2023-09-20 15:35:08 ET
Summary
- Guidewire Software, Inc. beat revenue and earnings estimates in its FQ4 2023 financial results.
- The company offers software solutions for the insurance industry and has a positive growth outlook.
- My concerns about potentially high valuation lead me to a Neutral [Hold] outlook on Guidewire Software in the near term.
A Quick Take On Guidewire Software
Guidewire Software, Inc. ( GWRE ) reported its FQ4 2023 financial results on September 7, 2023, beating both revenue and consensus earnings estimates.
The firm offers software solutions for the insurance industry and other related market participants.
I previously wrote about Guidewire with a Hold outlook due to slowing revenue growth.
While the firm may continue to produce solid results over the coming quarters, I’m concerned about valuation, so my outlook on Guidewire Software, Inc. is Neutral [Hold] in the near term.
Guidewire Software Overview And Market
Based in San Mateo, California, Guidewire Software was established in 2001 with the aim of delivering software solutions to property and casualty insurance companies across the globe.
The company is led by CEO Mike Rosenbaum, who formerly held roles in product management and strategy at Salesforce.
Guidewire's main product lineup consists of:
- InsuranceSuite Cloud: policy, billing, and claims
- InsuranceNow
- InsuranceSuite: self-managed
- Reinsurance management
- Underwriter management
- Various integrations.
To acquire customers, GWRE employs a combination of in-house direct sales and marketing strategies alongside referrals from a variety of consulting, technology, and implementation partners across multiple industry sectors.
A 2022 market research report from Allied Market Research said that the claims processing software market was worth approximately $33.9 billion in 2020 and is projected to hit $73 billion by 2030.
This equates to an anticipated CAGR (Compound Annual Growth Rate) of 8.3% between 2021 and 2030.
The primary factors behind this expected growth are insurance companies' increasing interest in automating their claims processing methods and managing the entire claim lifecycle from initial filing to closure.
Moreover, North America produced the highest revenue by region in 2020; however, the Asia-Pacific region is predicted to generate significant growth through 2030.
Key competitors or other industry players encompass:
- Mitchell International
- CCC Intelligent Solutions
- Applied Epic
- Pega Claims Management
- LexisNexis Carrier Discovery
- Duck Creek Technologies
- Quick Silver
- Hyland Software
- FINEOS
- VENTIV.
Guidewire Software’s Recent Financial Trends
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Total revenue by quarter has risen per the chart below; Operating income by quarter has finally turned positive in the most recent quarter:
Total Revenue and Operating Income (Seeking Alpha)
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Gross profit margin by quarter has trended higher in recent quarters; Selling and G&A expenses as a percentage of total revenue by quarter have trended lower more recently:
Gross Profit Margin and Selling, G&A % Of Revenue (Seeking Alpha)
-
Earnings per share (Diluted) have remained negative until the current quarter’s notably positive results.
Earnings Per Share (Seeking Alpha)
(All data in the above charts is GAAP.)
In the past 12 months, GWRE’s stock price has risen 52.86%, beating that of the iShares Expanded Tech-Software Sector ETF’s ( IGV ) rise of 33.85%:
For balance sheet results, the firm ended the quarter with $798.7 million in cash, equivalents and short-term investments and $397.2 million in total debt, all of which was categorized as long term.
Over the trailing twelve months, free cash flow was $32.6 million, during which capital expenditures were $5.8 million. The company paid a hefty $142.8 million in stock-based compensation in the last four quarters, the highest trailing twelve-month figure in the past eleven quarters.
Valuation And Other Metrics For Guidewire Software
Below is a table of relevant capitalization and valuation figures for the company:
Measure [TTM] | Amount |
Enterprise Value / Sales | 8.0 |
Enterprise Value / EBITDA | NM |
Price / Sales | 8.5 |
Revenue Growth Rate | 11.4% |
Net Income Margin | -12.4% |
EBITDA % | -13.8% |
Market Capitalization | $7,590,000,000 |
Enterprise Value | $7,230,000,000 |
Operating Cash Flow | $38,400,000 |
Earnings Per Share (Fully Diluted) | -$1.35 |
(Source - Seeking Alpha.)
As a reference, a relevant partial public comparable would be CCC Intelligent Solutions Holdings (CCCS):
Metric [TTM] | CCC Intelligent Solutions | Guidewire | Variance |
Enterprise Value / Sales | 9.8 | 8.0 | -18.2% |
Enterprise Value / EBITDA | 51.9 | NM | --% |
Revenue Growth Rate | 10.2% | 11.4% | 11.4% |
Net Income Margin | -10.3% | -12.4% | 19.8% |
Operating Cash Flow | $214,850,000 | $38,400,000 | -82.1% |
(Source - Seeking Alpha.)
Sentiment Analysis
I prepared the chart below based on a word count analysis of management’s recent earnings conference call.
Earnings Transcript Key Terms Frequency (Seeking Alpha)
The chart indicates that the firm and its clients are working their way through a challenging insurance industry environment.
Analysts asked management about the trend of displacing other vendors, fiscal 2024 profit outlook and a slowdown in deal ramping activity.
Management responded that prospects are increasingly frustrated with legacy systems and have greater alignment with Guidewire’s future vision.
Also, leadership stated that the forward profit estimate is going to be driven more by subscription revenue scale rather than services margin.
Management admitted that deal ramp delays noted in the previous quarter’s results are still a factor going forward.
Commentary On Guidewire Software
In its last earnings call (Source - Seeking Alpha ), covering FQ4 2023’s results, management highlighted the 17% growth in ARR (Annual Recurring Revenue) for the full fiscal year.
Leadership also noted that the company has largely completed its transition to a cloud-centric focus and is engaging with insurance companies of all sizes worldwide to grow its ARR.
To that end, it announced the closing of 11 Tier 1 company deals during the quarter, including Progressive Insurance in the U.S. and Allstate in Canada.
However, management didn’t disclose any customer or revenue retention rate information.
Total revenue for FQ4 2023 rose by 10.4% year-over-year and gross profit margin increased by an impressive 13.2%.
Selling and G&A expenses as a percentage of revenue declined by 0.2% YoY and operating income turned positive, at $6.1 million.
The company's financial position is solid, with plenty of liquidity, some long-term debt and reasonable free cash flow.
Looking ahead, estimated full fiscal year 2024 revenue is expected to grow by 8.6% over FYE 2023.
If accomplished, this would represent a drop in revenue growth rate versus FYE 2023’s growth rate of 11.43% over FYE 2022.
Regarding valuation, the market is valuing GWRE at an EV/Sales multiple of around 8.0x on TTM revenue growth rate of 11.4% against a median Meritech SaaS Index implied ARR growth rate of 19% ( Source ).
The Meritech Capital Index of publicly held SaaS application software companies showed an average forward EV/Revenue multiple of around 8.6x on September 1, 2023, as the chart shows here:
So, by comparison, GWRE is currently valued by the market at near to the broader Meritech Capital SaaS Index, at least as of September 1, 2023.
Risks to the company’s outlook include an economic slowdown that may be underway and lengthening sales and deal ramp cycles, which may reduce its revenue growth potential in the near term.
While GWRE appears to be gaining further traction in the markets in which it operates, the stock has produced quite a runup recently, and valuation appears to be reasonable where it is now, at around $92.50.
Furthermore, Seeking Alpha’s Valuation Metrics page for GWRE is flashing red, with numerous valuation red flags compared to sector medians, as the graphic shows below:
While the firm may continue to produce solid results over the coming quarters, I’m concerned about valuation, so my outlook on Guidewire Software, Inc. is Neutral [Hold] in the near term.
For further details see:
Guidewire Software Grows But Valuation May Be An Issue