Hi all:
I posted this on the Fool PBs. Thought I’d share it here also. For Tickertarget subscribers, Bert wrote about this stock back on September 13, when it was sporting a much higher share price.
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Hi Fools:
I have been studying Guidewire over the last 6 week weeks. I was surprised to learn that it is not in the Fool Universe. I offer up this deep dive to generate a discussion about the company and to assess, through your thoughts and input, the overall merits (or not) of owning a share of this company.
Company Purpose:
From the Guidewire Website: “Guidewire exists to deliver the industry platform that P&C (Property & Casualty) insurers rely upon to adapt and succeed in a time of accelerating change—and to ensure that every customer succeeds in the journey…We believe that P&C insurance plays a vital role in protecting people and business and in enabling society to function. We specialize in serving P&C insurers, with a focused commitment that puts customer success above all else. We are privileged to serve a global community of more than 350 primary insurers of all sizes and lines of business in more than 30 countries.”
Background: (Sources: Wikipedia and Forbes)
Guidewire (aka Guidewire Software, inc) was founded in 2001 by: Ken Branson, James Kwak, John Raguin, and Marcus Ryu–(current CEO)from another software company called Ariba (and McKinsey, where James and Marcus had met); and John Seybold and Mark Shaw from Kana Software. In September 2011, Guidewire filed with the SEC to raise up to $100 million in an initial public offering (IPO) and first publicly traded on the NYSE in January 2012. It had targeted a range of $10 to $12 per share, priced at $13 on Tuesday for a total of $115 million, and soared 32 percent to close at $17.12 in its first day of trading.
On at the end of the IPO day, Guidewire CEO Marcus Ryu said this: “It’s interesting, we weren’t entirely sure what sort of reception we would get from the investing public because the market we serve is quite specialized,” Ryu said. “We’re very well known in our industry but not really well known to the investing world or the general public.
Most of the buzz in the IPO market these days is around social media companies, but Ryu said investors appreciated that his company has a clear business strategy and a large market — the $1.2 trillion insurance industry — with defined needs."”
https://www.forbes.com/sites/tomtaulli/2012/01/26/how-guidew…
The total value of the current P & C Insurance Industry: $2 Trillion.
Over the years, Guidewire has been aggressive in completing bolt-on acquisitions including in 2013, Guidewire acquired Millbrook, Inc., a business intelligence company; in 2016, they acquired ISCS (cloud computing), FirstBest (underwriting) and EagleEye Analytics; in 2017, the company acquired Cyence, a cyber insurance company.
Guidewires current business model is based on the transition in P & C insurance industry from decades old, in-house mainframe systems running licensed software to cloud based software systems. Guidewire is the top dog, global leader in working with P & C insurance companies to replace their legacy systems with with its InsuranceSuite App, which manages, claims, billing and the entire policy life cycle.
Here is how the company describe InsuranceSuite:
Guidewire InsuranceSuite™ is a proven solution that promotes optimized insurance operations through insights derived from an engaged global customer community, and empowers employees, agents, and customers to respond and adapt to market change.
By providing a single source of truth for all customer, transactional, and financial data, InsuranceSuite:
*Enables insurers to realize analytic insight and a true omnichannel experience across all distribution channels and all lines of business
*Empowers insurers to quickly adapt their products and processes to achieve speed-to-market and invoke operational efficiencies and continual improvement across their organization
*Enables profitable growth and the ability to capitalize on today’s market opportunities and trends, including swift adoption of innovative technologies, delivering personalized product and service offerings, meeting increasingly heightened customer expectations, and addressing aggressive industry competition.
We’ve designed InsuranceSuite using a modular approach based on a common technology platform that covers the entire insurance lifecycle. Insurers can select and implement individual applications or a pre-integrated core system suite based on their specific requirements and priorities. This also maximizes flexibility for insurers to deploy and upgrade as they see fit.
We also offer flexible deployment options, including the ability to deploy InsuranceSuite via a traditional on-premises approach or in private and public (and hybrid) cloud environments like Amazon Web Services (AWS) or Microsoft Azure. Alternatively, insurers can leverage a Guidewire Cloud™ partner to design a custom cloud solution.
Guidewire offers many other related products, including newer data, analytics and digital offerings (including DataHub and Guidewire Live) that will allow the company’s salespeople to upsell current clients. You can find a description of all of Guidewire’s products (Core, Digital and Data) here:
https://www.guidewire.com/products
Customers:
There are 1,500 P & C insurers globally. Guidewire announced at its analyst day in September, 2018 it has 30 of the total of 70 Tier 1 customers (i.e. insurers writing more than $5 billion in direct written premiums–DWP–annually); 99 of Tier 2 of about 200 total; and 251 Tiers 3, 4, and 5 customers of the remaining 1,200. In 2013, Guidewire had 11 Tier 1 customers, 42 Tier 2 customers and 130 Tier 3, 4, 5 customers. As Guidewire grows its customer base it also continues to aggressively market its products to its current base of customers. According to Morningstar, Guidewires current customer base accounted for 61% of the company’s fiscal 2018 sales.
LTV/CAC. An August 2018 Morningstar report points to the Guidewire’s incredible ability to retain its customers and upsell products to them:
“By our estimates, Guidewire’s lifetime value/customer acquisition ratio, or LTV/CAC, is 5.15, if we take the median of the past eight quarters. We view this as best-in-class, the highest we’ve seen among software vendors in our coverage, even above the elite pantheon of Workday and ServiceNow. We believe the LTV/CAC metric is an important indicator of a software vendor’s efficiency in attracting new customers and retaining existing ones. For every $1.49 spent to acquire a customer, Guidewire extracts a $7.65 lifetime value for the customer. Similarly, as we look at Guidewire’s fluctuating GAAP profitability and transition to cloud products, we use the LTV/CAC ratio to assess whether the firm lacks pricing power and operating expenses are out of control, or whether the firm is making wise investments in order to secure more customers and future revenue. We think the latter clearly applies to Guidewire and its operations today. For Guidewire, we believe the firm’s expanding slew of products (InsuranceSuite Cloud, InsuranceNow, DataHub, and so on) have provided ample cross-sell and upsell opportunities. These exemplary unit economics give us confidence in the stability of Guidewire’s business and economic moat.”
https://www.researchpool.com/provider/morningstar/guidewire-…
Most of Guidewire’s customers are transitioning from out-dated IT infrastructure (e.g. COBOL systems,mainframe systems, etc.). Switching to Guidewire’s products requires a massive effort that can take as long as 12-36 months (depending on what they are adopting from Guidewire). In order to go through such an effort the company must make a decision that Guidewire will become their strategic partner for many years to come. This arduous transition creates a massive switching cost to the customer, basically locking them in to Guidewire’s offering into the future, and providing Guidewire a tremendous moat. According to Morningstar, Guidewire has never lost a customer to a competitor.
The downside to the complexity of this process is that it can slow the growth of Guidewire’s overall customer base. In fact, Guidewire, in its Q1 ER, cut its full year revenue guidance because some of their largest cloud deals are taking longer than management originally anticipated. CEO Marcus RYO addressed the issue on the Q1 FY19 Conference Call:
Brad Sills – Bank of America Merrill Lynch – Analyst
Oh, hey, guys. Thanks for taking my question. I wanted to ask about getting these customers over the hurdle with InsuranceSuite Cloud. Is there something about the architecture, the data center model, whether it’s hosted, or do you need to go to multi-tenancy? Is there some kind of investment that you might need to make to make it easier to kind of get these customers over that hurdle for adoption?
Marcus Ryu – Chief Executive Officer
Brad, it’s really – well, as best as we can tell, there really isn’t an architectural hurdle here. It’s entirely about a risk aversion at war with a pursuit of opportunity and benefit that our customers are going for. And they need to overcome that risk aversion by doing lots and lots of validation, confirming that we understand all of their data sovereignty requirements, a ton on info security. There’s a lot of negotiation around liabilities and indemnification on different theoretical bad outcomes that can happen. And then there’s just the governance process that sometimes our customers have to discover for themselves about what it takes, what levels of approval they need in order to make a decision like this. It’s almost always now a board-level topic.
We’re not a stranger to building – having to build serious institutional consensus for a company to work with us. We’re seeing that kind of maybe doubled now when we’re talking about these cloud relationships, because our customers tend to see that as kind of a one-way ticket, that once they make this decision, they’re really entrusting us for the long haul, which is true for core systems, but they – in a sense, they feel it’s doubly true when it comes to the cloud, because now it’s not only the application that they’re betting on, but kind of division of labor that would be very difficult for them to reverse in the future. And I think it’s rational for insurers to want to think about that very carefully, and all the implications of it. And that’s what’s involved in these discussions.
What makes that easier over time, I think, is simply repetition and greater market adoption. And just because the – this isn’t a novelty, this is really responses to the deepest, the most strategic need that our customers have. And that’s what we’re responding to here, and that’s why they’re investing the time to do these explorations. Once we validate that with the growing number of customers in our nearly 400-customer community, we think that there really will be a momentum behind that that becomes – that feels more and more like inevitability.
Guidewire continues to up/cross sell current customer and bring on new customers. Here is what Marcus Ryu reported for Q1 FY19: (note also the international nature of Guidewires operations):
With respect to new sales, we had an active first quarter, adding four new customers that selected a broad range of Guidewire Insurance Platform products, and 10 existing customers that selected additional products. Aioi Nissay Dowa Insurance Europe, a $500 million DWP subsidiary of MS&AD, one of Asia’s largest insurers, selected a broad range of products that included InsuranceSuite, Data and Digital, and other products. Optimum General Insurance Group of Canada selected PolicyCenter rating management and reinsurance management. Cortage la Prairie Mutual Insurance Company, also in Canada, selected ClaimCenter. Zurich Financial Services Australia selected ClaimCenter, which further expanded our relationship with multinational insurer Zurich Insurance Group.
Selected customer expansions included Donegal Insurance Group, which became a full InsuranceSuite customer with their selection of PolicyCenter, and further extended their Guidewire commitment by selecting Data and Digital Products, along with Rating and other add-on modules. Connecticut Interlocal Risk Management Agency added Predictive Analytics. Farm Bureau Mutual Insurance Company of Idaho selected Rating Management. And a number of customers, including EUI Limited, Fred Loya Insurance Agency, Insurance Australia Limited, Jewelers Mutual Insurance Company, and Pekin Insurance Group, added Digital Products.
Competition/Moat
As mentioned above, the high switching cost associated with adopting Guidewire’s offerings creates a “locked in” B2B strategic relationship that provides Guidewire a significant moat. Duck Creek is Guidewire’s closet competitor with $100-150M in sales in 2018 according to Gartner (compared to GWRE sales of $661M). However, Guidewire current customer base represents 25% of all direct premiums written, the largest footprint in the industry, deep understanding of the industry and related regulation and laws and a deep customer base with long term experience with the Company to reference to future customers. Here is a link to Duck Creek’s website: https://www.duckcreek.com/product/
Q1 FY19 Financials
*Total revenue for the first quarter of fiscal year 2019 was $179.7 million, an increase of 66% from the same quarter in fiscal year 2018.
*License and subscription revenue was $94.3 million, an increase of 213%; services revenue was $64.4 million, an increase of 9%.
Note: CFO CURTIS SMITH regarding Subscription Rev increase (from Q1 FY19 Conf Call):
This outsized growth rate is positively impacted by four factors. The two largest factors were included in our outlook provided last quarter. First and most notably, due to ASC 606**, a number of our term contracts that we previously recognized on a quarterly basis, due to quarterly invoicing terms, will now be recognized upon the annual renewal. This anticipated change moved approximately $12 million in revenue from latter periods in fiscal 2019 into Q1.
Second was the start of a 10-year term license contract in Q1, which accelerated over $10 million of term license revenue into Q1 when compared to a typical new two-year term license contract. Third, in addition to those anticipated factors, a customer consolidated multiple contracts into one agreement, pulling forward approximately $9 million in revenue from latter quarters in fiscal year 2019. And fourth, license and subscription revenue benefited from approximately $3 million of hosting revenue, moving from services under ASC 605 to subscription under ASC 606. These last two factors were not considered in the outlook we provided last quarter. Even without these two items, we exceeded the high end of our license and subscription revenue guidance for the quarter.
https://www.fool.com/premium/coverage/earnings/call-transcri…
**If you don’t know what ASC 606 is, read this: https://bakertilly.com/insights/asc-606-revenue-recognition-…
*Maintenance revenue was $21.0 million, an increase of 11%. First quarter year-over-year growth comparisons were positively impacted by the adoption of ASC 606.
Profitability
*GAAP income from operations was $1.1 million for the first quarter of fiscal year 2019, compared with a $32.7 million loss in the comparable period in fiscal year 2018.
*Non-GAAP income from operations was $31.7 million for the first quarter of fiscal year 2019, compared with a $8.3 million loss in the comparable period in fiscal year 2018.
*GAAP net income was $5.5 million for the first quarter of fiscal year 2019, compared with a $8.9 million loss for the comparable period in fiscal year 2018. GAAP net income per share was $0.07, based on diluted weighted average shares outstanding of 82.2 million, compared with a $0.12 net loss per share for the comparable period in fiscal year 2018, based on diluted weighted average shares outstanding of 75.2 million.
*Non-GAAP net income was $29.9 million for the first quarter of fiscal year 2019, compared with a $4.8 million net loss in the comparable period in fiscal year 2018. Non-GAAP net income per share was $0.36, based on diluted weighted average shares outstanding of 82.2 million, compared with a $0.06 net loss per share in the comparable period in fiscal year 2018, based on diluted weighted average shares outstanding of 75.2 million.
Liquidity
*The Company had $1.2 billion in cash, cash equivalents and investments at October 31, 2018, compared with $1.3 billion at July 31, 2018. The Company used $27.2 million cash from operations in the first quarter of fiscal year 2019, reflecting normal seasonal patterns.
http://ir.guidewire.com/phoenix.zhtml?c=248177&p=irol-ne…
Why I became a shareholder in GWRE:
*Top Dog; Wide Moat; Tremendous, industry leading LTV/CAC metric; GWRE provides vertical services in a specific industry making it difficult for horizontal software vendors (e.g. CRM) to enter and compete; Founder lead by CEO Ryu who has a 95% Glassdoor rating (ranked a Top CEO in 2018; Guidewire consistently voted Best Places to Work: 2018 (#68), 2016 (#3), 2014 (#6)…See here on Glassdoor: https://www.glassdoor.com/Overview/Working-at-Guidewire-EI_I… Significant TAM (long runway) and business momentum that should provide a significant advantage in securing the “next customer.” A customer focused business that continues to innovate through R & D and strategic acquisitions (excellent capital allocation); If all goes as planned and indicated by current momentum, GWRE should be printing $ (65%+ margins) in the future (or so I hope). 
Issues to watch:
*New competitors (e.g. SAP) or current competitors begin to gain market share; Guidewire struggles to bring on new customers at a pace that allows the company to grow rapidly enough, to justify share price, while minimizing professional service costs; an economic downturn or major catastrophic event hits the P & C industry hard and reduces their spending on system upgrades; autonomous vehicle adoption reduces the demand for auto insurance; due diligence demands on company leaders and boards of switching to GRWE systems encourages P & C insurers to make due with their legacy IT infrastructure systems.
That’s all I got.
Best, Swift…
Long GWRE (as of 1/4/19)