Should Investors Bet on Guidewire Despite the Selloff?

Source: Thinkstock

Source: Thinkstock

Guidewire Software, Inc. (NYSE:GWRE) is a key company that supports insurance companies. It builds software products that help property and casualty insurers replace their legacy core systems and transform their business. Guidewire products enable insurers to deliver improved service, increase market share, and lower operating costs.

Guidewire “InsuranceSuite” provides the core systems used by insurers as operational systems of record. Additional products provide support for data management, business intelligence, anytime/anywhere access, and guidance and monitoring. So far, more than 150 insurers around the world have selected Guidewire. In turn, shareholders of Guidewire have been rewarded. The stock had more than doubled from 2012 to 2014. However, shares have dropped nearly 35 percent in the last four months. Is this selloff an opportunity? Guidewire’s recent results suggest the future may be strong for this growing company.

Total revenue for the third-quarter of fiscal 2014 was $82.0 million, an increase of 20 percent from the comparable period in fiscal 2013. Year-to-date revenue for fiscal 2014 was $232.0 million, an increase of 14 percent from the comparable period in fiscal 2013. Total license revenue — including term and perpetual licenses — for the third-quarter of fiscal 2014 was $31.9 million, an increase of 39 percent from the comparable period in fiscal 2013. Term license revenue was $28.2 million, a 58 percent increase from a year ago. Revenue from perpetual licenses was $3.7 million compared with $5.0 million a year ago. Maintenance revenue was $10.4 million, up 15 percent from the comparable period in fiscal 2013, and services revenue was $39.7 million, up 10 percent from the comparable period in fiscal 2013.

Total license revenue, including term and perpetual licenses, for the nine month period of fiscal 2014 was $86.0 million, an increase of 15 percent from the comparable period in fiscal 2013. Term license revenue was $80.6 million, a 19 percent increase from a year ago. Revenue from perpetual licenses was $5.4 million compared with $6.5 million a year ago. Maintenance revenue was $30.0 million, up 8 percent from the comparable period in fiscal 2013, and services revenue was $116.1 million, up 14 percent from the comparable period in fiscal 2013. Rolling four-quarter recurring term license and maintenance revenue was $165.3 million, an increase of 26.3 percent from the comparable period in fiscal 2013.

The company, however, is still losing money. Operating loss was $3.4 million for the third-quarter of fiscal 2014, compared to $4.4 million GAAP operating loss in the comparable period in fiscal 2013. Non-GAAP operating income was $10.9 million for the third-quarter of fiscal 2014, compared to $3.9 million non-GAAP operating income in the comparable period in fiscal 2013. GAAP net loss was $1.4 million for the third-quarter of fiscal 2014, compared to $2.7 million GAAP net loss for the comparable period in fiscal 2013. GAAP net loss per share was $0.02, based on basic and diluted weighted average shares outstanding of 68.3 million, compared to GAAP net loss per share of $0.05 for the comparable period in fiscal 2013, based on basic and diluted weighted average shares outstanding of 57.0 million. Non-GAAP net income was $7.6 million for the third-quarter of fiscal 2014, compared to $2.0 million non-GAAP net income in the comparable period in fiscal 2013. Non-GAAP net income per diluted share was $0.11, based on diluted weighted average shares outstanding of 71.9 million, compared to $0.03 non-GAAP net income per diluted share for the third quarter of fiscal 2013, based on diluted weighted average shares outstanding of 62.2 million.

Guidewire does, however, have a decent balance sheet. The company had $600.1 million in cash, cash equivalents and investments at April 30, 2014, compared to $588.4 million at January 31, 2014. The company had $20.3 million in cash-flow from operations in the third-quarter, compared to cash-flow from operations of $5.0 million in the comparable period in fiscal 2013. Marcus Ryu, chief executive officer, Guidewire Software stated the following:

Our third-quarter results exceeded our expectations for both revenue and profitability. New customer wins, expansions of existing relationships, and several major implementation go-lives all represented progress in our mission to be the global property/casualty insurance industry’s premier technology partner in the replacement of its obsolete legacy core systems. We also continue to advance our product development in significant new initiatives launched over the last year. We see significant opportunity in strategic areas including portals, data management, and analytics, as we further build on the success of our proven core operating platform, GuidewireInsuranceSuite, in the marketplace.

Overall, Guidewire’s results were better than expected for revenue. The company is taking on new customers and broadening its relationship with existing customers. The company is advancing products to replace obsolete systems and to support new initiatives in the coming quarters. I would like to see the company start turning an operating profit, however, the stock has the potential to give strong returns. While the risk is high that the company won’t successfully deliver, and I think it is a touch speculative, I rate it as a buy nonetheless.

Disclosure: Christopher F. Davis holds no position in Guidewire but may initiate a long position in the next 72 hours. He has a buy rating on the stock and a $46 price target.

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