Insurance industry-focused software maker Guidewire (NYSE: GWRE) announced better-than-expected revenue in Q1 CY2025, with sales up 22% year on year to $293.5 million. Guidance for next quarter’s revenue was better than expected at $336 million at the midpoint, 1.1% above analysts’ estimates. Its non-GAAP profit of $0.88 per share was 88.1% above analysts’ consensus estimates.
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Guidewire (GWRE) Q1 CY2025 Highlights:
- Revenue: $293.5 million vs analyst estimates of $286.6 million (22% year-on-year growth, 2.4% beat)
- Adjusted EPS: $0.88 vs analyst estimates of $0.47 (88.1% beat)
- Adjusted Operating Income: $46.06 million vs analyst estimates of $39.63 million (15.7% margin, 16.2% beat)
- Revenue Guidance for Q2 CY2025 is $336 million at the midpoint, above analyst estimates of $332.2 million
- Operating Margin: 1.5%, up from -6.9% in the same quarter last year
- Free Cash Flow Margin: 9.5%, down from 28.4% in the previous quarter
- Annual Recurring Revenue: $960 million at quarter end, up 15.9% year on year
- Billings: $286.2 million at quarter end, up 26.4% year on year
- Market Capitalization: $18.05 billion
Company Overview
Founded by two individuals involved in the development of leading procurement software Ariba, Guidewire (NYSE: GWRE) offers insurance companies a software-as-a-service platform to help sell their products and manage their workflows.
Sales Growth
Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last three years, Guidewire grew its sales at a 12.6% annual rate. Although this growth is acceptable on an absolute basis, it fell short of our standards for the software sector, which enjoys a number of secular tailwinds.
This quarter, Guidewire reported robust year-on-year revenue growth of 22%, and its $293.5 million of revenue topped Wall Street estimates by 2.4%. Company management is currently guiding for a 15.3% year-on-year increase in sales next quarter.
Looking further ahead, sell-side analysts expect revenue to grow 13.5% over the next 12 months, similar to its three-year rate. This projection is admirable and indicates the market is forecasting success for its products and services.
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Annual Recurring Revenue
While reported revenue for a software company can include low-margin items like implementation fees, annual recurring revenue (ARR) is a sum of the next 12 months of contracted revenue purely from software subscriptions, or the high-margin, predictable revenue streams that make SaaS businesses so valuable.
Guidewire’s ARR punched in at $960 million in Q1, and over the last four quarters, its growth was solid as it averaged 14.7% year-on-year increases. This alternate topline metric grew slower than total sales, which likely means that the recurring portions of the business are growing slower than less predictable, choppier ones such as implementation fees. If this continues, the quality of its revenue base could decline. 
Customer Acquisition Efficiency
The customer acquisition cost (CAC) payback period represents the months required to recover the cost of acquiring a new customer. Essentially, it’s the break-even point for sales and marketing investments. A shorter CAC payback period is ideal, as it implies better returns on investment and business scalability.
Guidewire is extremely efficient at acquiring new customers, and its CAC payback period checked in at 17.7 months this quarter. The company’s rapid recovery of its customer acquisition costs indicates it has a highly differentiated product offering and a strong brand reputation. These dynamics give Guidewire more resources to pursue new product initiatives while maintaining the flexibility to increase its sales and marketing investments.
Key Takeaways from Guidewire’s Q1 Results
We were impressed by how significantly Guidewire blew past analysts’ billings expectations this quarter. We were also happy its annual recurring revenue, EPS, adjusted operating income, and quarterly revenue guidance outperformed Wall Street’s estimates. Overall, we think this was a solid quarter with some key areas of upside. The stock traded up 8.6% to $236.90 immediately after reporting.
Guidewire put up rock-solid earnings, but one quarter doesn’t necessarily make the stock a buy. Let’s see if this is a good investment. What happened in the latest quarter matters, but not as much as longer-term business quality and valuation, when deciding whether to invest in this stock. We cover that in our actionable full research report which you can read here, it’s free.
