Guidewire Software (GWRE) Down 12.3% Since Last Earnings Report: Can It Rebound?

It has been about a month since the last earnings report for Guidewire Software (GWRE). Shares have lost about 12.3% 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 its most recent earnings report in order to get a better handle on the important drivers.

Guidewire Q1 Results Benefit from Solid Adoption of Cloud-based Products

Guidewire Software, Inc. delivered first-quarter fiscal 2019 non-GAAP earnings of 36 cents per share, outpacing the Zacks Consensus Estimate by 20 cents. Notably, the company reported a loss of 6 cents in the year-ago quarter. The figure also came ahead of the management’s guided range of 18-22 cents per share.

The company reported revenues of $179.7 million, which surged 66% from the year-ago quarter. The figure comfortably surpassed the Zacks Consensus Estimate of $163 million and was above the higher end of management’s guided range of $159-$163 million.

The increase can primarily be attributed to growth in Services revenues and License revenues. Further, strong adoption of several cloud-based products remained a key catalyst.

The company has adopted a new revenue recognition standard — ASC 606 — which came into effect from first-quarter fiscal 2019.

Quarter in Detail

Per the new accounting standard, the company will now have three main segments namely License and subscription, Maintenance, and Services.

License and subscription revenues soared 213% from the year-ago quarter to $94.3 million. Transition to cloud-based subscription under ASC 606 positively impacted the revenues.

Maintenance revenues amounted to $21 million, up 11% year over year. Further, Services revenues increased approximately 9% from the year-ago quarter to nearly $64.4 million.

During the reported quarter, new and existing customers selected multiple components of Guidewire InsurancePlatform which included InsuranceSuite, digital, data and analytics.

Additionally, management remains optimistic about Cyence buyout on account of its strength in cyber risk capabilities. Notably, Cyence determines the economic impact of a cybercrime via a software platform, which is built on cyber-security related data science.

Operating Details

In first-quarter 2019, non-GAAP gross profit came in at $109 million, up 987% from a year-ago quarter, primarily on the back of higher revenue base.

Non-GAAP gross margin was 61% compared with 51% in the year-ago quarter.

Total non-GAAP operating expenses came in at $77.3 million during the reported quarter, up 22% year over year. The increase can primarily be attributed to higher research and development expenses. Costs pertaining to Cyence buyout and new internal projects led to the surge in expenses.

Non-GAAP operating income came in at $31.7 million, against the year-ago quarter’s operating loss of $8.3 million. Non-GAAP operating margin during the quarter came in at 17.6%.

Balance Sheet & Cash Flow

The company had cash and cash equivalents and short-term investments of $1.08 billion as on Oct 31, 2018 as compared with $1.07 billion at the end of the previous quarter.

Cash used in operating activities in the first quarter was $27.2 million. Free cash flow in the first quarter was ($30.7) million.

Guidance

For second-quarter 2019, revenues are expected to be in the range of $157-$161 million.

License and subscription are expected to be in the range of $75-$79 million. Maintenance revenue is anticipated to be in the range of $20-$21 million. Services revenues are projected to be in the range of $60-$63 million.

Non-GAAP operating income is expected to be between $12.5 million and $16.5 million, while non-GAAP net income is anticipated to be within $14-$17.3 million.

Non-GAAP net income per share is expected to be between 17-21 cents.

Guidewire updated fiscal 2019 outlook. The company expects total revenues to be in the range of $722-$732 million (previously $740.5-$752.5 million), citing a decline in anticipated services revenues.

License and subscription are expected to be in the range of $379-$389 million. Maintenance revenue is anticipated to be in the range of $81-$83 million. Services revenues are projected to be in the range of $257-$265 million.

Non-GAAP operating income is now expected to be between $106.5 million and $116.5 million ($104.5 million and $116.5 million).

Non-GAAP net income is projected to be between $1.24 cents and $1.34 per share ($1.15 cents and $1.26 per share).

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -452.38% due to these changes.

VGM Scores

Currently, Guidewire Software has a subpar Growth Score of D, however its Momentum Score is doing a lot better with an A. However, the stock was allocated a grade of F on the value side, putting it in the fifth 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.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Guidewire Software has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.

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