What happened

In response to the company's announcement of fiscal 2020 second-quarter results, shares of Guidewire Software (GWRE 0.58%), a software company that focuses on the property and casualty insurance industry, fell 13% as of 10:10 a.m. EST on Thursday.

So what

The headline numbers for the quarter looked great:

  • Revenue grew 3% to $173.5 million. That was much higher than management's guidance range and 5% higher than Wall Street was expecting.
  • Adjusted earnings fell 36% to $0.21 per share. That was also much higher than the consensus estimate of $0.13 in adjusted earnings.
Man with head against wall in conference room

Image source: Getty Images.

But traders were taken by surprise when management updated its full-year guidance.

The company now expects full-year revenue to land between $702 million and $714 million. That's much lower than its prior range of $759 million to $771 million. It's also nowhere close to the consensus estimate of $766.1 million in full-year revenue.

Management also stated that its full-year adjusted EPS was expected to land between $0.82 and $0.94. That's also well below the $1.19 that Wall Street was expecting.

Given the weak full-year guidance, it's no surprise to see shares take a step back today. 

Now what

You might assume that the downward guidance revision is because Guidewire's business is getting weaker. In fact, the opposite is true.

On the conference call with investors, Jeff Cooper, vice president for finance, stated that the downward guidance revision is being caused by increased demand for the company's cloud-based products:

[T]he market is shifting away from self-managed core systems faster than we expected. Customers and prospects primarily in North America, previously considering self-managed systems, are in many cases reconsidering that path and extending their thought process to consider Guidewire Cloud. As we think about the future, we believe we can best service our customers in the cloud modality. And as a result, we welcome the shift.

In other words, cloud-based software brings in less revenue up front, and with the transition happening faster than expected, management was forced to lower its near-term revenue and profit outlook. That news might not sit well with traders, but it should be music to long-term investor's ears.

The transition to a software-as-a-service model can be painful, but it's worked out very well for investors in Microsoft, Adobe Systems, and Autodesk. I suspect the same thing will happen with Guidewire, too.

In other words, I think it's just a matter of time before this high-quality growth stock regains its momentum.