Guidewire (GWRE)

Insurance industry-focused software maker Guidewire (NYSE:GWRE) reported Q1 CY2025 results beating Wall Street’s revenue expectations, with sales up 22% year on year to $293.5 million. Guidance for next quarter’s revenue was better than expected at $336 million at the midpoint, 1.1% above analysts’ estimates. Its non-GAAP profit of $0.88 per share was 88.1% above 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 put up a good quarter or two, but many enduring ones grow for years. Over the last three years, Guidewire grew its sales at a 12.6% 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 22%, and its $293.5 million of revenue topped Wall Street estimates by 2.4%. Company management is currently guiding for a 15.3% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 13.5% over the next 12 months, similar to its three-year rate. This projection is healthy and suggests the market is forecasting success for its products and services.

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 $960 million in Q1, and over the last four quarters, its growth was solid as it averaged 14.7% 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 represents the months required to recover the cost of acquiring a new customer. Essentially, it’s the break-even point for sales and marketing investments. A shorter CAC payback period is ideal, as it implies better returns on investment and business scalability.

Guidewire is extremely efficient at acquiring new customers, and its CAC payback period checked in at 17.7 months this quarter. The company’s rapid recovery of its customer acquisition costs indicates it has a highly differentiated product offering and a strong brand reputation. These dynamics give Guidewire more resources to pursue new product initiatives while maintaining the flexibility to increase its sales and marketing investments.

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 61.9% gross margin over the last year. That means Guidewire paid its providers a lot of money ($38.13 for every $100 in revenue) to run its business.

In Q1, Guidewire produced a 62.2% gross profit margin, up 1.9 percentage points year on year. Guidewire’s full-year margin has also been trending up over the past 12 months, increasing by 3.1 percentage points. If this move continues, it could suggest better unit economics due to more 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 has done a decent job managing its cost base over the last year. The company has produced an average operating margin of 1.9%, higher than the broader software sector.

Analyzing the trend in its profitability, Guidewire’s operating margin rose by 7.8 percentage points over the last year, as its sales growth gave it operating leverage.

In Q1, Guidewire generated an operating margin profit margin of 1.5%, up 8.5 percentage points year on year. The increase was solid, and because its operating margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, R&D, and administrative overhead.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Guidewire has shown robust cash profitability, driven by its cost-effective customer acquisition strategy that enables it to invest in new products and services rather than sales and marketing. The company’s free cash flow margin averaged 20.4% over the last year, quite impressive for a software business.

Guidewire’s free cash flow clocked in at $27.83 million in Q1, equivalent to a 9.5% margin. This result was good as its margin was 9.2 percentage points higher than in the same quarter last year, but we wouldn’t put too much weight on the short term because investment needs can be seasonal, causing temporary swings. Long-term trends are more important.

Over the next year, analysts’ consensus estimates show they’re expecting Guidewire’s free cash flow margin of 20.4% for the last 12 months to remain the same.

One of the best ways to mitigate bankruptcy risk is to hold more cash than debt.

Guidewire is a profitable, well-capitalized company with $920.4 million of cash and $706.7 million of debt on its balance sheet. This $213.7 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.

We were impressed by how significantly Guidewire blew past analysts’ billings expectations this quarter. We were also happy its annual recurring revenue, EPS, adjusted operating income, and quarterly revenue guidance outperformed Wall Street’s estimates. Overall, we think this was a solid quarter with some key areas of upside. The stock traded up 8.6% to $236.90 immediately after reporting.

Updated: July 9, 2025 at 10:31 PM EDT

We think that the latest earnings result is only one piece of the bigger puzzle. If you’re deciding whether to own Guidewire, you should also grasp the company’s longer-term business quality and valuation.

Guidewire isn’t a terrible business, but it isn’t one of our picks. To kick things off, its revenue growth was uninspiring over the last three years. And while Guidewire’s efficient sales strategy allows it to target and onboard new users at scale, 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 15.2x. At this valuation, there’s a lot of good news priced in - you can find more timely opportunities elsewhere.

Wall Street analysts have a consensus one-year price target of $243.54 on the company (compared to the current share price of $231.25).