Guidewire Earnings: Professional Service Work Transitioning Faster to Partners, Which Is Good

We are raising our fair value estimate to $98 per share, from $94 previously, for wide-moat Guidewire. We raised our near-term profitability estimates based on more rapid improvements in operations, but we still see shares as overvalued. While we do not see major changes in the demand environment, the firm is showing flashes of improvement. Guidewire reported solid second-quarter results that were slightly shy of our expectations for revenue but easily outpaced our profitability assumptions. The outlook was reduced, with revenue $19 million lower at the midpoint as a result of a faster-than-expected shift of implementation work to partners, while non-GAAP operating profit dollars were unchanged for the same reason, as implementation services are very low or even negative margin. Given the margin profile, we welcome the accelerating shift to partners. We continue to see Guidewire as the primary winner as the property-casualty insurance industry continues to modernize and displays durable momentum with customers selecting the platform.