenue guidance. Management cited strong demand for its primary cloud-based products, and we are encouraged that customer preferences for core offerings are shifting toward InsuranceSuite Cloud and InsuranceNow. This dynamic has resulted in 43% of new sales coming from subscription-based offerings thus far in fiscal 2018, ahead of management’s full-year expectation of 30% to 40%. Demand for Guidewire’s cloud offerings is coming from vendors of all sizes, and management noted an existing Tier 1 customer will expand its relationship with Guidewire via InsuranceSuite Cloud this year. We continue to expect Tier 1 insurers to make more gradual moves to the cloud, but we think Guidewire has rightly invested in its services arm to ensure smooth initial implementations and spur future growth.
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