2023-05-20 04:50:47 ET
Summary
- Guidewire Software reported its Q1 2023 financial results on March 6, 2023.
- The firm provides cloud-based software to insurance companies.
- GWRE management has reduced forward revenue growth expectations, and the company continues to produce significant operating losses.
- I'm Neutral [Hold] on GWRE until operating losses are meaningfully reduced.
A Quick Take On Guidewire Software
Guidewire Software ( GWRE ) reported its FQ2 2023 financial results on March 6, 2023, beating revenue and EPS consensus estimates.
The firm provides a range of software solutions for the insurance industry and other related participants.
GWRE's topline revenue growth is slowing, and operating losses continue to be substantial.
Until management can retain revenue growth while reducing operating losses, i.e., managing for a balance between growth and profitability, I'm Neutral [Hold] on GWRE.
Guidewire Software Overview
San Mateo, California-based Guidewire Software was founded in 2001 to provide software solutions for property and casualty insurance companies worldwide.
The firm is headed by Chief Executive Officer Mike Rosenbaum, who previously led product management and strategy at Salesforce.
The company's primary offerings include the following:
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InsuranceSuite Cloud - policy, billing and claims
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InsuranceNow
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InsuranceSuite - self-managed
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Reinsurance management
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Underwriter management
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Various integrations
GWRE acquires customers through its in-house direct sales and marketing efforts as well as through referrals from a variety of consulting, technology and implementation partners across numerous industry verticals.
Guidewire's Market & Competition
According to a 2022 market research report by Allied Market Research, the market for claims processing software was an estimated $33.9 billion in 2020 and is forecast to reach $73 billion by 2030.
This represents a forecast CAGR of 8.3% from 2021 to 2030.
The main drivers for this expected growth are a desire for insurance companies to automate its claims processing approach and manage the entire claim lifecycle from first filing until closure.
Also, N. America represented the greatest revenue by region in 2020. However, the Asia Pacific region is expected to grow markedly through 2030.
Major competitive or other industry participants include:
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Mitchell International
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CCC Intelligent Solutions
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Applied Epic
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Pega Claims Management
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LexisNexis Carrier Discovery
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Duck Creek Technologies
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Quick Silver
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Hyland Software
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FINEOS
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VENTIV
Guidewire's Recent Financial Trends
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Total revenue by quarter has risen per the following chart:
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Gross profit margin by quarter has proceeded according to the chart below:
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Selling, G&A expenses as a percentage of total revenue by quarter have trended lower in recent quarters:
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Operating income by quarter has remained substantially negative, as shown below:
- Earnings per share (Diluted) have varied significantly by quarter:
(All data in the above charts is GAAP)
In the past 12 months, GWRE's stock price has risen 4.51% vs. that of CCC Intelligent Solutions' (CCCS) growth of 15.07%, as the chart indicates below:
For the balance sheet, the firm ended the quarter with $714.7 million in cash, equivalents and short-term investments and $396.3 million in total debt, none of which was categorized as the current portion due within 12 months.
Over the trailing twelve months, free cash used was ($18.6 million), of which capital expenditures accounted for only $4.5 million. The company paid $138.2 million in stock-based compensation in the last four quarters, the second highest figure in the past eleven-quarter period.
Valuation And Other Metrics For Guidewire
Below is a table of relevant capitalization and valuation figures for the company:
Measure [TTM] | Amount |
Enterprise Value / Sales | 7.3 |
Enterprise Value / EBITDA | NM |
Price / Sales | 7.7 |
Revenue Growth Rate | 13.9% |
Net Income Margin | -19.2% |
EBITDA % | -19.3% |
Market Capitalization | $6,580,000,000 |
Enterprise Value | $6,370,000,000 |
Operating Cash Flow | -$14,100,000 |
Earnings Per Share (Fully Diluted) | -$2.00 |
(Source - Seeking Alpha)
As a reference, a relevant partial public comparable would be CCS Intelligent Solutions; shown below is a comparison of their primary valuation metrics:
Metric [TTM] | CCC Intelligent Solutions | Guidewire Software | Variance |
Enterprise Value / Sales | 8.1 | 7.3 | -9.7% |
Enterprise Value / EBITDA | 41.8 | NM | --% |
Revenue Growth Rate | 11.6% | 13.9% | 19.6% |
Net Income Margin | 3.6% | -19.2% | --% |
Operating Cash Flow | $186,120,000 | -$14,100,000 | --% |
(Source - Seeking Alpha)
The Rule of 40 is a software industry rule of thumb that says that as long as the combined revenue growth rate and EBITDA percentage rate equal or exceed 40%, the firm is on an acceptable growth/EBITDA trajectory.
GWRE's most recent Rule of 40 calculation was negative (5.4%) as of FQ2 2023's results, so the firm has performed poorly in this regard, per the table below:
Rule of 40 Performance | Calculation |
Recent Rev. Growth % | 13.9% |
EBITDA % | -19.3% |
Total | -5.4% |
(Source - Seeking Alpha)
Commentary On Guidewire
In its last earnings call (Source - Seeking Alpha), covering FQ2 2023's results, management highlighted the firm's focus on its ecosystem, with 21,000 consultancy and system integrators and 6,300 cloud-certified consultants at quarter's end.
ARR, or Annual Recurring Revenue, finished the quarter at an annual run rate of $707 million ahead of expectations.
However, its Services segment was at a negative margin, although management expects it to return to a positive margin by the second half of 2023.
Total revenue for Q1 2023 rose 13.7% year-over-year while gross profit margin improved by 3.1 percentage points.
The company's ARR attrition rate is expected to be 3%.
Selling, G&A expenses as a percentage of revenue fell 5.4 percentage points, a positive signal indicating increased sales/marketing efficiency. Operating losses fell 41.3% year-over-year.
Looking ahead, management reiterated total revenue to be $899 million at the midpoint of the range, or a growth rate of 11%.
Leadership guided non-GAAP operating loss to $12 million at the midpoint, though this likely does not include stock-based compensation expenses, which are substantial for Guidewire.
The company's financial position is strong, with high liquidity, approximately $400 million in long-term debt and a relatively low level of free cash used in the trailing twelve months.
Regarding valuation, the market is valuing GWRE at an EV/Sales multiple of around 7.3x.
The Meritech Capital Index of publicly held SaaS software companies showed an average forward EV/Revenue multiple of around 5.5x on April 27, 2023, as the chart shows here:
So, by comparison, GWRE is currently valued by the market at a premium to the broader Meritech Capital SaaS Index, at least as of April 27, 2023, but at a discount to competitor CCC Intelligent Solutions.
Risks to the company's outlook include an economic slowdown that may already be underway, reduced credit availability which may affect customer/prospect spending plans and longer sales cycles which may reduce its revenue growth potential throughout the remainder of 2023 and possibly into 2024.
From management's most recent earnings call, I prepared a chart showing the frequency of key terms mentioned (or not) in the call, as shown below:
I'm most interested in the frequency of potentially negative terms, so management cited 'Uncertain' two times, 'Challeng[es][ing]' three times, 'Macro' four times and 'Drop' once.
The negative terms refer to the generally uncertain macro environment for the company as well as analyst questions about the effects of that uncertainty on management's forward projections.
Should total revenue growth of 11% be achieved in 2023, that would represent a step down in growth for the company while GAAP operating losses continue to remain substantial.
In a higher interest rate environment, this will likely result in continued negative pressure on valuation multiples for the stock.
Therefore, until management can retain revenue growth while reducing operating losses, i.e., managing for a balance between growth and profitability, I'm Neutral [Hold] on GWRE.
For further details see:
Guidewire's Revenue Growth Slows As Operating Losses Continue