Guidewire Software (GWRE)

Insurance software provider Guidewire Software (NYSE:GWRE) reported revenue ahead of Wall Street’s expectations in Q2 CY2025, with sales up 22.3% year on year to $356.6 million. On top of that, next quarter’s revenue guidance ($318 million at the midpoint) was surprisingly good and 5.3% above what analysts were expecting. Its non-GAAP profit of $0.84 per share was 33.3% above analysts’ consensus estimates.

Company Overview

With its systems powering the operations of hundreds of insurance brands across 42 countries, Guidewire Software (NYSE:GWRE) provides a technology platform that helps property and casualty insurance companies manage their core operations, digital engagement, and analytics.

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.

Guidewire competes with insurers' internally developed solutions as well as specialized P&C insurance software vendors like Duck Creek, EIS Group, Insurity, Majesco, and Sapiens. The company also faces competition from horizontal software providers such as SAP and Salesforce that offer broader enterprise solutions.

A company’s long-term performance is an indicator of its overall quality. Any business can have short-term success, but a top-tier one grows for years. Over the last three years, Guidewire Software grew its sales at a 14% compounded annual growth 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 Software reported robust year-on-year revenue growth of 22.3%, and its $356.6 million of revenue topped Wall Street estimates by 5.8%. Company management is currently guiding for a 21% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 12.3% over the next 12 months, a slight deceleration versus the last three years. Still, this projection is above the sector average and suggests the market is baking in some success for its newer 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 Software’s ARR punched in at $1.03 billion in Q2, and over the last four quarters, its growth was solid as it averaged 15.6% 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 Software is extremely efficient at acquiring new customers, and its CAC payback period checked in at 17.6 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 Software more resources to pursue new product initiatives while maintaining the flexibility to increase its sales and marketing investments.

For software companies like Guidewire Software, 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 Software’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 62.5% gross margin over the last year. That means Guidewire Software paid its providers a lot of money ($37.46 for every $100 in revenue) to run its business.

This quarter, Guidewire Software’s gross profit margin was 65%, marking a 2.1 percentage point increase from 62.9% in the same quarter last year. Guidewire Software’s full-year margin has also been trending up over the past 12 months, increasing by 3.4 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 metric shows how much revenue remains after accounting for all core expenses – everything from the cost of goods sold to sales and R&D.

Guidewire Software has managed its cost base well over the last year. It demonstrated solid profitability for a software business, producing an average operating margin of 3.4%. This result was particularly impressive because of its low gross margin, which is mostly a factor of what it sells and takes huge shifts to move meaningfully. Companies have more control over their operating margins, and it’s a show of well-managed operations if they’re high when gross margins are low.

Looking at the trend in its profitability, Guidewire Software’s operating margin rose by 8.8 percentage points over the last year, as its sales growth gave it operating leverage.

This quarter, Guidewire Software generated an operating margin profit margin of 8.3%, up 4.8 percentage points year on year. The increase was encouraging, 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 Software 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 23.3% over the last year, quite impressive for a software business.

Guidewire Software’s free cash flow clocked in at $237.7 million in Q2, equivalent to a 66.7% margin. This result was good as its margin was 1.7 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’ consensus estimates show they’re expecting Guidewire Software’s free cash flow margin of 23.3% for the last 12 months to remain the same.

Companies with more cash than debt have lower bankruptcy risk.

Guidewire Software is a profitable, well-capitalized company with $1.15 billion of cash and $705.3 million of debt on its balance sheet. This $444.2 million net cash position is 2.4% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We were glad the company's revenue and operating outperformed Wall Street’s estimates convincingly. It was also great to see Guidewire Software’s revenue guidance for next quarter top analysts’ expectations. On the other hand, its billings missed, but the market seems to be willing to forgive this. Overall, this print featured some key positives. The stock traded up 14.2% to $248 immediately after reporting.

Updated: November 15, 2025 at 9:46 PM EST

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

There are things to like about Guidewire Software. Although its revenue growth was uninspiring over the last five years, its growth over the next 12 months is expected to be higher. And while Guidewire Software’s gross margins show its business model is much less lucrative than other companies, its efficient sales strategy allows it to target and onboard new users at scale. On top of that, its strong free cash flow generation gives it reinvestment options.

Guidewire Software’s price-to-sales ratio based on the next 12 months is 13.5x. Looking at the software landscape right now, Guidewire Software trades at a pretty interesting price. If you believe in the company and its growth potential, now is an opportune time to buy shares.

Wall Street analysts have a consensus one-year price target of $268.38 on the company (compared to the current share price of $222.42), implying they see 20.7% upside in buying Guidewire Software in the short term.