Guidewire Extends Its Streak of Solid Results; FVE Decreased to $120

Business Strategy & Outlook

Guidewire is reaping the benefits of years of groundwork in the form of convincing property and casualty, or P&C, insurers to upgrade their aging core legacy systems to Guidewire’s solutions. The company has used a modern software platform to disrupt a sleepy industry that has been underserved by legacy software vendors, and there is still a long runway for additional growth for Guidewire. Guidewire as executing a classic land-and-expand strategy. The company started with the most critical piece, ClaimCenter, which is customer facing and handles claims processing, and then organically layered in BillingCenter and PolicyCenter within the next several years. Today, Guidewire has a broad software suite that covers all areas of an insurer’s needs and offers a wide variety of add-on solutions. Importantly, the company acquired ISCS to land a lower- and middle-tier SaaS offering.

By any objective measure, Guidewire has become the leading provider of core software to the P&C insurance industry. The company already covers 25% of direct written premiums, or DWPs, and it wins more deals per year than its largest competitors combined. Just as the company nudged the industry to modernize, it will be at the forefront as it now leads a wide array of the largest insurers into the SaaS age with InsuranceSuite Cloud and other cloud-based solutions. Indeed, results were uneven throughout 2019 because of accelerating SaaS adoption, but Guidewire has turned the corner and results are expected to be more predictable in future. Guidewire is anticipated to win more than its share of new clients, especially at the larger end of the market. From there the company is projected to upsell additional lines of insurance business and add on features. Momentum is on the company’s side after capturing many critical Tier 1 insurer mandates, as the industry can no longer wait or afford to maintain legacy systems built in the 1950s in some instances.

Financial Strengths

Guidewire has a standard level of financial strength. Revenue is growing rapidly on an organic basis, and non-GAAP margins are positive and expanding. Continued penetration into Tier 1 and 2 core solutions, with conversions and new bookings of InsuranceSuite Cloud, and the cross-selling of data-driven and digital add-ons will drive consistent midteens annual revenue growth over the next five years. As of July 31, Guidewire had $1.1 billion in cash offset by $344 million in debt, resulting in a net cash position of $776 million. The $344 million in debt represents convertible notes due in 2025, which is not considered as problematic, given the company’s cash balance and expected free cash flow generation leading up to the debt maturity date, and the likelihood it converts into equity rather than is repaid. GAAP Operating margin was negative in fiscal 2021, but is expected to gradually improve over time as a result of easing pressure from accounting treatment for two larger transactions in fiscal 2017 and 2018, and the maturation of the business model transition to subscriptions.

On a non-GAAP basis, margin contraction is modelled in fiscal 2022, followed by several hundred basis points of margin improvement each year over the next five years, driven by scale. Guidewire does not pay a dividend, does not regularly repurchase shares although it did recently begin doing so, and generally makes small acquisitions. The company completed two larger acquisitions in the context of its deal history, with deals of $154 million in fiscal 2017 and $130 million in fiscal 2018. Since its 2012 IPO, Guidewire has completed a handful of acquisitions for approximately $500 million in aggregate. The company is expected to occasionally make small, feature-driven acquisitions. Management is expected to initiate a dividend in the foreseeable future.

Bulls Say

Guidewire is the clear leader seeking to modernize a large and underserved P&C insurance market that is ripe for modernization.

Guidewire is investing in R&D and acquiring companies to add new solutions and features to its existing platform, as there is room to at least quadruple revenue within its existing clients.

Some friction is being removed from the sales process, as insurers are recognizing the need to modernize and the sales conversation is easier with as many live Tier 1 and 2 customers as Guidewire has.

Company Description

Guidewire Software provides software solutions for property and casualty insurers. Flagship product InsuranceSuite is an on-premises system of record and comprises ClaimCenter, a claims management system; PolicyCenter, a policy management system including policy definitions, quotas, issuance, maintenance, and renewal; and BillingCenter, for billing management, payment plans, and agent commissions. The company also offers InsuranceNow, a cloud-based offering, as well as a variety of other add-on applications.

(Source: Morningstar)

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