Guidewire Software (GWRE) Down 20.9% 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 20.9% 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 the most recent earnings report in order to get a better handle on the important catalysts.

Guidewire Beats on Q2 Earnings & Revenues, Revises View

Guidewire Software reported second-quarter fiscal 2020 non-GAAP earnings of 21 cents per share, outpacing the Zacks Consensus Estimate by 61.5%. However, the bottom line declined 36.4% from the year-ago quarter.

The company reported revenues of $173.5 million, surpassing the Zacks Consensus Estimate by 5%. Further, the top line surpassed the higher end of management’s guided range of $162-$166 million. Moreover, the top line improved 3% from the year-ago quarter. The growth can primarily be attributed to higher License and subscription revenues. Further, management remains optimistic on growing clout of its several cloud-based products and InsuranceSuite Cloud deal wins.

Quarter in Detail

License and subscription revenues (60.5% of total revenues) improved 21% from the year-ago quarter to almost $105 million, driven by growth in subscription revenues.

Term license revenues improved 3.7% year ago quarter to $74.3 million. Subscription revenues soared 93.9% year over year to $28.6 million on solid adoption of InsuranceSuite cloud. In the fiscal second quarter, 63% of new software sales were subscription-based, compared with 53% in the year-ago quarter. Perpetual license revenues came in at $2 million.

Maintenance revenues (12.2%) amounted to $21.1 million, down 0.7% year over year. Management expects maintenance revenues to be muted as customers opt for cloud-based subscription services over term licenses.

Services revenues (27.3%) decreased 21.7% from the year-ago quarter to $47.4 million.

Annual recurring revenues (or ARR) were $474 million as of Jan 31, 2020, compared with $463 million as of Oct 31, 2019.
 
Margin Details

Non-GAAP gross margin contracted 100 basis points (bps) on a year-over-year basis to 59%, on increasing investments to enhance cloud capabilities that more than offset growth in license and subscription revenues and ongoing shift to subscription-based solutions.

Non-GAAP gross margin for Licensing contracted 880 bps to 80.5%. Non-GAAP gross margin for Maintenance contracted 120 bps to 82.8%. Meanwhile, non-GAAP gross margin for Services came in at 0.8%, compared with 9.6% reported in the year-ago quarter.

Total operating expenses climbed 15% year over year to $86.9 million.

Non-GAAP operating income came in at $15.4 million during the reported quarter, down 39.1% year over year. Non-GAAP operating margin during the quarter contracted 610 bps from the year-ago quarter to 8.9%.

Balance Sheet & Cash Flow

As of Jan 31, 2020 cash and cash equivalents and short-term investments came in at $1.055 billion, compared with $1.011 billion as of Oct 31, 2019. The company generated cash from operating activities of $19.5 million in the fiscal second quarter. During fiscal second quarter, free cash flow came in at $16.7 million.

Guidance

For fiscal third-quarter 2020, revenues are expected to be in the range of $153-$157 million. License and subscription are expected to be in the range of $78-$82 million. Maintenance revenue is anticipated to be in the range of $20-$20.5 million. Services revenues are projected between $53 million and $57 million.

The company projects non-GAAP loss of 6-2 cents per share in third quarter fiscal 2020.

Guidewire revised fiscal 2020 outlook on increasing cloud implementations and higher allegiance of large customers to manage reducing the demand for the company’s software management services. The company now expects total revenues between $702 million and $714 million, compared with prior guided range of $759-$771 million.

License and subscription are now expected to be in the range of $415-$425 million compared with prior guided range of $443-$455 million. Maintenance revenues are now anticipated to be in the band of $83-$84 million, compared with previous range of $85-$87 million. Services revenues are now anticipated between $202 million and $208 million, compared with prior range of $224-$236 million.

Management now expects 70-80% of new sales to be subscription-based, compared with prior guided range of 55-75%. The company anticipates non-GAAP earnings of 82-94 cents per share in fiscal 2020.

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 -1110.71% due to these changes.

VGM Scores

At this time, Guidewire Software has a poor Growth Score of F, a grade with the same score on the momentum front. Following the exact same course, 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 #3 (Hold). We expect an in-line return from the stock in the next few months.

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