Guidewire Software: Insurance Industry Software

| About: Guidewire Software, (GWRE)

SUMMARY

Guidewire Software (NYSE:GWRE) priced above their filing range recently at $13 versus the $11 mid-point and has traded strongly in the aftermarket to $17. The company provides a software solution to P&C1 insurance companies for policy management, claims and billing. Revenues of $200M are growing at 20% with attractive gross and operating margins. License revenues are growing at a faster rate and effectively a large portion of their revenues are recurring. At the higher price the shares are close to our IV of $15. The company has an opportunity to expand into the "big data" segment of the business which could open up additional opportunities and boost valuation.

POSITIVES, NEUTRALS AND NEGATIVES

+ Large opportunity - The P&C insurance industry is large and spends over $14B2 on software and services. Most of the existing technology is old, highly customized, inflexible and expensive to maintain.

+ Size & customer base - At a $200M revenue run rate and a broad mix of over 100 insurance companies as customers, along with good integration partners, Guidewire is well-established in the market.

+ Attractive business model - Contracts are multi-year renewable with a portion tied to the revenues of the client's insurance business. This gives the company high visibility and a large recurring revenue base.

+ The management team may not be the most fun group at a party but it's one with much industry experience combining a range of backgrounds in insurance, banking and technology.

= The valuation is reasonable. At the prior mid-point of $11 it was attractive. The price of $17 is in the range of our IV of $15.

= Although we view it as a + the nature of the business and the management team is long-term. Markets can be unfriendly to increased investment levels or deferred revenues. This could increase volatility but may provide better entry points for new investors in Guidewire depending on the circumstances.

- Investors have tended towards "hotter" growth companies of late and some strong but mundane growth stories have not received as much interest. Guidewire could be one of these in the after-market.

- Having to pay $10M to Accenture to settle claims is included in the S-1 and should be behind the company but management hasn't spent time addressing it.

- Projected spending levels on sales and marketing seem high and if sales cycles lengthen near-term results might still disappoint on the bottom line. Increasing sales costs might not be well-received.

1 Property & Casualty Insurance is about protecting things as opposed to life and health insurance.
2 According to Gartner Group.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.