Based in San Mateo, California, Guidewire Software (proposed GWRE) scheduled a $82 million IPO with a market capitalization of $523 million at a price range mid-point of $11 for Wednesday January 25, 2012.
This week two other IPOs are scheduled. Six are scheduled for the week of January 30, so far... (see our IPO calendar).
GWRE is a venture-backed software company targeting claims processing for property & casualty insurers, worldwide. As of October 31, 2011, GRWE had 103 customers.
Sales were up 49% to $52 million for the October 2011 quarter from the year earlier period. However, "we currently expect our revenues for the second and third fiscal quarters of 2012 to be down or flat as compared to the first fiscal quarter of 2012" (page 13, S-1). Also see 'quarterly fluctuations' below.
Revenue for the fiscal year ended July 2011 was $172M, so GWRE is running at a revenue rate in the range of $200+ million per year, up 16% from $172 million. That's not a lot to get excited about.
GWRE's IPO may be 'in demand' based on its claim to be a cloud company, and based on recent revenue increases. However, At $82 million the float is a little small to be of much interest to larger institutions. And a major competitor -- Accenture (NYSE:ACN) -- recently entered GWRE's 'cloud' arena.
Therefore, we wouldn't be in a hurry to chase after GRWE in the IPO after market.
NOT A CLOUD COMPANY, YET
Cloud-based companies get high P/E ratios. IPO examples in the last year include Servicesource International (NASDAQ:SREV) P/E 86; Cornerstone OnDemand, (NASDAQ:CSOD) loss; Carbonite (NASDAQ:CARB) loss. (source: Google Finance)
GWRE would have you believe it deserves a 'cloud' multiple. Don't be mislead, however, by this statement on page 1:
"According to Gartner, Inc., as of January 2011, ClaimCenter, our first application, is the P&C insurance industry's most widely used web-based claims system." (note: 'web-based' often means Internet or cloud-based)
While we believe Gartner, the 'cloud' statement needs to be considered in context, for example:
- "Our customers typically choose to deploy our solutions on-premise due to security requirements and numerous integration points with other systems." Page 86, S-1
- "In the event that our customers seek to shift their enterprise environments to a cloud infrastructure in the future, our technology will accommodate this transition." Page 95, S-1
- "Although our software products typically are deployed on our customers' premises, our products may be deployed in our customers' cloud-based environments" Page 28, S-1.
So yes, GWRE has cloud capability. However, it appears that at present GWRE's 'cloud' delivery option is not currently in high demand by the industry.
Accenture , with $38 billion market capitalization, recently began to aggressively target GWRE's 'cloud' market. The risk is that ACN may bundle its competing cloud-based software solutions as a loss-leader into larger contracts that includes extensive CAN consulting.
INTELLECTUAL PROPERTY RISK
"On December 22, 2011, GWRE received written notice from the party from which GWRE purchased such patents of its intent to repurchase the four patents." (see "Intellectual Property" below)
Guidewire Software is a leading provider of core system software to the global property and casualty, or P&C, insurance industry. GWRE's solutions serve as the transactional systems-of-record for, and enable the key functions of, a P&C insurance carrier's business: underwriting and policy administration, claims management and billing.
GWRE has developed an integrated suite of highly configurable applications that are delivered through a web-based interface and can be deployed either on-premise or in cloud environments.
A key advantage of GWRE's architecture, according to GWRE, over that of legacy core systems is that GWRE's solutions enable extensive configurability of business rules, workflows and user interfaces without modification of the underlying code base, allowing customers to easily make changes in response to specific, evolving business needs. GWRE's Guidewire InsuranceSuite includes Guidewire PolicyCenter, Guidewire ClaimCenter and Guidewire BillingCenter applications, which enable a broad range of core P&C insurance operations.
CUSTOMERS & BILLING
GWRE's customers range from some of the largest global insurance carriers or their subsidiaries such as Tokio Marine & Nichido Fire Insurance Co., Ltd. and Zurich Financial Services (OTC:ZFSVY) to national carriers such as Nationwide Mutual Insurance Company to regional carriers such as AAA affiliates. As of October 31, 2011, GWRE had 103 customers.
GWRE primarily generates software license revenues through annual license fees that recur during the multi-year term of a customer's contract. The average initial length of contracts is five years, and these contracts are renewable on an annual or multi-year basis.
GWRE typically bill customers for license and maintenance fees annually in advance. GWRE primarily derives service revenues from implementation and training services performed for customers. A significant majority of services are billed on a time and materials basis and recognized as revenues upon delivery of the services.
GWRE has historically experienced seasonal variations in revenues as a result of increased customer orders in its second and fourth fiscal quarters and subsequent annual fees. GWRE generally sees increased orders in its second fiscal quarter, which is the quarter ended January 31, due to customer buying patterns.
GWRE also sees increased orders in its fourth fiscal quarter due to efforts by its sales team to achieve annual incentives. As a result, a significantly higher percentage of GWRE's annual license fees are invoiced and recognized as revenues during those quarters at contract inception or in the subsequent quarter when the annual license payment is due and in subsequent years upon the anniversary of the contract date.
For example, GWRE received new orders for both term and perpetual licenses in the fourth fiscal quarter of 2011 that committed future product functionality that was delivered in the first fiscal quarter of 2012. As a result, GWRE's license revenues in the first fiscal quarter of 2012 were $7.2 million higher than they would have been had the functionality been delivered in the fourth fiscal quarter of 2011 and, "we currently expect our revenues for the second and third fiscal quarters of 2012 to be down or flat as compared to the first fiscal quarter of 2012."
As of October 31, 2011, GWRE owned six issued U.S. patents. Issued patents are scheduled to expire between 2013 and 2026. Four of these patents are subject to an option in favor of the party from which GWRE purchased such patents; these patents can be re-purchased from GWRE during a 60-day period starting December 14, 2011.
On December 22, 2011, GWRE received written notice from the party from which GWRE purchased such patents of its intent to repurchase the four patents during the 60-day period. In connection with the repurchase, GWRE will retain a license to such patents and immunity from suit by the repurchasing party in connection with such patents.
GWRE has also filed 18 U.S. patent applications.
The market to provide core system software to the P&C insurance industry is highly competitive and fragmented. This market is subject to changing technology, shifting client needs and introductions of new products and services. GWRE competitors vary in size and in the breadth and scope of the products and services offered. Current principal competitors include:
Internally developed software
Many large insurance companies have sufficient IT resources to maintain and augment their own proprietary internal systems, or consider developing new custom systems;
IT services firms
Firms such as Accenture , Computer Sciences (NYSE:CSC), MajescoMastek (MASTEK) and Tata Consultancy Services (NYSE:TCS) offer software and systems or develop custom, proprietary solutions for the P&C insurance industry;
Property & Casualty insurance software vendors
Vendors such as AQS, Inc., Duck Creek Technologies (recently acquired by Accenture), OneShield, Inc. and StoneRiver, Inc. provide software solutions that are specifically designed to meet the needs of P&C insurance carriers; and
EMPLOYEES: 684 as of October 31, 2011
VENTURE CAPITAL FUNDED
Pre-IPO ownership: U.S. Ventures (30%), Bay Partners (25%), Battery Partners (7%)
USE OF PROCEEDS
GWRE expects to net $73 million from the IPO. $4.8 million is allocated to satisfy employee tax obligations for stock awards, with the balance slated for general corporate purposes