Q3 2020 Guidewire Software Inc Earnings Call
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Good afternoon, and welcome to Guidewire Software's earnings conference call for the third quarter fiscal year, Twentytwenty, which ended on April thirtyth.
My name is John Cooper, I'm, the Chief Financial Officer, and with me on the call as Mike Rosenbalm Guidewires Chief Executive Officer.
Hey, complete disclosure of our results can be found in our press release issued today as well as an eye related form 8-K furnished to the S. You see both of which are available on the Investor Relations section of our website.
Today's call is being recorded at a replay will be available following the conclusion of the call.
Statements made on this call include forward looking statements regarding our financial results products customer demand operations the impact of Cobot 19 on our business certain leadership changes and other matters.
These statements are subject to risks uncertainties and assumptions and are based on management's current expectations as of today and should not be relied upon as representing our views as of any subsequent date.
Please refer to the press release and the risk factors and documents, we file with the FCC, including our most recent quarterly report on form 10-Q, four information on risks uncertainties assumptions that may cause actual results to differ materially from those set forth in such statements.
We will also refer to certain non-GAAP financial measures to provide additional information to investors.
Reconciliation of non-GAAP C. GAAP measures is provided in our press release, but the primary difference is being stock based compensation expenses amortization of intangibles, the amortization of debt discount and issuance cost from our convertible notes.
Changes in fair value of strategic investments and the related tax effects of these adjustments. Additionally, reconciliations and additional data are also posted in the supplement on our IR website.
With that let me turn the call over to Mike.
Thank you, Jeff and thanks to those of you join us for our third quarter earnings call quite a lot of has changed since our last call in March and I'm proud of how everyone is guidewire has adapted in responded to the changes required by the Cobiz 19 endemic.
A lot has also changed in just past week and so before I get to the quarterly results I want to take a second and relate to everyone. How deeply saddened every single member of the team here at Guidewire is regarding the death George Floyd.
The underlying inequality in racism it reflects in our society.
Then a message to our company yesterday that said, it's just fundamentally not acceptable to me that a portion of our community feels that the system, we live with values their lives less than mine.
We are all committed to doing our part in working to dressed as the guidewire and in our communities.
And I'm confident that we will find some value from this senseless loss of life.
It's forcing us to have a conversation, we're uncomfortable having and even though that seems like a very small step I think it will lead to positive change.
With that ill proceed to the quarterly update.
We had a good quarter all things considered as you can imagine we spent a lot of our time working to adapt to a new approach to work. In addition to the normal things we do to operate the company.
We're happy to report that they are our grew 10% from a year ago, so $483 million inline with our expectations.
Additionally, we exceeded our guidance ranges for revenue and profitability in the third quarter.
We've adapted to working from home companywide and I expect us to operate this way through at least our fourth quarter and most likely our first quarter, which ends in October.
I've been particularly impressed with our teams flexibility and eagerness to support one another as our colleagues juggled, sometimes less than ideal work environments with personal responsibility and the long list of new stresses and uncertainties. We're all now facing.
Like many others in the technology industry, we've been pleasantly surprised by how smoothly. This transition has gone and we're working to ensure that we take everything we have learned from this experience and apply it logically to how we operate going forward.
No doubt that we will support a greater percentage of remote work and find new and more creative uses for our office space is going forward.
While we continue to execute effectively as a company there are kobin related impacts to our business that we're dealing with.
You know we sell large heavily negotiated deals for complex I T projects that have long sales cycles.
We haven't happy to see existing deals in projects continuing to move forward and in many cases, our customers are just as motivated to continue to make progress on these initiatives as we are.
A large majority of our new sales in any given year come from existing customers and we very often have long standing relationships with customers and prospects that have transitioned well to virtual engagements. However, we have seen lengthening sales cycles and in some cases delayed decision making related to the very significant amount.
Of uncertainty many of our insurance customers and prospects are facing we expect this to continue in Q4, which is a critical period given the seasonality of our business.
We consider ourselves fortunate to operate in a very resilient vertical with a strong recurring revenue business model based on delivering mission critical applications, but we do expect that the current environment, we'll have some impact on our ability to close new business and that is considered in our outlook for Q4, which Jeff will discuss in more de.
Two.
Looking at some of the details of our third quarter, we delivered solid results in an uncertain environment and while new business activity was not as strong as a typical Q3, we did add for new customers and seven existing customers selected additional guidewire products.
Momentum for Guidewire cloud continued in the quarter with over 60% of new sales from cloud, which included insurance suite cloud insurance now and science products, particularly notable win was with a veeva Italia and existing customer who has opted to migrate their insurance suite and since the Guidewire cloud.
Given the environment in Italy during the quarter I found it to be a remarkable example, the perseverance and resilience of our community and we were all very inspired to get this transformation started in the midst of these difficult circumstances.
We also saw momentum continue with insurance now are all in one cloud offering.
CFM insurance, a provider of farm homeowners and renters insurance selected insurance now to modernize their operations in the third quarter also and as discussed on our last call Tuscarora Wayne insurance decided in Q3 to migrate their on premise instance of insurance now to Guidewire cloud.
Science contributed three notable wins in the quarter showing the breadth of our reach by adding to our client base, an insurer and Mg and a reinsurer.
German insurer selected science risk selection and accumulation for its international corporate underwriting business and in the UK Osteo Group services selected science accumulation and risk selection for small business for cyber and finally, a market leading reinsure based in Bermuda license science risk.
Finally, we closed one new on premise suite customer and an on premise core system expansion in the quarter, British Columbia Automotive Automobile Association, a $225 million DWP ensure serving one in three households in British Columbia selected all of insurance suite.
As well as data and digital Admirals, a tier to ensure in the UK expanded their relationship with Guidewire to add claim center.
As part of our move to work from home our services organization has successfully transitioned to 100% remote implementations very effectively in Q3, we completed nine core data or digital go lives, including a go live on insurance, we'd cloud at my Stephen France on insurance now go live and a full insurance we.
Go live in addition to customers went live on new products six customers completed major major version core upgrades.
Our continued momentum would not be possible without our partner community, notably within our partner community. Approximately 475 consultants from 19 partner companies have an hour and advanced certifications required for Guidewire cloud implementations up from approximately 270 as of the end of last quarter. We believe that this growth is.
An exciting proof point of the opportunity our partner see in the future of Guidewire cloud.
I'm grateful for the efforts throughout our ecosystem for the continued service and leadership to the TNC industry. I'm also pleased to announce that we closed two small venture investments in exciting innovators in the ensure tech landscape better view and clear analytics better view as a geospatial analytics provider that helps underwriters managed.
Property risk and helps adjusters to remotely manage property claims clear analytics as a provider of predictive analytics solutions focused on workers compensation and commercial claims these investments totaled $2 million and closed in Q4, we look forward to working with both companies as they help support what we measure as the largest and most by.
Every application ecosystem and PNC insurance.
As I previewed in our previous quarterly call. We completed in May what I think is one of the most important releases we've ever done at the company.
We're calling this release Aspen.
And it is our first cloud optimized for lease of insurance we.
This is the first release to take advantage of our Guidewire cloud platform on interviews and introduces the cloud native rating service a cloud native rules engine, a completely new approach to integrated digital experiences and a number of enhancements to policy center designed to allow insurers to launch new insurance products more quickly and more easily.
Our mission is to enable insurers to engage innovate and grow efficiently and the Aspen release of insurance, we as a major milestone and that journey.
I'd also like to take this opportunity to discuss some leadership changes that we are making in the company.
First after 15 years that Guidewire and an incredible career and enterprise software, Steve Sherry has decided to retire.
We will continue with the company as Chief sales officer through the end of our fiscal year and we will stay on after as SVP strategic accounts through at least the end of the calendar year to ensure a complete and seamless transition.
We are all incredibly indebted to Steve for the contribution and leadership. He provided during his years that Guidewire incredible sales leader and has built a truly first class sales division here at Guidewire that will surely outlast him.
In anticipation of Steve's retirement, we're excited to welcome Franco down to the leadership team here at Guidewire. Frank is a 20 year sales veteran and leader from Oracle accompany that we all deeply respect in his professionalism and approach to enterprise sales.
Frank was most recently a group Vice President at Oracle Cloud sales Division, we're lucky to get in and excited for him to join you will start with US on June 15, and have an opportunity to work with Steve and the team as we close out the year.
Which points, Steve will smoothly past, the chief sales officer Baton to frame on August Onest.
Second I'd like to congratulate Jeff Cooper, our new CFO, who you will hear from in a minute.
After an extensive and thorough search we have decided that there really is no one better to lead our finance organization right now than Jeff as command of the very complex financial details of our business model transition. In addition to the trust the organization hasn't him and the leadership. He has shown during this interim period in the cobot 19.
Transition all demonstrated to me in our board that Jeff was the right financial leader for Guidewire right now.
During the process I continually asked myself, who do I trust financially manage and leave this company and it just kept coming back to Jeff. He has a command of the business and a belief in our potential and I'm excited about what we will build together.
Third I'd like to congratulate personal hung on a promotion to President in addition to her role as COO Guidewire Priscilla joined Guidewire in 2005. She has for many years been a key driver of the most critical guidewire initiatives and expect will remain a key leader of the organization for years and years to calm she embodies the grid.
Determination and resilience of our culture and I'm excited to continue to partner with or as we drive the next chapter for Guidewire Guidewire cloud in our partner ecosystem.
She has been an invaluable partner to me and coming up to speed here at Guidewire and I look forward to her continued leadership in partnership.
I hope that these leadership changes signal to you how extremely optimistic we are about our strategic direction in the long term opportunity to serve the TNC industry.
We are not slowing down investment in our cloud platform and cloud operations team. The investments, we're making today will be key to our future success as the industry increasingly recognize the benefits of our cloud product.
In summary, like many others, we're facing new uncertainties as a result of the cobot 19 pandemic, but we are optimistic that these impacts are temporary when considered against the multiyear timeframe time and time horizon, we optimized for and the fundamental market pressures driving demand for modern insurance platforms.
As our cloud offering matures, we expect demand will continue to strengthen we're building the most comprehensive cloud based platform an ecosystem in the world and I'm confident that guidewire and the insurance industry, we serve well whether this storm, we'll get through this period of social and economic uncertainty and come out a stronger more efficient company and.
I hope a stronger and better world now I'll turn it over to Jeff.
Thank you Mike.
Our our ended the third quarter at 483 million on a constant currency basis, an increase of approximately 10% year over year.
New Air are added year to date has been split pretty evenly between new deal sold and air our step ups from RAF deal sold in prior years.
Our retention continues to be inline with our expectations established at the beginning of the year.
Which given the current environment demonstrates the resiliency of our recurring revenue model.
Total revenue in the third quarter was 168.2 million above the high end of our guidance range.
Subscription revenue in the quarter was 30.1 million up 105% year over year due to ongoing insurancesuite cloud activity and some positive science usage, resulting in 1.1 million of variable revenue true ups.
License and subscription revenue was 93.2 million, which was also above the high end of our guidance range and the primary driver of our total revenue outperformance.
Through the end of the third quarter subscription sales as a percent of total new sales was 61%.
New term licenses and renewals of contract durations that were longer than our standard to your initial an annual renewal terms contributed approximately 13 million and incremental revenue when compared to our with our standard term durations.
As a reminder, last quarter, we mentioned that we expected approximately 10 million of incremental revenue from longer than standard deal duration contracts embedded in our outlook for the back half of the year.
And we did expect much of that activity to land in Q3, where we had the most visibility into longer duration contracts.
Maintenance revenue and services revenue in the third quarter were largely in line with our expectations at 20.7 million and 54.3 million respectively.
Turning to profitability, we will discuss these metrics on a non-GAAP basis.
Gross profit was 94.2 million in the third quarter compared to 94.1 million a year ago.
License and subscription margin for the quarter was 76% down from 87% a year ago as a result of large investments in cloud operations.
Services gross margin for the quarter was 12% down from 16% a year ago.
Overall gross margin for the quarter was 56% compared to 58% a year ago.
The impact on margin declines from license and subscription and services revenue were partially offset by a mix shift in total revenue away from services revenue.
Total operating expenses were 88.5 million in the third quarter, an increase of 8% from a year ago.
Operating income was 5.8 million exceeding our guidance range due to revenue upside and to a lesser extent expense favorability.
Global work from home efforts reduced travel spending in the quarter, which was partially offset by initiatives to better support our employees working from home.
Net income was 7.7 million or nine cents per diluted share.
We ended the quarter with 1.3 billion in cash cash equivalents and investments.
Operating cash flow for the quarter was 4.6 million and free cash flow for the quarter was 1 million, excluding 5.3 million in final expenditures associated with our new headquarters.
Operating and free cash flow in the quarter were negatively impacted by approximately 10 million as a result of early partial payment of annual bonuses that would have typically been paid in September 2020 for all active bonus eligible employees, excluding senior executives.
Turning to our outlook for fiscal 2020.
We are very very pleased with a number of active cloud conversations we have going on with existing and potential new customers.
Global Feltl shelter in place mandates have reinforce the need for modern core systems.
However, the current environment is expected to impact deal closings in Q4 as a result, we're updating our air our growth outlook to between nine and 11% for the year.
Also we didn't want to comment briefly on fully ramped they are.
As a reminder, fully ramped air our is defined as the annualized recurring value of all active term license subscription and maintenance agreements at the fully ramped annual price outlined in the customer contract.
In fiscal 2019 fully ramp air our benefited from a flurry of cloud deal activity in the back half of the year with significant ramps.
Given the current environment, we're not expecting similar activity levels. This year and as a result year over year growth comparisons for fully ramped air are at year end are expected to be closer to air our growth levels.
Our current outlook assumes that new subscription sales as a percent of total new sales will be at the lower end of our previously disclosed range of 70% to 80%.
And our subscription revenue outlook is expected to be between 116, and 118 million this year, representing 80% growth at the midpoint, a small increase from our prior guidance.
We are updating our license and subscription revenue outlook to between 419 and 427 million for the year as a result of our higher subscription outlook combined with more than expected multiyear term license activity, partially offset by increased uncertainty on deal timing.
During the current environment.
Currently incremental revenue from term licenses that are longer than our standard terms is expected to be approximately 2 million in Q4 or 15 million in the back half of the year, which is higher than the less than 10 million that informed our back half of the year outlook last quarter.
There is no change in our maintenance outlook.
We are adjusting our services revenue outlook to between 198 and 204 million.
This 4 million dollar adjustment at the midpoint is largely due to the fact that our services teams are no longer billing customers for travel expenses since we're not going on site.
Billable travel expenses run through our services line that is zero percent margin.
We have also seen a small number of project slowdown or be put or be put on pause, which has an impact on our expected results.
Overall, we're extremely proud of our services organizations ability to execute ongoing projects remotely with limited disruption.
We except we expect total revenue between to be between 703.5 and $711.5 million for the year compared to our previous range of 702 to 714 million.
With respect to gross margin, we still expect overall non-GAAP gross margin to be between 58, and 59%, we still expect license and subscription margin to be between 78, and 79% even with a higher overall subscription mix and we still expect services gross margin to be between six and 7%.
[music].
We now expect operating income to be between 65 million and 73 million, representing a non-GAAP operating margin at the midpoint of 10%.
We expect free cash flow to be between 65, and 75 million, excluding approximately 11 million of cash outlays associated with our new headquarters. This outlook reflects approximately 10 million dollar impact of the partial early payment of annual bonuses.
While it has been customary for us to provide some preliminary insights into the next fiscal year during our third quarter call given the uncertainty of the macroeconomic environment, we're not in a position to do that now.
That said despite the near term uncertainties, we are confident our ability to execute to execute against the exciting opportunity in front of us.
And we plan to continue ongoing investments to build upon our market leadership as insurers embrace the cloud.
As we transition into our next fiscal year, we will be we are evaluating our approach to guidance with the goal is simplifying the number of metrics to focus investors on the metrics that matter, who will discuss this in more detail on the Q4 call.
Additionally, we will be changing the presentation of our income statement, starting with our 2020 10-K.
Subscription revenue has grown to more than 10% of total revenue we needed to revisit our income statement presentation to comply with FCC guidelines.
On the face of the income statement, we will report license revenue.
Subscription and support revenue and services revenue.
License revenue will include term license and perpetual license revenue.
Subscription and support revenue will include software subscriptions and what is currently maintenance revenue both of which are recognized ratably.
Services revenue will remain unchanged.
This will create a more simplified presentation for investors by segmenting the upfront revenue components, the ratable revenue components, and the time and materials revenue components on separate lines.
We will also continue to present the details of revenue in the footnotes to our financial statements to allow investors to compare with the current presentation and breakout subscription revenue as a standalone item.
Finally, I would like to thank Mike and the board of directors for Entrusting me with the permanent CFO role I'm very honored to move into this position.
Some of you know I was part of the underwriting team on Guidewires IPO when I was at Deutsche Bank and I have always had a ton of respect for this organization.
I'm most excited about the massive opportunity in front of us as we deliver the agile cloud based systems that are chosen industry needs.
In summary, we executed well in the third quarter. Despite the constraints faced by our employees and customers during the cobot 19 pandemic.
The current environment highlights the need for flexible modern core systems, and we look forward to helping our customers and navigate these uncertain times.
Operator, you can now open the call for questions.
Thank you.
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We ask that you please limit yourself to one question and one follow up question. One moment. Please while we call for your questions.
Our first questions come from the line of Chris Merwin of Goldman Sachs. Please proceed with your questions.
Okay. Thanks, so much for taking my questions.
I just wanted to ask about Kobe and in particular, how that relates to the conversations that you're having with insurance companies right now are they starting to rethink their approach at digital transformations at all I know before co bid on you had talked a bit about some of these companies were were maybe not as willing to jump to on prem because they're on the mainframe.
And they want it instead to go.
All the way to a cloud system, but just curious like as you have the dialogue with your customers who are seeing in some cases, some disruption to their business hi, how are they thinking about progressing their digital transformation efforts. Thank you.
Oh, Yes, I think.
There's absolutely no doubt that I.
I think every insurance company in the World is thinking about the digital interface.
Used to interact with their customers I will speak into one of our.
One of our top customers and they said the mindset that they've taken is that every single person and every single company.
You know has taken this last couple of months to assess all of their recurring payments all their bills.
And there has been doing that digitally and so the digital interface is the mechanisms that these companies have for engaging with people have been exercise in a way that is pretty abnormal and I'm sure. It absolutely is.
Causing companies.
I think about.
How they can execute more effectively on those.
Types of projects.
That said.
You heard us talk about.
So the nature of the solutions that we provide on either Guidewire is not something that you put in to deal with a one month.
Deals.
Project cycle to solve a problem very very acutely I think it's the insurance companies that have made the investment.
You know over the past few years there in a very good position to be able to adapt to these things and adjusted these things very quickly.
So I think.
Overall coated.
And like I said that that's sort of assessment of what is our digital transformation strategy look like is going to help us.
I would say we need to get through this sorta period of uncertainty related to the economic conditions that were facing right now before that sort of kicks in.
That makes sense.
Yes, that's perfect. Thank you and maybe just a follow up on cloud gross margins I know one of the focus is at the analyst day last year was.
Figuring out how to scale up is gross margins over time.
Based on what you've seen so far in can you talk about your confidence level in the long term outlook that you gave for gross margins for the cloud business and could we even see a multi tenant version of guidewire in the future. Thanks.
Yes. Thanks, Let me, let me touch on a per second Jeff and then you can offer your your perspective.
I want to talk about asking for a second in the release that I talked about.
We made a very very significant investment in a layer on top of AWB west to facilitate our ability to run.
Multiple instances of Guidewire more efficiently.
Across the service I wouldn't exactly technically call that multi tenancy, but theres a degree of multi tenancy in the efficiencies.
It implies.
Embedded into that release, we've also those those services that I was talking about that we've released as part of this as part of the Aspen release, our multi tenant services.
And so would you want to think about is the blended model, where we're able to give the insurance company our insurance customers.
The surety of a single instance, a single database segregate the segregated data at the same time be able to provide services that are super super efficient for us to run an update and augment the value that they're getting from the core service.
You know I think.
We do I do remain confident that we will get to the long term.
Economics in terms of the margins that we that we marked that we marked out.
The question is just how long is going to take us to do that Aspen was a super Super important milestone in that journey and now I'll, let Jeff comment.
Further on how we can provide you detail on that.
Yes, I have only thing I would add is as Aspen as a as a as they really critical step for the company and as we inspect our financial models. Each one of these steps we take.
That path to that visibility to that end state becomes more and more clear and so now as we inspect our financial model. We have a number of inputs that we have some history with we have some meaningful expectations about where they would go and we can start managing the business to that so.
It's becoming more and more clear with each one of these new more cloud native releases that comes out so thats been helpful backdrop.
Thanks, Larry and Chris so much.
Our next question, it's comforting the lineup Sterling outside of JP Morgan. Please proceed with your questions.
Yes, Thanks, Hi, guys I was curious in terms of the commentary around elongated sales cycles, obviously unprecedented environment that we're in.
You Peel back the I need a little bit further how much of that along didnt sales cycle is concerned by the customers around their own internal budgets versus just the logistics of negotiating in this environment versus something else.
Yeah, It's interesting question.
First thing I want to reenter just make sure as clear as we do see the demand there.
You know these projects are real there there is a.
Clear demand for this and under normal conditions sort of pre coded.
I would we would we would just had a lot more surety about.
How these things would progress the dynamic that we're seeing is just.
Just increased.
Questioning about is this the right month to do this is this the rate quarter to do this and are we in our we really looking at all the risks associated with our that the operating budgets. These insurance companies in sort of just double and triple checking the assumptions, which in a normal environment with a normal degree of uncertainty.
The.
You know just doesn't just doesn't happen.
And so.
No I guess I would I would say as we see I'm hopeful that as we see the economies start to open back up and the surety associated with macroeconomic conditions.
Improve.
Some questions as it relates to.
Just how the overall economy is going to function going forward.
I think that that will improve.
You know and we're looking we're looking that this literally on a daily basis and starting to see signs that.
Some of the even longer term deal cycles are starting to pick up and people are starting to answer the phone and just have the just have the mindset, if they're willing to engage with us on what is very very often a multi year journey. So.
It is it is a challenge for us to get through but but I really do remain confident in the long term demand and the long term potential for us.
Got it and then one follow up is there any hindrance to implementations by not being able to get onto the customer president and the current environment.
Yes, it Super question and I'll be.
Just totally direct with you. This was the biggest concern that we had when this thing started in early March where are we going to be able to continue to execute on these project implementations in this environment and the unequivocal answer to that is yes.
It is absolutely amazing.
What im not just guidewire, but I think the insurance industry itself has pulled off in this transition to a work from home environment.
Upgrades are happening releases are happening.
Like the systems are continuing to run the call centers are running.
For you now from a work from home environment.
And it it really is a phenomenal.
I don't know data point, I guess about the state of where we are with digital transformation in our industry.
That that went from being something we were all very very worried about and focused on addressing to something that we feel pretty confident and actually very confident in.
Going forward and.
I'll tell you I think it's going to change in the long run too you really don't see you know the majority of people are saying Hey, what can we learn from this and do we need to be onsite quite as much as we were before and can we find a new way to do this and break some of the habits that we used to have and maybe just get a little bit more.
Active and more efficient.
On these projects going forward, so I really see that as a positive.
Thanks, guys.
Thank you.
Thank you our next questions come from the line of Tom Roderick of Stifel. Please proceed with your questions.
Hi, guys. Thanks for taking my questions appreciate it.
Just kind of piggy back on on Sterling's question does what Mike I'd Love to hear a little bit more just in terms of.
The cadence of conversations we've heard this time and time again from companies throughout software with big transformational deals. They just hit the pause button in the spring. So I think we all understand that.
Understanding that it's a little bit of a race against the clock with your fiscal year I'd love to just sort of here. How these how these conversations with your tier one thing there are potential cloud deals are shaping up with respect to give any visibility going into the fourth quarter and then naturally some of those will push out a little farther and again, we all understand that but with respect to.
The idea of a fiscal year.
Sort of ending does that kind of put a pause on that sales cycle or do you sense. The urgency as you reengage with these with these tier ones in cloud customers at say it doesn't really matter in July or August or whatever they're ready to do it when that when the budget is available can you kind of take us through the cadence of your conversations that the sea level.
Sure.
I I guess.
I'm trying to think about what additionally, I would say.
Deals are still there when we look at the pipeline that we're looking at in Q4.
Yes.
We've had like like we said you know a deal pushed and we are seeing additional checkpoints on these decisions just.
My perspective is just making sure that our customers have as much data as they need in order to make this decision now and so it's sort of theres a lot of complexity, they're dealing with in terms of the puts and takes associated with co bid in the impacts that it has on their business in the quarter.
Sections, they're making about.
The overall macroeconomic.
Conditions that add those things improve it starts to look more like we'll be able to get.
Get those deal done, but that said like I said, we have had deals.
That pushed across a boundary.
Okay, I, just keep coming back to the mindset that Guidewire is absolutely a multi year company right. We're thinking about this in terms of 510 years and creating a system that is going to work for this entire industry and our entire customer base and so this.
This this co is 19 pandemic I want to make light of it but we think we're going to get through it. The industry is very resilient the demand for our core systems in the modernization of these systems is still there and so whether all these deals are happened in Q4 or some of them slipped to Q1.
Next fiscal year, we're going to do our absolute best to make the case they should be done in Q4.
But we do have that visibility into that overall demand environment and remain very very confident.
In the operations of the company.
And so you know I guess in terms of answering specifically your question about giving you a little bit insight into how they're thinking about it I just think that as you could probably imagine everybody is just trying to make triple sure that they've thought through all the ramifications of decisions like this before they.
Before they make that go decision and that's just causing the sales cycles to be slightly lengthened.
And that's what we're seeing and we're continuing to work through it but as things improve.
I think that demand environment will improve.
Yes, that's really helpful. Thanks, Jeff a quick follow up for you.
We've heard from again, a number of software companies, which customers kind of pushing back on payment terms and you're not exactly in the most troubled of industries with customers. They can't can't pay or have to push out payment terms, but any any issues that we should sort of be aware of in terms of payment deferrals or customers asking for concessions at this point.
It really hasn't been material a couple of our smaller insurers have asked for some concessions, but we haven't seen anything material number.
Fantastic. Thank you both appreciate it.
Thanks, a lot.
Thank you our next questions come from the line of Ken Wong of Guggenheim Securities. Please proceed with your questions.
Great. Thanks for taking my question.
The first one for you Mike.
Thinking about the slight push out the delays just wondering if you're seeing anything different in regards to cloud transaction versus traditional on premise is there any.
On longer than the other day, both seeing similar type delays from from customers.
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Yes, I'm trying to think answers as like a distinction I would say no.
The biggest thing you guys kind of keep in mind with respect to cloud transit transactions for us is.
When they are a in existing customer what we're working through that customer is a timing around an upgrade a timing around work related to making sure that implementation is ready to be run on the guidewire cloud and the timing and how exactly we.
You know they budget for that expense is really more of the issue.
Than anything specifically, you know cove, it or non coded.
When I think about the business being a lot.
The distinction between the upgrade of our installed base to the Guidewire cloud in the benefits that were able to achieve from adding functionality and capabilities around.
Around digital transformation, and agility with where the product release like Aspen.
And it slightly different for a customer that's going from a legacy system and going directly to a modern system.
It's those kinds of each one of those scenarios has has unique dynamics.
So I don't think Theres a distinction between those two things as it relates to co related.
Uncertainty I, just think like I said.
These insurance companies or just you know bike nature and by design very careful and very thoughtful about the way. They approach. These decisions and these systems decisions are incredibly strategic an important for them and so.
You know it's this situation is just going to create a little bit extra work for us all in working through it and that creates a little bit.
More uncertain season in the normal quarter about our ability to project, what closes and Doesnt close.
But I'm very very confident that we'll get through this.
Got it got it and then Jeff one for you.
I guess I was little surprised to see you guys had sort of a nice from multi year activity driving Tom I.
I guess, how should we think about customer appetite for for longer duration deals going forward is that a trend. You continued takes expect to persist into fourq you perhaps beyond.
Yes.
Yes, I mean, we've always had customer appetite for signing longer term deals and as you know as we migrated into assay six so six we put that limit or on our customers in order to try and preserve a revenue recognition pattern.
Argue now is is that we have air our as a metric that normalizes through a lot of that complexity. We can do the right thing by Guidewire and the customer and start considering some of these longer term arrangements again, so we are expecting to see some more of them.
Our standard two plus one framework still is our standard contract framework that we are engaging with customers, but my expectation as you may see more of these and the only really impact to revenue on the on Prem term license deals.
Got it thanks guys.
Thank you.
Our next questions come from Bob on sorry of William Blair. Please proceed with your questions questions.
Hey, guys. Thanks for taking my question and.
Just piggyback on Tom answered question, but with a different twist, so hopefully not beating this this dead horse here, but.
We talked about slowing sales cycle, but I'd like to put that a little bit think about RFP. So talking to some of your bigger partners I would say some of the big four days uptick in RFP, which I got that could be six months out eight months out well, let's think about multiyear sort of engagement. The customer has that has those Abbott RFP circle back to you are you seeing an uptick in RFP.
Add requests for proposals across your customers I've been a quick follow up.
Short answer is no I would say, it's pretty aligned to the normal.
You know our normal demand cycle like I said before I think that theres sort of two levels around which.
People think about these digital transformation projects as you might think what can we do sort of neatly in sort of maybe.
A.
A quicker approach Guidewires approach is really to address the issue from a core system perspective.
And.
To be honest with you that the in the first made the coated.
We saw a drop off in that activity that has started to pick up and get back to normal, but I wouldn't say that we've seen an uptick.
RFP activity for all core system modernization.
But we know like I said it hasn't changed dramatically.
One way or the other.
Just one thing that I would add on and Mike referenced in his script was.
I was just the activity we've seen in our partner community around getting cloud certifications and we've seen a really interesting tick up there, which as you know I think an exciting leading indicator and may correlate to some of the reference checks you are doing.
Yes, no other as mentioned the RFP activity.
Some of the Big close to me up and then maybe haven't trickle down to you yet because it's early for going to start filling that up but that's an interesting but those out plays out over multiple quarters, I guess, a quick follow up side and letting more longer term here, obviously other consumer side this disruption and the different transmission of the critical because consumers want responses real time in the legacy systems are doing it.
And you think about the SMB business I'd say, it's still very much agent based on Dyco disrupted obviously, the consumer business given the fact that with co bid with all of this new owner wants to go through someone Hasnt agent based model you have more competition in the business side.
I'll be insurance World said, Hey, we need to rebound somebody says that the more real time or cotton able to receive any traction or interest our discussion on that side.
And contracted up your consumers I'd love to answer that but there's a difference on that side at all I get about model is still heavily agent based in many cases.
Yes. Good question I would say this ask I wouldn't say this is related to covert necessarily but we have and I have had.
Numbers numbers of conversations about the relationship and the value chain associated with the way insurance for small businesses is sold and produce and managed.
And there's just an obvious.
And if there is really a plethora of opportunity to improve the efficiency of that value chain and guidewire can play a very very big role for carriers and thinking about that is not at all and uncommon conversation.
We have with customers on the demand side.
So it's a great it's a great insight.
Helpful. Thank you guys appreciate taking my question.
Our next question has come from the line of Michael Turits of Wells Fargo. Please proceed with your question.
Okay, great. Thanks, good afternoon.
Just want to look at some of the recurring metrics subscription revenue remained strong grew more than 100%, but yeah, our target for the year coming back a bit I mean, it it sounds like most of that change just comes down to Q4 in the current environment is is that right and then on the ramp. They are our comment are you, saying as some of that new business.
Potentially elongates here that next year, you wouldn't expect to see a similar shape or step up as compared to what you're seeing this year is that the right way to capture that.
Yes so.
Absolutely.
Our adjustment to our outlook is reflective of just the difficult selling environment in Q4.
And that's that's the context, there with respect to fully ramped fully ramp air our is a concept that will be a pretty.
Potentially volatile metric and it correlates to large cloud deal activity with significant ramps and we just saw a lot of that in Q4 last year. It as we're moving into this year. Our expectation was that that trend would continue so little bit of more challenging environment. This year that has caused for a difficult compare in Q4.
In particular, and so we just wanted to highlight that for investors.
Okay that makes sense and then maybe just sticking with it Jeff on margin can you just expand on some of the key sources of margin upside here is is there any way for us to think about how much of that is related to the new environment. I know you mentioned some cost offsets related to just the initial work from home phase, but I guess I'm wondering if margins are.
Troughing cure or if there is some temporary changes.
The model just given the way the works being done is changing that we should just be aware of and thinking about forecast here.
Yeah.
We're still investing in our and our platform and what we think is going to be.
The platform that we monetize for the next 10 20 years and we're obviously in the midst of what is a very complicated transition.
The current environment has an impact on some near term expenses whether its expense.
Travel and expense or some other smaller things, but the takeaway is we're still investing this business model transition, we're kind of in the heart of it right now and that's when the margin impacts our most acute.
And we'll we're going to be updating folks as we exit Q4 and expectations for next year and so not a position to comment whether this year next year as where we would expect the bottom out from an operating margin perspective.
But that's it that's how we're thinking about it.
Okay.
Appreciate the color. Thanks.
Thank you.
Our next questions come from the line of Matt Vanvliet of BTI Ji. Please proceed with your questions.
Hi, guys. Thanks for taking my question.
I guess.
Looking at what some of the business activity as Ben both through the quarter and and through the first.
A month plus some of the current quarter.
But given given your geographic footprint across much of the world.
Serious if you're seeing sort of a pickup in business activity, whether that's an asia or as European markets.
Look to open up a little bit more than maybe we are in the U.S.
Every moment.
And just sort of the timeline that you've seen in each of those major regions as.
As you know cobot as has spread across on a delayed basis through much of those much of those reasons.
Yes, it's interesting question I would say that I haven't seen any.
Real relationship with the timing of.
You know the.
Some of economies opening up I don't know whether that has to do with the dynamic the way the in the insurance customers we serve.
Operate but I haven't seen a pattern.
With respect to that.
No I think if anything its.
Thinking about how it relates to.
Our travel you know and our ability to work.
And how it changes that we operate the company.
I'll be nationally rather than a change in the demand environment associated with what we're selling.
But like I said before we're operating so effectively.
In this current environment that.
It's not really something that worse, specifically concerned with.
But the short answer is no I haven't seen anything regionally related to how this is evolving.
And I don't know Jack you some nab.
No I mean, I, obviously, our sales cycles are so long that these decisions take a significant amount of time. So I think it's harder for us to maybe see some of those shorter term geographic macro impacts and than others.
Great. Thanks, and then maybe as a follow up Joe.
And just curious as you continue to talk about investing in the cloud for the long term.
Are you realizing some cost savings from premier the reduction in travel or potential.
I guess longer term impacts of of having people either work remotely or using some of what some of the tools that you've been utilizing here.
Reduce costs moving forward and maybe reallocating some of those.
In particular.
Just curious how you're thinking of that so far it so much as you're looking at planning got mixture.
No there are absolutely opportunities there that we're evaluating deeply right now and we are in the throws of our planning for for next year. So.
There are some pretty interesting outcomes as a result of this and and just some of the learnings about how efficient we can be.
That we will build into our thinking.
Just wanted to make sure that we're not we're not viewing this as an opportunity to retrench or think about our cost structure just because we're in the early stages of what we think is a very critical platform shift in the industry. So we're just that were not slowing down we're not taking our federal our foot off a gas, but there are definitely opportunities.
Around some of the areas you mentioned.
Understood Okay, great. Thank you.
Thank you.
Our next questions come from a Inc. Tandon of Needham. Please proceed with your questions.
Hey, Good afternoon, guys is actually how Peterson on for Mike. Thanks for taking the question its.
Just wanted to get a little more love your thoughts on that their spend a lot of press on a lot of PMC carriers. They showed some policy rebates such to customers and fewer miles on the road dealing more remote environment to has that changed.
Discussions whether it's any interest in additional interesting subscription based deals.
Or any anecdotally like potential changes 90, but that's just kind of want to see how.
The impact on the PNC industry is having on some of the discussion that you guys are having even if some of the sale cycles are getting pushed out.
Yes. So you know you. This was one of the real early.
Things that we recognize and our customers recognize once these lockdown Scott.
Turned on worldwide was this dramatic drop and the amount of miles driven claims.
Volume et cetera, and you know the insurance or reinsurance industry in my opinion has done something phenomenal in.
In these rebates in premium reductions to align to that just as it is effectively a stimulus.
That the insurance industry is provided to these people who are in many cases need need those funds pretty a lot.
I really see that as a onetime event and I think that they're looking at it like that that we're going to get back to normal state.
You know eventually and so in terms of recurring the recurring nature projects and software IP projects I haven't seen anybody.
Think about that structurally.
I would say, there's a lot of discussion about whether or not this pushes the industry more towards pay per mile utilization based insurance, we've got a great guidewire customer examples somebody who's using policy center to do that.
Now with the modern system, you can execute projects like that and that's really interesting and theres been a lot of discussion about whether or not that's something that structurally changes as an outcome from this but as it relates to I.T. budgets and projects.
The answer is no.
Okay. That's helpful. And then I guess, just a quick follow up on the margin cash flow.
And your thoughts on you know, what how you would balance whether its protecting profitability and cash flow.
First kind of long term investments for the cloud if kind of the sales cycle stay elongate Ed or after we get like a second wafer or something like that just want to see how you guys are thinking about.
Bouncing then the near term impact for so long term investments.
Yes, it's a really good question and.
It's a very active conversation were having internally obviously, we are tremendously excited about this opportunity in front of us and an opportunity to expand our town and build on our market leading position in the industry. So.
We want to make sure that we're doing the right things with respect to investing in our product and investing in our cloud operations to be ready for what we think will be a wave of.
Cloud migrations in the future here. So so that's first and foremost and then as we kind of inspect our year and inspect.
Bookings and how things are are shaping out in a particular period, we may make adjustments, but but we're not.
We just want to make sure that we're keeping our eye on the long term.
Great. That's helpful. Thanks, guys.
Thanks very much.
Our next questions come through the line of Rishi Jaluria of D.A. Davidson. Please proceed with your questions.
Hey, Mike and Jeff Thanks for taking my questions, Jeff Congratulations on all of the pulled on promotion really well preserved.
I want to start just by asking a little bit of an industry type of question. Obviously PNC is much more resilient and while the other industry is out there not seeing the same sort of headwinds just get a sense I'm on the budget side with interest rates kind of at all time lows and seeming to be here is that something that is pressuring budget at all.
Or is that really not a factor that comes up in conversations I've got a quick follow up.
Yes, I would tell you that.
Short answer is not a conversation that comes up however, there's variety of puts and takes that are at play in each individual insurance company related to this and.
And it's probably it's really is probably one of the factors that's behind the scenes, they're evaluating and deciding whether it's appropriate for them to invest in green light the project that they're thinking about with us.
Their savings and there's higher expenses and there is more risks and theres less risks and there's just a whole very complicated equation.
That our customers are dealing with across a variety of different geographies in different lines of business.
And all that complexity, they're dealing with creates the the dynamic.
That I was talking about in terms of them being able to say that now is the right quarter for them to start steel or start this project excuse me.
Wouldn't say at an interest rate dynamics is one of the things that you know that specifically we talked about it's certainly something we think about certainly something would think about but I would say there's a variety of back in addition to that that are at play.
Kind of thought that's helpful. And then just quickly with Kadare connections going virtual.
How are you thinking about the potential impact on pipeline building on customer networking them on the partner side, just wanted to get a sense for for what you're thinking about that thanks.
Well you know, it's a really important event for us so I'm not going to sugar coat, it and say that it's not really disappointing to me that we're not going to be able to do that event in person and I look forward to getting back to those events and getting back to that approach to enterprise sales just as soon as it's safe to do so I will say, though that I've been very very.
Impressed.
With a couple of things related to this number one is the creativity that our teams have shown in terms of creating new digital content, new mechanisms for connecting with customers and number two I would say that.
It is phenomenal we easy for us to do phone calls with customers now right my ability to do a 30 minute call with the customer or a prospect.
As much much easier in this environment and that's something that I hope stays.
So the willingness of people to take a few minutes and watch.
A video or appeal read a piece of collateral that we've made about our latest release.
That's gone up that's kind of way way up.
Just anecdotally I had two conversations literally two conversations as we.
Where customers in the midst of sales calls have said almost verbatim.
Normally don't do this but I watched the video that you guys sent me last week and I really enjoyed it and so that gives me some confidence that we're going to be able to use the digital mechanisms to start to replace some of the things that we're losing one more just because we're not able to get together and person as an industry.
So hopefully that helps.
Yes, hi, really helpful. Thank you so much.
Our next question will come from the line of Pat Walravens of JMP Securities. Please proceed with your questions.
Hi, This is John for Pat. Thank you taking our question can you just give us a quick update on the competitive landscape.
You're seeing there.
Thank you.
Thanks for the questions short answer is we haven't seen any change in the competitive landscape, we talked about this or.
Remains a competitive market, but the dynamics is we see it.
In terms of when rates and competitive deals haven't really changed.
It remains pretty steady.
Okay.
We have no further questions at this time I'll now turn the call back over to Mike Rosenbaum for any closing comments.
Alright, Thanks, all for participant in the call today, we delivered solid quarter during a very dynamic macro environment. Despite some near term challenge. We're all excited about the demand we see in a in technology and advancement of our cloud strategy, where as optimistic as ever about the long term vision.
And the opportunity that we see in front of us and I hope, you're all safe and well and look forward to connecting again in Q4, so thanks, very much and goodbye everybody.
This does conclude Tonight's conference you may disconnect. Your lines at this time. Thank you for your participation have a great evening.
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