First, looking at its Q4 performance, EPS came in at $0.59, blowing out the $0.39 Capital IQ consensus. The $0.20 beat was its largest beat in at least five years, and it extends its winning streak vs. the Street's EPS consensus to four straight quarters.
Revenue jumped by 28% year/year to $181.1 million, also easily exceeding the $168.8 million expectation. The 28% topline growth was its strongest since 4Q13, making this one of GWRE's best quarterly performances in its history. During the conference call last night, management stated that business activity was healthy across both of its product lines. It added nine new customers, including five for InsuranceSuite and one for InsuranceNow. Existing customers also increased their spend with GWRE. Specifically, 27 clients expanded their deals by adding products, such as its data and digital engagement platform.
Business looks robust, so, it was surprising that its Q1 guidance was so weak at EPS of ($0.17)-($0.14) versus the $0.04 consensus, and revenue of $98-$102 million versus the $112.9 million consensus. However, the downside guidance is not because it expects business to slow down. Rather, it is due to it changing its business model to a subscription based one from a licensing one.
Currently, most of its software is under a term license model, which means it recognizes revenue earlier. At times, it is paid weeks ahead of the invoice date, so the associated revenue can be recognized in an earlier quarter or even year. In a subscription model, revenue recognition is delayed, shifting some revenue into later quarters.
So, the guidance it provided last night assumes that the percentage of subscription sales will rise from 6% in FY17 to 30% in FY18. This headwind will abate over time and in the long-term, it believes this shift will lead to improved profitability.
This transition aside, GWRE is bullish on its outlook, commenting that insurers are very interested in transforming their business interfaces to improve the customer-agent relationship, thereby improving customer loyalty. Additionally, insurers are looking to apply complex predictive analysis and machine learning to operational decision making.
To wrap up, investors are focusing on the momentum underlying GWRE's business, rather than the short-term hiccup related to the business model shift, which has shares popping to new all-time highs this morning.