Guidewire (GWRE)

Insurance industry-focused software maker Guidewire (NYSE:GWRE) reported Q4 CY2024 results topping the market’s revenue expectations, with sales up 20.2% year on year to $289.5 million. Guidance for next quarter’s revenue was optimistic at $286 million at the midpoint, 2.3% above analysts’ estimates. Its non-GAAP profit of $0.51 per share was in line with analysts’ consensus estimates.

Company Overview

Founded by two individuals involved in the development of leading procurement software Ariba, Guidewire (NYSE:GWRE) offers insurance companies a software-as-a-service platform to help sell their products and manage their workflows.

Software is eating the world, and while a large number of solutions such as project management or video conferencing software can be useful to a wide array of industries, some have very specific needs. As a result, vertical software, which addresses industry-specific workflows, is growing and fueled by the pressures to improve productivity, whether it be for a life sciences, education, or banking company.

Competitors in insurance-focused vertical software include Duck Creek (NASDAQ:DCT) and private company EIS Group as well as horizontal software platforms such as SAP (NYSE:SAP) and salesforce.com (NYSE:CRM).

A company’s long-term sales performance is one signal of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Over the last three years, Guidewire grew its sales at a 12.4% annual rate. Although this growth is acceptable on an absolute basis, it fell short of our standards for the software sector, which enjoys a number of secular tailwinds.

This quarter, Guidewire reported robust year-on-year revenue growth of 20.2%, and its $289.5 million of revenue topped Wall Street estimates by 1.4%. Company management is currently guiding for a 18.8% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 14.4% over the next 12 months, an acceleration versus the last three years. This projection is commendable and implies its newer products and services will catalyze better top-line performance.

While reported revenue for a software company can include low-margin items like implementation fees, annual recurring revenue (ARR) is a sum of the next 12 months of contracted revenue purely from software subscriptions, or the high-margin, predictable revenue streams that make SaaS businesses so valuable.

Guidewire’s ARR punched in at $918.1 million in Q4, and over the last four quarters, its growth was solid as it averaged 14.4% year-on-year increases. This alternate topline metric grew slower than total sales, which likely means that the recurring portions of the business are growing slower than less predictable, choppier ones such as implementation fees. If this continues, the quality of its revenue base could decline.

The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.

Guidewire’s recent customer acquisition efforts haven’t yielded returns as its CAC payback period was negative this quarter, meaning its incremental sales and marketing investments outpaced its revenue. The company’s inefficiency indicates it operates in a competitive market and must continue investing to grow.

For software companies like Guidewire, gross profit tells us how much money remains after paying for the base cost of products and services (typically servers, licenses, and certain personnel). These costs are usually low as a percentage of revenue, explaining why software is more lucrative than other sectors.

Guidewire’s gross margin is substantially worse than most software businesses, signaling it has relatively high infrastructure costs compared to asset-lite businesses like ServiceNow. As you can see below, it averaged a 61.4% gross margin over the last year. That means Guidewire paid its providers a lot of money ($38.57 for every $100 in revenue) to run its business.

This quarter, Guidewire’s gross profit margin was 61.9%, up 1.4 percentage points year on year. Guidewire’s full-year margin has also been trending up over the past 12 months, increasing by 5.2 percentage points. If this move continues, it could suggest a less competitive environment where the company has better pricing power and leverage from its growing sales on the fixed portion of its cost of goods sold (such as servers).

While many software businesses point investors to their adjusted profits, which exclude stock-based compensation (SBC), we prefer GAAP operating margin because SBC is a legitimate expense used to attract and retain talent. This is one of the best measures of profitability because it shows how much money a company takes home after developing, marketing, and selling its products.

Guidewire was roughly breakeven when averaging the last year of quarterly operating profits, decent for a software business.

Looking at the trend in its profitability, Guidewire’s operating margin rose by 10.6 percentage points over the last year, as its sales growth gave it operating leverage.

In Q4, Guidewire generated an operating profit margin of 4%, up 9.2 percentage points year on year. The increase was solid, and since its operating margin rose more than its gross margin, we can infer it was recently more efficient with expenses such as marketing, R&D, and administrative overhead.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Guidewire has shown robust cash profitability, giving it an edge over its competitors and the ability to reinvest or return capital to investors. The company’s free cash flow margin averaged 18.9% over the last year, quite impressive for a software business.

Guidewire’s free cash flow clocked in at $82.28 million in Q4, equivalent to a 28.4% margin. This result was good as its margin was 1.9 percentage points higher than in the same quarter last year, but we wouldn’t read too much into the short term because investment needs can be seasonal, leading to temporary swings. Long-term trends trump fluctuations.

Over the next year, analysts predict Guidewire’s cash conversion will slightly improve. Their consensus estimates imply its free cash flow margin of 18.9% for the last 12 months will increase to 20.6%, it options for capital deployment (investments, share buybacks, etc.).

Companies with more cash than debt have lower bankruptcy risk.

Guidewire is a profitable, well-capitalized company with $1.17 billion of cash and $885.8 million of debt on its balance sheet. This $283.2 million net cash position gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

It was encouraging to see Guidewire’s revenue guidance for next quarter beat analysts’ expectations. We were also happy its revenue narrowly outperformed Wall Street’s estimates. Overall, this quarter had some key positives. The stock traded up 1.7% to $189.90 immediately following the results.

Updated: May 19, 2025 at 10:32 PM EDT

Are you wondering whether to buy Guidewire or pass? We urge investors to not only consider the latest earnings results but also longer-term business quality and valuation as well.

Guidewire’s business quality ultimately falls short of our standards. To kick things off, its revenue growth was uninspiring over the last three years. And while its expanding operating margin shows it’s becoming more efficient at building and selling its software, the downside is its customer acquisition is less efficient than many comparable companies. On top of that, its gross margins show its business model is much less lucrative than other companies.

Guidewire’s price-to-sales ratio based on the next 12 months is 14.4x. At this valuation, there’s a lot of good news priced in - we think there are better opportunities elsewhere.

Wall Street analysts have a consensus one-year price target of $210.72 on the company (compared to the current share price of $215.41), implying they don’t see much short-term potential in Guidewire.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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