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Stock Analyst Update

We'd Be Happy Buyers of Guidewire on Price Pullback

The wide-moat firm is enjoying greater demand for its core cloud products.


 Guidewire (GWRE) reported third-quarter results that were in line with our expectations as the firm continues to see elevated interest in its core cloud products. The firm added two new InsuranceSuite Cloud customers in the quarter, including a Tier 1 insurer, and management remains confident in the firm’s ability to add four or five total InsuranceSuite Cloud customers in fiscal 2018. CFO Curtis Smith provided an early look at fiscal 2019 that appears to be in line with our prior expectations as the benefits of greater cloud demand are offset by ratable revenue recognition practices and certain impacts of ASC 606. We are maintaining our wide moat rating and $100 fair value estimate. Shares have rallied as much as 30% year-to-date and trade at a narrow discount to our fair value estimate, but we remain happy buyers on any pullbacks.

Third-quarter revenue rose 14% versus the prior-year period to $140 million, in line with our expectations. License and other revenue fell 15% versus the prior-year period to $50 million, though this decline was exacerbated by some license revenue being pulled forward in the second quarter, while a substantial Tier 1 customer payment is now being collected in the fourth quarter moving forward. Still, the biggest takeaway in the quarter is the continued strength of cloud sales, as 50% of new sales this year have come from cloud-based subscriptions. The firm is trending toward the high end of its anticipated range for cloud sales mix between 30% and 40% for the full year, and management expects that mix to increase to 40%-60% in fiscal 2019. We suspect Guidewire will begin to see existing customers pursue migrations to cloud-based products in the coming quarters, which could accelerate cloud mix in fiscal 2020 and beyond.

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Rodney Nelson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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