Q4 2020 Guidewire Software Inc Earnings Call
Welcome to Guidewire fourth quarter fiscal year 2020 financial results conference call. At this time all participants are in a listen only mode. A question answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone Keypad as reminder.
Conference is being recorded I would now like to turn the conference over to your host Mr. John Cooper CFO. Thank you you may begin.
Good afternoon, and welcome to Guidewire Software's earnings conference call for the fourth quarter fiscal year 2020, which ended on July 31st.
My name is John Cooper, I'm, the Chief Financial Officer, and with me on the call as Mike Rosenbalm Guidewires Chief Executive Officer.
A complete disclosure of our results can be found in our press release issued today as well in our as well as in our 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 and 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 Carbonite channel our business and other matters.
These statements are subject to risks uncertainties assumptions and are based on management's current expectations as of today and should not be relied upon as representing our views as to any subsequent date.
Please refer to the press release on a risk factors and documents, we file with the FCC, including our most recent quarterly report on form 10-Q.
And our annual report on form 10-K to be filed yes, you see.
For information on risks uncertainties and 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.
A reconciliation of non-GAAP to GAAP measures is provided in our press release.
Additionally, reconciliations additional data are also posted in the supplement our IR website.
With that let me turn the call over to Mike.
Thanks, Jeff and thanks, everyone for joining us today.
It's now been a little over a year since I joined Guidewire and this call marks the assessment of my first fiscal year as the leader this incredible company.
People say, we're should expect the unexpected and I could say without a doubt we exercise that principle pretty thoroughly this year.
When I joined we talked a lot about the cloud transformation, we are embarked on.
And now a year later when I assess the progress we have made I can say I have absolutely no doubt that we're on the right.
We continue to build proof points and momentum across product services, and our ecosystem and most importantly, with our customers.
Each of those proof points builds confidence credibility and trust and helps us continue to build cloud momentum.
Regarding Kobe and our operating model things are little changed since last quarter.
We have opened a few of our international offices in accordance with local guidelines, but the vast majority of our employees are still working from home and not traveling.
The company continues to operate effectively as you will see in our product and sales momentum in Q4.
One of the positives I personally experienced it said social norms now allow me to connect with customers virtually a lot more but I might have before using airplanes in hotels.
This has given me an opportunity to do almost 50 checkpoints with insurance technology is executives across our customer base and around the world. These conversations even more than the objective measures. Our progress in Q4 have validated to me that we are on the right.
As we execute on our product vision for Guidewire as a cloud service I believe it's just a matter it's time for each customer makes the decision to upgrade to guide Barclays.
So while I was excited when I joined a year ago, I'd say I'm feeling much more confident now that we're on the right.
Turning to our financial results, we ended fiscal 2020, beating our guidance for revenue and profitability, but they are finishing the year $514 million driving this performance was very strong momentum in God work cloud products with 10, Insurancesuite cloud deals and three insurance now.
Deals closed in Q4.
Combined with sales of on premise add ons expansions and new sales that exceeded our expectations.
Subscription revenue grew 84% to $120 million and the fiscal year, and we are positioned well for subscription growth into fiscal 2021.
We were pleased to see customers and prospects transact in a meaningful way in Q4.
This fight a degree of uncertainty due to cope with overall the insurance industry remains a strong market continues to be focused on the digital transformation projects that drive our business.
We are in a great position to be the technology and cloud platform leader that powers. The PNC industries digital transformation for decades to come.
As we extend our leadership position and transition the industry to our cloud platform.
Last quarter I mentioned that we were poised to release Aspen, our first cloud optimized product release for insurance suite.
In June we did exactly that with a virtual public launch attended by more than 15 Entre people.
That's been unifies digital analytics, AI and our core transaction system. It's a one platform delivered other cloud service Aspen introduced our cloud services architecture, featuring new cloud native services for rating and business rules and a new cloud data pipeline, which provides access to core system data in real time.
It's truly the next generation PNC cloud platform.
We've already seen exit existing guidewire cloud customers upgrade the Aspen with M.C. completing the first stage of their upgrade to Aspen and only a week USAA and American family have started their aspen implementations.
[noise] Aspen is already contributing to our momentum as cloud upgrades and new customer adoption with 10.
Customers selecting insurance, we cloud in the fourth quarter.
This brings the total number of insurance, we cloud customers 26, doubling since the end of last year insurance now our full suite cloud solution purpose built for smaller U.S. insurers also had a great year with six new deals three of which were in the fourth quarter.
62 insurers have now purchased insurance suite for insurance now on Guidewire cloud.
Early success with Aspen is just the beginning as we look forward to introducing new releases every six months with our band for lease next scheduled for November followed by Cortina early in 2021, and so on and so on we expect each new release, well have new capabilities and cloud native services, our customers will use to him.
Prove how they engage with their policyholders and agents innovate and grow efficiently.
As is evidenced by the early indicators for mass been upgrade these upgrades will be easier and easier for customers to adopt accelerating the value they derived from running guidewire.
Looking at the fourth quarter in more detail of the 10 Insurancesuite cloud deals we closed six customers purchased upgrades from self managed to our full insurancesuite cloud offering. This includes three tier two insurers would be the Canada, Texas mutual insurance company and why when Easter mutual insurance.
Company and three tier three insurers Germania, a copy tell and western national.
Germanium cloud upgrade included a major expansion in the DWP scope of their plan deployment Cappy Childs upgrade included a significant expansion from filling center only to the full suite in the cloud.
Yes, Hey insurance group, a AAA insurer selected Guidewire cloud to migrate Claimcenter C.S.A. offers automobile homeowners and other personal lines of insurance to AAA members through <unk> AAA clubs and 23 states in the district of Columbia.
Finally, threed customer selected Insurancesuite cloud for insurance lines, not previously managed by a guidewire core system.
My free North America selected Policycenter on Guidewire cloud, including digital for commercial lives a tier one ensure chose claimcenter cloud for a new insurance brand to support the Greenfield digital first renters insurance line and another tier one insurer selected all of insurance suite cloud for a new.
Innovative insurance brand targeting commercial auto use cases.
As I previously mentioned, we also continue to our cloud momentum, but all in one course solution insurance now.
Three deals in the fourth quarter.
And existing tier one customer purchase insurance now for a 100 million dollar GWP commercial auto line.
The oldest insurer in the United States, the Philadelphia contribution ship, which by the way was founded by Benjamin Franklin well be migrating their insurance now the point it to Guidewire cloud and cure auto insurance became a new insurance now customer in the quarter.
Insurance now has proven to deliver very tangible business benefits for our customers and we look forward to seem that success. These new customers can achieve.
Very pleased with the turnaround we activated that insurance now over the last year I'm confident that we have the right product team and go to market motion to build on the success in fiscal 21.
In addition to cloud momentum, we continue to expand the relationships and signed new customers for on premise products. This new on premise business was particularly strong internationally, reflecting our belief that customers in North America earlier in the cloud adoption cycle.
We added three on premise customers in Europe.
Bode was assurances of Switzerland, and colonnade insurance based in less than Luxembourg selected Insurancesuite.
Sky distribution VR GE group.
Startup based in Poland selected Insurancesuite and digital Additionally, Hannover re a tier one insurer in Germany, and Guidewire are undertaking a pilot to prove out the ability of policycenter to be used as an underwriters cockpit.
I never really well take inward reinsurance policies created by brokers and Cedents and populate policy center in order to provide a consistent you to their underwriters rounding out our new on premise business. That's your five insurer in Canada selected Insurancesuite.
Digital and data.
At the end of fiscal 2020 $518 billion of direct written premium was under a license for at least one guidewire core application up 3% from last year.
This growth rate as a result of new sales activity this year being more focused on expanding our footprint at existing customers through add on business in cloud upgrades versus previous years.
Turning to go lives a go live event is always an exciting time for our customers and customer adoption is how we ultimately to far in our success in the fourth quarter. I was pleased to see 14 customers go lives on implementations for 27, Guidewire products, including three cloud products go lives.
Great to see our services team and our S. I partners continue to drive successful go lives in a primarily virtual delivery context.
Meanwhile, our growing partner ecosystem continues to be an important contributor to our increasing market leadership, our partners facilitate customer implementations and help us accelerate customer success with value added solutions for insurance suite.
We ended the year with approximately 620 consultants from 28 partner companies, who have now earned the advance certifications required for Guidewire insurance, we cloud implementation is up from approximately 475 as of the end of last quarter. We believed that this growth is an exciting proof point for the API.
Unity, our partner seat in the future of Guidewire cloud.
The Guidewire marketplace has also been a valuable resource for customers to drive value and simplify integrations across the insurance lifecycle. For example, the general estimates they will generate a million dollars per year cost savings and reduce payment cycle times by 80% as it rolls adult of automating their claim payment process by using Guidewire.
And our marketplace partner Insurepay.
And fiscal 20, our marketplace <unk> ecosystem grew to include 91 solution partners up from 52, a year ago, providing more than 140 apps.
We introduced a number of new partners in Q4, one new partner Handy provides an app that connects claimants directly to approved contractors seamlessly. After a claim has entered in claim center yeah walks the contractor through the inspection eliminating the need for adjuster inspections contractor beds and significantly reducing cycle times cost for.
Insurers and increasing customer satisfaction. This is just one example of the many innovations our ecosystem partners are delivering to the insurance industry through our marketplace I continue to be energized by what they can accomplish by integrating into our foundational core systems.
In summary, we had a great fourth quarter that capped off an important year for our company and specifically for Guidewire cloud, we're starting fiscal 2021 with growing optimism for the business as excited as we are about our cloud success. It's also important to realize the Guidewire cloud is still in the early days a penetrating a large market.
Opportunity the vast majority of our customers and the broader industry have yet to take the first step in their core cloud journeys. The strides we have made towards advancing our cloud platform and demonstrating customer success are important reference points for the industry, we look forward to leading and supporting new and existing customers instead, they about evolved.
Core cloud based core systems, and look forward to serving them as effectively as we possibly can.
Now I will turn the call over to Jeff.
Thanks, Mike.
As Mike noted, we had a very strong Q4 highlighted by 10, new insurance, we cloud deals.
They are ended the fiscal year at 514 million up 12% from a year ago.
We measure air on a constant currency basis during the fiscal year and revalue a are at your end for current FX rich.
Rate changes between July 29 chain in July 2020 resulted in a 5 million dollar benefit there are.
As a result air our grew 11% on a constant currency basis.
A little more than half of new a are added in the fiscal year came from new deals sold to new and existing customers and a little less than half came from a our step ups from ramp deals sold in prior years.
Fully ramped they are which is defined as the annualized recurring value of all active term licenses subscription and maintenance agreements at the fully ramped annual price outlined in the customer contract ended the year at over 600 million, representing 13% year over year growth and 12% growth on a constant.
Currency basis.
We will continue to discuss fully ramped they are on an annual basis as we work through this cloud transition.
Turning to the income statement I wanted to remind you all that we have adjusted our income statement presentation, and we will address this new presentation on the call today.
Between our press release on the financial supplement which can be found on our IR website, you should have all the details to reconcile to our prior presentation.
Total revenue in fiscal 2020 was 742.3 million ahead of the expectations, we discussed last quarter.
Subscription revenue for the year was 119.7 million up 84% year over year due to ongoing insurancesuite cloud activity.
Subscription new sales ended the year at just under 70% of total new sales.
Subscription and support revenue ended the year at 203.5 million up 35% over last year.
License revenue in fiscal 2020, which no longer include subscriptions was 301.6 million.
To compare with our prior presentation license and subscription revenue was 451.2 million well above our prior expectations.
The fourth quarter benefited from 17.6 million, an incremental revenue from deals with duration longer than our standard to your initial terms followed by our annual renewals.
Going into the fourth quarter, we had about 2 million of deal duration impact embedded into our outlook.
Even when normalizing for deal duration license revenue was ahead of our expectations due to higher term license bookings.
For the year.
Yeah.
License revenue was ahead of our expectations due to higher term license bookings.
For the year license revenue benefit if were 33.5 million an incremental revenue from longer duration deals.
Services revenue ended the year at 207.3 million down 41.4 million from last year, but ahead of our expectations as our services organization effectively managed ongoing projects, while working from home.
The year over year decrease is primarily driven by the completion of large guidewire insurancesuite implementations since the end of last fiscal year increased involvement by aside and cloud implementations and reduced billable travel associated with cobot Nike.
Turning to profitability, we will discuss these metrics on a non-GAAP basis.
Gross profit was 452.7 million for the year compared to 442.6 million a year ago.
Overall gross margin was 61% and ahead of our expectations because of higher than expected term license revenue.
Subscription and support margin for the year was 55% compared to 66% a year ago.
The decline was the result of significant investments in our cloud operations function to support our growing insurancesuite cloud customer base.
Operating income was 104.8 million exceeding our guidance range due to higher than expected revenue.
We ended the year with 1.4 billion in cash cash equivalents and investments.
Operating cash flow benefited from strong collections and ended the year at 113.1 billion.
Free cash flow fund finished at 98.5 million, excluding 11 million and final expenditures associated with our new headquarters.
Turning to our outlook for the first fiscal for the first quarter in the fiscal year 2021, we're energized by the momentum we see in our club business and at the same time, we recognize the unique macroeconomic environment, we and our customers are currently facing.
In the first quarter, we expect a RV between 509 and 512 million.
A large contract consolidation and the sunsetting of support for our acquired on premise is yes customers are unique events expected in Q1 that contribute to the sequential decline.
The contract consolidation occurred with one of our largest customers who had 12 active licenses, including licenses for noncore products that were not an active production.
And a core product license for a small insurance line that they were they are exiting.
We have worked with this customer can consolidate the contractual framework and put in place one enterprise license agreement with a five year four month commitment.
This customer is still an active guidewire supporter and in our top five as measured by air are.
For the year, we expect air or to grow between nine and 11%, which implies fiscal 2021 air ending a are a 560 the 571 million.
Continued adoption of our cloud products by new and existing customers as a key driver of a our growth.
We expect the industry shift to cloud based core systems will allow us to accelerate a arbroath overtime.
However, we are still in the early days of this transition and we recognize that ensures tend to be cautious and their decision making.
I want to re platforming core systems.
Over the longer term this conservative nature plays into our strengths as the proven market leader, who has demonstrated that we can tackle the most complex core system monetizations.
In prior quarters, we've discussed the impact to our income statement from the business model shift to subscription revenue and the new revenue pattern for term licenses because of our adoption or they ask you 66.
We expect the impact of the business model shift to be apparent in fiscal 2021.
Hey, arc and help investors normalize varying revenue recognition patterns.
To provide better measure of our overall software sales growth.
Total revenue for Q1 is expected to be between 160 to 166 million.
This includes $14 million of term license revenue from contract duration that deviate from our standard.
Primarily due to the large contract consolidation that I just referenced.
Subscription revenue is expected to be approximately 35 million in Q1.
Total revenue for the year as expected to be between 723 and 733 million.
We expect that our subscription revenue will be approximately 165 million, representing 34% growth and support revenue is expected to decline by about 2 million year over year.
Services revenue is expected to be approximately 190 million a decline of 8%.
License revenue is expected to decline.
Is expected to decline due to our shifted subscription sales as well as the impact of multiyear license revenue recognized last year that will not recur this year.
We have not modeled any positive impact of multiyear term license revenue above the 14 million, we have visibility into in Q1.
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We expect total gross margins for the year to be approximately 55%.
But this gross margin will ultimately depend on our final revenue mix.
Services margin as expected to be similar to what we experienced in fiscal 2020.
The business model shift in revenue complexity are also visible in the divergence between our expectations for operating income.
And cash flow from operations.
With respect to operating income, we're expecting an operating loss in Q1 of between 10 and 6 million.
For the year, we expect an operating loss of 5 million to positive operating income of 5 million.
Our operating income was significantly impacted by the revenue recognition patterns reported on our income statement.
Which may vary depending on whether we sell a multiyear term license or subscription agreement.
Thankfully our customers continue to pass in the same way, which is primarily annually upfront.
As a result, just as we believe our AR is the best proxy for momentum, we believe that cash flow from operations as a better measure of our profitability then operating income.
Our cash flow from operations expectations in fiscal 2021 are between 60 and 70 million.
We expect the decline in cash flow from operations as we continue to build out our cloud operations function and invest in cloud capabilities.
This is a once in a generation platform shift for the industry, that's significantly expands our cam and.
And we are investing today to capitalize on this opportunity for decades to come.
Additionally, we expect approximately $15 million less and interest income in fiscal 21.
We expect the spent approximately 40 million in capital expenditures, including 25 million and build out expenses as we're moving to new offices in Dublin, Ireland, Our European headquarters and Toronto, Canada.
Project dates may be delayed due to the pandemic and may stretch into the next fiscal year.
Additionally, our planning for these and other locations takes into account a new approach the offices as we consider more flexible work arrangements that may require less office space in the future.
In summary, we are proud of what the team was able to accomplish thank you for a tremendous result.
We look forward to providing more detail at our analyst day, which will be a virtual that on October 13th.
Operator, you can now open the call for questions.
At this time will be conducting a question answer session if you'd like to ask your question. Please press star one on your telephone.
Hey confirmation to indicate your line is not question Q. You May proceed starts to if you would like your loved your question from the Q.
Since you think speaker equipment and may be necessary to pick up your hands that before passing the starkey.
Please limit yourself to one question as well as one follow up on moment, when we pull for questions.
The first question comes the line of Penguin Guggenheim Securities. You May proceed with your question.
For taking my question and great quarter guys.
First off can you Mike.
We'd love to get a sense of what you're hearing from customers in regard to Aspen, obviously very strong quarter from a cloud deal perspective, but just wondering how they're thinking about adopting aspen with all the new feature potentially dragging out sales cycles or has that shortened the sales cycle.
Yes, thanks for the question.
Yeah.
No I wouldn't say at all that its dragging on sales cycles. You know I think the biggest thing customers are excited about with respect to Aspen is just this philosophy of making the upgrades easier and easier and easier for them to take crate and the proof points that I talked about that which are early.
A couple of customers began the process, but those proof points are positive and I think what you know what I'm hearing from people. It's just real real excitement about the shift in the strategy the product strategy that we've taken from a two year cycle to a six month cycle and a shift in the design approach.
So the idea that we expect these to be just easier and easier and easier to adopt.
You know that you add on top of that.
Started the idea that you can take these cloud native services and you can use them to add to the approach that they're taking to building out new lines of business on a guidewire core platform and it just offers them more flexibility in terms of how they use the system to attack business problems and so I wouldn't say it slows.
Down at all.
It's a it's it's been really really positive feedback that I've gotten from customers in terms of our strategic project direction.
Got it fantastic and then I guess could give you had it for you or Jeff, but as you look at.
So do you guys in the passive obviously well thought out a number of 20% longer term just wondering as we look at this trajectory is it fair to assume that fiscal 21 is the trough and any color you can provide there.
Yeah, I think that I'll, let Jeff chime in and I think we intend to provide a little bit more longer term visibility on the analyst day presentation that will provide you know certainly we see the potential for that when you look at the <unk> you know the the installed base.
Essential that we see you know, but the guidance. We provided this year. It's just based on what we see in the pipeline and what we feel very confident in our ability to go execute on this year, Jeff anything to add.
Yes, I think that's you hit it might be only thing that we've talked about in the past Ken is just the pace of this migration activity as a as the big driver of growth and and you know we're trying to be thoughtful about how we approach that and you know this industry moves at its own pay so.
As Mike said, we have no I'd say better visibility into our guide for this year than we did in prior years and you know would want to be conservative as we think through the next year.
Great. Thanks, Jeff Thanks, Mike.
Our next question comes from the line of Chris Merwin of Goldman Sachs. You May proceed with your question.
Hi, Thanks, so much for taking my question I wanted to ask about a error I think in fiscal 19 air our grew 11% you're fully ramped was over 20% in and this year. If I've got the numbers right error I was 12% to fully ramped was 13% so looks like the gap between those two metrics, it's come in quite a bit.
Just curious like one in particular is driving that is there anything changing with the way that your pricing. These deals and anything you can say about what fully ramped air or might like look like next year relative to your guidance. Thanks.
Yes. Good question I think there are a couple of things driving at one is we exited the f. why 19.
The year over year gross and what we would call and they are our backlog number was actually use like over 300% because that was a relatively we'd always sold ramps, but the way, we engage with customers and a cloud contact and especially in a migration context really accelerated the slope of these ramps.
And so that drove the very significant year over year growth. They are now coming out of fiscal 2001, our fiscal 19, we had a fairly significant amount of customers that we signed in Q4 that were larger customers work with steeper ramps and so that created a more difficult compare year over year.
We said an expectation last quarter that we expected fully ramp there are to come in roughly in line with air our growth. This year, but we're pleased with some of the cloud activity. This year that I'm coming in just a little bit higher than era.
Got it. Thank you and then maybe just a follow up on on premise demand I know last quarter I think there was a headwind there from from a slowdown in on premise demand not just I guess it wasn't in isolation in the sense. It seemed like what customers are thinking about a cloud migration. This quarter. It sounded like you saw a pickup in activity an on prem.
I think you called out a few deals there. So maybe I can you just talk a bit about the state of of demand for on premise and I mean in particular for customers that.
You are considering either going to on premise or cloud I mean, what is their mindset today and what have you factored into the outlook for next year as it relates to the health of the on Prime and cloud business. Thanks.
Well. So first thing I'd say is that we are in a particularly good condition.
Technically.
To be able to support a bolt both customer choices right. The fact that we're starting from a core application you know that's really market, leading and as feature and you know functionally complete as anything in the market.
You know puts us in a great position to be able to provide customers the sort of operating model of choice.
As we discussed previously I think North America is ahead of the curve and relative to Europe, and Asia, and how they're thinking about.
Cloud deployments in cloud implementations I expect in the long run the.
That everybody ill make this switch to the cloud just because the the.
The characteristics of the upgrades and the functionality that we can provide a in a cloud modality or just significantly better.
But that said different customers have different approaches in different mindsets about when that's going to make sense.
I would like I say I've had a lot of conversations with customers and some of them start off by saying you know we've already made the decision strategically to start moving assets to to the cloud and we and we were already underway others are just saying you know we're going to wait maybe until the next cycle, maybe even five years.
That they're just not ready and.
That that sort of customer by customer by customer and so projecting that you know in making an estimate for how much demand.
We'll see quarter to quarter.
No. It's we work with them and and we and we try to predict that but my sense is that as we're able to show more and more functional value and more and more agility that customers that make the decision to go with our cloud approach, we're going to see that shift, but like I said it we're going to.
Great position to be able to offer both and that's why it's exciting to be able to called those out call out those wins because one of the for those customers who are trying to drive digital transformation, you know and but they havent made the decision to go with a cloud strategy in there in there I T shop.
It's great to be able to a to be able to support and serve those customers as well.
That's great. Thanks, so much.
Our next question comes from the line of Bob.
Blair you May proceed with your question.
Hey, guys Congrats and thanks for taking my question I guess I wanted to touch a little bit on the competitive environment.
You've obviously seen one of your competitors go public and that's one I'd love to hear you can see more or less up but the other one Mike obviously still for the lofty.
They've gotten insurance offering and they sort of you read the marketing materials talk like they have a pricing engine the policy engine anything else.
I understand that you think about the space and then short Tech space, you know getting quite a bit of investment how you view the credit environment have there been any changes.
Yes, I think the headline answer to your question is is we haven't seen any changes in the competitive dynamic. We obviously have seen a lot of activity in our market.
And a lot of success in our market you know.
That that I think is not unexpected we're not the only.
Company in the world to recognize the very significant opportunity that call. It. The you know the digital transformation or that Digitization of insurance presents to the world. We like our position very much as you know coming out this from a position of strength with.
Hundreds and hundreds of customers across all tiers, I really feel good about our competitive position and we haven't seen seen a change in the dynamic.
Of the competition, but like I've said on previous calls we compete for these deals.
We have our strengths.
And we lead with our strengths and we aspire to win every deal, but we don't win every deal.
You know it too it's a competitive market.
I really appreciate the sorta, yeah, I don't know the part of your question related to ensure tech investment. It's one of the reasons I'm. So excited about our marketplace and our approach to have an open <unk> you know sort of the philosophy that we can plug these innovative startup technologies into our core systems.
I can't tell you the number of times I hear customers.
Sort of saying you know, we're so thankful that we executed on the Guidewire core program a few years ago. Because now we're in addition to with a modern system with the ability to open the system up and connecting these ensure tax and really start to innovate in terms of how they're able to engage.
With their customers and so that part of it is really really exciting.
Insurance is it's unique.
It's a unique market, it's a really really unique technical challenge that requires that really deep expertise.
In core systems, and it's kind of one of the things Thats been hard for me, but also pretty validating just learning how deep how incredibly deep the investment that Guidewire has made in.
In that core system across claims and policy in billing its somewhat one to one of my you know sort of internal comments is that it's sort of mid misstating. It had call. It one market right. Because you really have to think about this market in terms of all the lines of business and all the states and all the countries.
That we've really invested in over the years to be able to give these our customers a head start in terms of how they approach, bringing a modern insurance product to market.
So when we get you know getting tier velocity question I really think that this is going to strengthen.
The partnership with Salesforce I think that sales force is a you know by this by their acquisition is very serious about the vertical strategy and very serious about insurance industry and I really think they adding the velocity team and the velocity I P is really just going to strengthen our.
Our partnership and make it a you know just more feasible for every insurer in the world to be able to have a first class CRM platform and a first class core system or claims and policy and billing.
Yeah I was very helpful. Thank you and then one quick one for Jeff you know, obviously, historically Q4 has been sort of seasonally the strongest quarter.
And I know you know just comps at about how difficult deal done in terms of how hard to decide to predict sort of the deal timing as we think about next year should we expect the same seasonality on a quarterly basis or is there some sense of the demand partially pent up and also interest on Aston sort of help support growth earlier throughout the year that maybe worse than expected.
You know any deals maybe pushed out to the garden bomb at Michaels early fiscal 21 anything like that that would change seasonality in the coming here. Thank you.
Yeah, I don't think anything significant changing seasonality in the coming year.
We did have a very strong Q4, Steve handed the rains over to Frank as that there's a new sales leader it out I mean, he did a good job of running the table on the deals that he had MS pipeline. So that was embedded in our guide for Q1 and that that we're not expecting a lot of new sales activity in Q1, and the pipeline will build.
We are thinking about ways to increase the linearity.
And we have a couple initiatives in place that we think we can do that better and then as we get into more of the six month release cadence and the cloud demand becomes more pervasive rather than where we are today is still with the early adopters I think we can we can lessen some of this this back end weighted this but I don't expect to see that.
This fiscal year.
Great Great. Thank you and really not show in the quarter. Thanks again guys. Thanks.
Our next question comes from the line of Sterling on T.J.P. Morgan You May proceed with your question.
Great. Thanks for taking my question. This is Jackson ader on for Sterling Tonight.
Our question actually up a.
Application just on the mechanics, I mean, when we think about closing tenant insurance suite deals and three insurance now built in the fourth quarter. When should we actually expect that said to fit a R.R. and is that different from when we would expect those deals actually hit subscription revenue.
Yes, it's a good question so.
So as soon as the deals are executed we they will hit a our our now a lot of the migration activity. We noted in the past can tend to have a relatively muted year, one air or impact as that customer is already paying a full term license fee and then we expect to see the incremental air our ramp over five year peer.
Good.
So so that is one of the dynamics that exists for a migration agreement. The other thing revenue occurs on the subscription side. Once we delivered the software and we can usually do that within 30 30 days in most instances so the revenue wouldn't hit until Q1.
On a migration deal because the customer continues to need to use their on premise software through a migration period, we do have to allocate some of that revenue for that cloud deal towards the term license component of the deal and as a result migration revenues can actually contribute to term.
License migration deals can actually contribute to term license revenue in the quarter and we did see that a bit in Q4.
Okay, that's helpful and interesting.
The our follow up question on the direct written premium the 518 for the core but.
Jim any sense for maybe what kind of DWP you have under under the Hood for non core products that may be art linked to the the the core platform.
It's a good question. The DWP that report is always tied to the core and we think about you know our core systems will manage that DWP and then the ancillary products are typically tied to a core.
You know, obviously things like science can be purchased independently, but that's not a metric that we've broken out.
Okay all right. Thank you.
Thank you.
Our next question comes from the line of my Young adult mid Needleman Cohen you May proceed with your question. Thanks.
Thank you Alex Good evening I, just wanted to piggyback off of a long question on the competitive landscape.
Could you share maybe some a qualitative data around when rates across the various tiers of the market then sort of tied to that would be any noticeable shift within the tiers, but you're competing on today.
Yes, let me comment on it I think we'll provide a little bit more detail at analyst day, but like I, just want or repeat what I said is that we have not seen a change in the competitive dynamic in the market.
You know that's you know based based on tier based on you know feel type whatever you know it just it typically looks.
Pretty stable to us relative to what we've seen over the past couple of years I would say.
We got the turnaround in the insurance now business has been a real real positive for us.
I was one of the things that when I joined the company a year ago.
When markets and I were talking about what's important to really focus on and help ensure that we're getting traction sort of month after month after month.
That was one of the major major objectives. So that we are really able to compete and all the tiers.
And so seeing the turnaround in that part of the business is real positive for me.
And like I said, you know in sort of their prepared remarks.
I think that momentum that we've established there should do well to help carry us forward.
Into next fiscal year and beyond.
I'm really excited about this company being able to put the best foot forward in terms of course systems for every tier.
In this market to hopefully that makes sense.
Yeah. That's helpful. Then Mike you mentioned the international expansion just wanted to get a sense given how localized the insurance industry is in our regulated as by region are you thinking more underlined the M&A as an expansion driver or do you think you can go about it organically and still be competitive, but some of your peers.
There that maybe more European centric.
I don't want to comment on acquisitions that I will say this our philosophy is we have a common core platform that.
Provides all the mechanisms that are necessary worldwide and then we have a very significant investment in providing the specific integrations in this specific functionality on top of that core platform for each region, where we want to compete.
I believe very very strongly that when you think about a long term cloud platform.
It's kind of exist for let's hope 100 years that is exactly the type of architecture that you want to.
Bring to bear and solving a problem like this.
So when you sort of piece together different technologies that are suited to a particular market you don't end up with the economies of scale and you don't end up with being able to deliver as much value each and every customer regardless of where they're located you know what the Guidewire model, we're able to make it.
Enhancement to the cloud data platform, you know that worse in Japan, and it works in Germany, and it works in Luxembourg and it works in every single state in the United States. When we make in enhancement to our Apiay that's that that becomes true. That's the philosophy of this company I think Thats why this company has been so successful or 18 years.
Now, we're bringing that to the cloud and I think it's gonna you know I think it's really going to help us when in the long run now. It's you know you got to have a very determined steady approach.
To to taking that sort of a strategy.
But I think it served us really really well to this point and I am excited in about our ability to sort of continue that investment internationally and continue to make progress internationally, because I think thats whats you know allows us to serve this industry most effectively.
That's very helpful. Thank you so much.
Our next question comes from the line up.
You May proceed with your question.
Yes, Hi, gentlemen, thank you for taking my questions I'll Echo the early or something that you're getting 10 cloud deals across the goal I when everyone's working remotely is.
Is it is quite significant so congratulations on that.
My first question for you just you know we've heard this concept of data gravity, it's something that's a real driver of cloud adoption for years, now and I I'd love to hear how youre customers are thinking about the role of predictive analytics AI and machine learning broader insights that that's having a catalyzing their desire to move to the cloud perhaps you could.
Talk a little bit more about science with some success there more recently and how that is linking up into cloud strategy that'd be great. Thank you.
Yes, thanks for the question there's.
No doubt that analytics and basically taking advantage of the data asset that is produced by running a core system in a modern way is one of the key drivers behind a lot of these projects and that's what's behind this strategy we.
Taken in Aspen around.
More completely integrating.
The predictive analytics assets as well as the science asset into our core system, because we really think that what you think of maybe previously as an insurance core system.
We'll change that then necessity to have.
Easy access to the data.
Easy access to the insights that you are deriving from that data and then pushing that information back to them to the to that each individual user so that their intelligent in the moment that they're using the system right. That's the real key I think to transform.
In this industry and that's what some of them more forward thinking customers are doing already with Guidewire and other innovative insurance assets.
Making all of that easier and easier and easier every single release as we make progress on our cloud platform is what's going to drive the incremental value in the incremental differentiation.
That our customers are after you know I really really just loved the question because.
Science and predictive analytics and you know our cloud data platform, all sort of coming together on a on a cloud platform that makes it easier for insurer for insurers to be able to deliver these innovative use cases, it's very very exciting now you know I I think we all sort of sometimes tend to get.
Down in how difficult and hard work. It is to do one of these modern transformations and migrate off that legacy mainframe platform and instantiate guidewire up across the set of lines of business, but once it's done and once you start to see that value you start to see the you know the.
Customers eyes light up with the exciting things that they're able to do now all these ideas people have about how you can use machine learning in AI to provide that insight to the agents and the adjusters and the underwriters, it's really exciting and so anyway I really appreciate the question and I think it's it's.
Central to the product strategy that we have here guidewire.
And I'm glad you brought up the context of Aspen in that answer Mike that's that that's sort of where I wanted to go next as you already started to move in migrate some of your customers I think you mentioned USAA and and fab earlier on the call. If you started this migration, but love to hear you talk a little bit about some of the channel.
Just some of that sort of inputs from a capacity standpoint, whether that services had implementation had just talking about the challenges and how you're managing through those challenges getting those customers in the beginnings of their migration to aspens that seems important to have some early successfully used cases there. Thank you for all this is great.
Hey, no problem and thanks again for a great question right and that's because it points to what I think as it very philosophical very fundamental change and guide wires position as it relates to our company our customers.
Technology strategies and that is to stay current okay. Instead of thinking about guidewire. As this thing that does this thing and we're going to use it and we're going to install it and then we're going to test it we're going to roll it out and it's going to be lives and we're going to forget about it for five years instead, we are.
Heartening with each and every one of these cloud customers to change their approach to thinking about every time, we provide an upgrade to slot that upgrade in to the cycle to slot that upgrade into the testing cycle to slot that upgrade into the development cycle. This is what is sort of behind the scenes going on.
When I say that weren't transformation, it's that we need to teach our teams how to execute on that change effectively we need to work with our customers very directly.
To to trust us and to work with us in lock step as we evolve the product and to to make plans about their implementations that enable them to dovetail those upgrades into their plans. That's what's really exciting about the partnership that we have established with USA.
Because they're committed and we are committed to doing this can in this sort of completely insync lockstep approach that enables them to be completely in line with all the innovation that we're providing in each release and to be just perfectly direct this is not the norm in.
The insurance industry, we intend to I intend this whole company and we intend to change that.
But it's going to take a wild right, it's going to take a couple of releases its going to take maybe a couple of years, it's going to take us being committed to working with each and every single one of our customers about establishing that new approach, but you know I've seen first hand based on my previous experience the difference in the amount of value that.
Software company can provide to its customer base once you're following an approach like that.
So that's why I'm, so excited about like I keep saying the path.
Because when I talk to these customers and we go through this and we talk about it we both recognize it it's a lot of change, but it's very clear, but theres a significant amount of value incremental value that we can provide to them.
So thanks for the question.
Really helpful. Thanks again appreciate it.
Our next question comes from a line of.
Gee you May proceed with your question.
Hi, guys. Thanks for taking my question I guess thinking about the number you talked about you have over 600 consultants now on the more advanced cloud implementation.
Certification here, but as we think about what what the demand looks like when you get a partner involved, especially one of the big Global S. sides are you seeing them also pushing harder on cloud projects as part of baby Big bigger digital transformations that they're engaged with that these customers.
Are they skewing the mix, even maybe more towards the cloud or or is it pretty consistent around a lot of those partnerships right now.
Yes, I wouldn't differentiate one versus the other but I would say, we're getting very very good alignment with them and that number is just that most objective way for us to assess that is that you know we're asking those partners to really step up and you know and get trained and certified on a whole bunch of new tech.
Knowledge in a whole bunch of new approaches that are better align to delivering value and they're stepping up. So we're very thankful that they're stepping into that because it's a significant investment on their part I think it aligns to the value that they see and being able to drive the does.
Implementations, but I think they they also recognize that this is just a better model. It's a better approach I think I think it sure if it's hard to find a technology and I T executive in the World These days who doesn't.
I'll admit that the cloud model logically is a better approach that having a vendor responsible for upgrading the service and keeping the service up today is a better approach because you know the R&D investment that you're making centrally can be more easily sort of.
Spread out and enjoyed by the customer base. The question is sorta, what's the timing when does it make sense for that particular customer in terms. The other projects that they have been so no kind of just like I said before.
We're in a very very good position and being able to deliver a nonprime core platform and a cloud core platform and depending on the timeline a particular customer has for their overall I keep landscape, that's going to more drives what the size and what Guidewire suggests.
But make no mistake that they're pushing it and we're pushing it because you know overtime were just it's just going to be more and more valuable and the flexibility in the agility that they're going to be able to enjoy from running projects.
On a cloud platform from Guidewires, just going to be greater and so you know I would say that's kind of my summary of the situation and you know just like US we're basically making sure that the customers are educated about what we think that future is but there were open to working with the customers based on the timelines it makes sense for their business.
Yes.
And then maybe following up a little bit on on Tom's question before but also.
Some of your earlier comments around you know the expansion of the marketplace and some of these new newer kind of digital and data driven functionality.
How much or when do you think about sort of exclusively providing that type of add on feature check cloud only customers I know in the past you talked about supporting the self managed customers for as long as you know for the foreseeable future I suppose but you know at what point do.
Like you start developing some that can only leverage the deployment model offered by the cloud and use that as more of a pull tactic to get customers to to not when migrate but then by new.
Club.
Yes, the way I've been phrasing. This is that I want the these decisions to be carrot, driven not stick driven I want to create such a compelling value proposition for the cloud that customers willingly an exciting.
Excitingly make that decision.
You know we will that decision ultimately ends up being very technical and ends up being very very much based on.
How expensive it is that how much investment does it take for us to be able to take some capability or feature and make it available.
In the on Prem modality to sometimes it's really straightforward uneasy I mean to the extent that we deliver a cloud native service for ratings.
That's just the cloud native service right. It doesn't really even makes sense for us to even contemplate the concept into that being run on Prem.
You know, but other times, there's going to be a debate and we're going to talk to our customers and we're going to assess and we're going to make that decision but.
I really am trying.
You know the concept that the service is a big part of the culture here and I think it's a big part of the reason that this company has been successful.
We really you know our customers are maybe the primary stakeholder of Guidewire and I think it makes sense for us to do all we can to enable those customers to make this decision make this upgrade decision on their timeline and how it makes sense for their business. These projects are incredibly complicated.
Now I'd like it sometimes it's hard to imagine when you're on a phone call talking about it in the and the abstract how complicated and how detailed and how much of a commitment necessary for an insurer to take on one of these projects and and it's just it's been a big part of the learning curve for me this year.
It's really fully understanding that and being able to empathize with the decision makers that these insurers and so that's why you know I just feel like we owe them.
Our best effort to continue to provide that service and make you know just make the cloud better and better and better such that when it makes sense, they're going to make that move. So hopefully that you know that helps you understand how I'm thinking about it.
That's very helpful. Thanks for taking my questions and a great job every quarter.
Hey, Thanks, a lot.
Our next question comes from the line of Michael Jordan with Wells Fargo Securities. You May proceed with your question.
Hey, there. Thanks. Good afternoon, just one for me on the marginal outlook you commented on the impacts from Rev. Rack and think it certainly makes us the point the cash flow as a better metrics during the transition given yes services coming down here and increasing involvement on the Parker side see psyche should also see.
Some offsets so it's just hoping to revisit the impacts driving that expected compression as it is primarily a function of cloud in our your expectations for cloud margins still holding given what you've observed with these initial cohorts of customers. Thus far thank you.
Yeah, that's it.
The big investments, we're making right now are on the cloud operation side, and then the product development side.
As we invest in our product to make it more efficient our cloud operations function should get also get more efficient overtime.
Neither big Big investments that we're making and we're in the early days of this this replatforming so.
That's the driver there are some other kind of smaller drivers on the fringes, we'd had happened very strong collections a year this year and.
Including working on some past two payments that flowed into this year that won't recur, but the primary driver of a year over year declining and cash from operations as they are those investments.
Got it thank you.
Our next question comes in the line of Joe.
With Baird you May proceed with your question.
Great Hi, everyone. Thanks for squeezing me in a hot I'll give it to one as well, but I wanted to go back to the conversation I, just the feedback related to outspend sense or release of odd.
And I'm curious if there were any use cases or segments of the broader customer audience that I don't know may be surprised you. It now that there is finally, a a cloud optimizes insurance suite release and Marquette and.
The things might you brought up like be digital first greenfield opportunity, that's not new to Guidewire of course, or even the new crop of all digital insurers target I'm home owners or or renters lines are there things about the product itself, where there is suddenly a broader side.
New opportunities, which may be a jacked up a new element for guidewire as oppose to what might have been the case before the Aspen release was out there.
Yeah. Thanks for the question so yeah for sure Cup sort of two part answer one you know were one part of a Aspen is something we're calling advanced product designer and its designs to enable.
Insurers to be able to design and release new lines of business much more efficiently and effectively.
Just really much more quickly than they could before and where I was talking to one of our tier one customers, who said you know look we're we're basically managing Manny lines of business with Guidewire and some of those lines of business are driving the majority of our DWP and.
The majority of our revenue and those get that most attention.
From our T. organization in the projects that are running guidewire and the smaller lines of business.
They they get neglected somewhat and so that you know the pace of change in the priorities there sort of frustrate those businesses.
Hey, PD and with Aspen, they're able to sort of balance that a little more more effectively such that the the business line users of those smaller lines of business can SAP something much more flexible much more real time and it was surprising to hear that right because we weren't necessarily think.
You know about that sort of value proposition and you know, but but it reminds you again of the complexity of the implementations that we are driving here and I would also.
It just speaks to the business benefits the business impact of adding agility to and I keep organization, especially one that's digitally driven and so.
You know just in terms of answering the second counterparty or are your question.
What what was exciting to me about Q4 was that there was just a variety of compelling events driving those deals.
You didn't just see one situation, causing the deal to do you not to transpire that you know that theres upgrades driving some of them and their digital transformations and digital interface is driving others and you know that theres new lines of business being launched you know and.
You know when we're in the middle of Q3, and we were questioning what's going on in the macroeconomic environment and how that can impact the insurance industry and how that's going impact guidewire I'd be lying to say that you know I wasn't a little bit nervous about what the future was going to look like but Q4. It just reminded us that this is a very solid industry.
Sorry, there's a whole bunch of really interesting dynamics driving this industry and you know if we do what you know we're supposed to do we deliver this platform we're going to be able to continue to really grow. This grow this company and serve these customers more effectively in it you know that was one of the ERP.
Parts of Q4, you know that was really motivating for me.
You know and hopefully that helps.
The answer your question.
It does not thank you very much.
Hi, Thanks, a lot.
Our next question.
Yeah.
They proceed with your question.
Hey, guys that has Irish malaria I'll, just one one that I would I want to squeeze and then thank you for for squeezing me in but on on the cloud gross margin side, if I do kind of the quick math between the new presentation and the old presentation, you're sitting around 35% give or take no.
Non-GAAP subscription gross margins, which I think feels a little lower than than I would've expected at this point, maybe can you walk us through a is that even directionally cracker. If my math entirely off and B. You know is that a function of just that the ramps and all the investments that you're making right now and there's gonna be natural leverage coming up from from here to get too.
That's 65% cloud gross margin target and that's why 24 or is there a lot of kind of more multi tenancy on services and.
Things that need to happen to tend to get from here to there. Thanks.
Yes, you. So there's a lot of investment going on in the product to build more multi tenancy into our onto our platform that we expect to realize over time and those investments will take time to kind of worked our way through our product and then into our customers and how we support and maintain those customers.
Making big investments and building out our cloud operations team I think we've commented on this in the past that.
You know to some extent these are really critical initial implementations and we have to get these right and we need to make sure that we invest the time and resources to bring every customer along that chooses to go on this path assessment and make them successful and so there maybe a little bit of over investment in terms of making sure.
We get this right and then we can leverage those investments overtime as we continue to migrate our customer base over there is one other small dynamic that well get into a bit more on the accounting and how cloud migrations in particular, we end up allocating a pretty significant part of the overall contract value to term license revenue, which depresses the subscription.
Value over the over the initial contract duration, even though we're fully investing and building out cloud operations to support those customers. So that as a small dynamic I think that my came estimated that that at a three percentage point to four percentage point impact in this fiscal year, and we expect that to grow a little bit the future and we can talk about the.
Got a little bit more at analyst day.
Okay wonderful thank you.
Our next question comes in the line.
JMP Securities You May proceed with your question.
Hi, This is John for Pat. Thank you so much for taking our questions just a quick one or on the Aspen the actual product architecture.
Can you just talking about if and how that architecture is differentiated from some of the other cloud offerings in the space of your competitors. Thanks.
Oh sure that's a tough one day answer quickly.
But I would say this is what's important to understand about guidewires approach. Okay. As we had 18 years invested in developing.
The world's leading claims policy.
And billing systems, and Insurancesuite very very complete offerings.
What we've done with Aspen is we've invested in a a cloud player that enables us to run those instances of Claimcenter policycenter billingcenter efficiently across many many instances and across all of the nonproduction instances necessary to manage.
The complex implementation.
The core system like Guidewire.
What you want to picture in your head is maybe one of the most complex environments in the world at some of our tier one insurers with many many instances that guidewire that that support development and testing and performance testing and then you a t. testing and finally production.
And so we've invested a very significant amount of time and effort into building a layer on top of Vws that facilitates our ability to run what will ultimately be tens of thousands of these guidewire instances. Additionally, we have developed what we're calling.
Cloud native services to support and augment the functionality in those core systems ratings, a very very good. Simple example, now we have a rating engine inside of policy center each customer that that runs policy center can use that rating engine. We've added now a cloud.
Native service for rating that can be used along side the policy center implementation.
Thats very flexible approach to doing that we don't replace it we don't foresee a customer to move to that cloud native rating engine, but they can over time start to leverage you know that cloud native rating engine and then what that does is it enables a customer to have more flexibility in terms of how they architect.
How they manage the system like I said on the you know in the call we expect more and more of these cloud native services to be.
Built and delivered on top of.
Aspen Bam far our cloud platform.
And those services, whether they be rating related or rules related or claims related or data related you know those little support the overall ecosystem of the Guidewire implementations, so hopefully that helps.
Doug Thank you.
Okay. Thanks, a lot.
Our next question comes from.
The Bank of America, you May proceed with your question.
Hey, guys. Thanks for fitting me in here.
Just wanted to ask one on the term license customers that you had a good quarter here on customers, adding more term I guess for those customers are they thinking about kind of a hybrid deployment here, we're going to add more term.
But think about migrating over to the cloud over time as in the roadmap.
Any commentary on just customers that are kind of adding more term license, but any kind of their roadmap. Thank you.
Yes, it's a good question because it's one that Jeff and I ask every single time, we talk to our customers are our sales organization about these deals.
With that these customers are perfectly aware of our long term road map and I would say for the most part they all have.
A plan in the forefront of their minds through the back of their minds about when it makes sense for them to go to the cloud its one of the nice things about our approach like I said is that they're able to if you know its cloud doesn't make sense for their organization. They can purchase on Prem.
You know they can deploy on prem with the intention of moving to the cloud in the future.
And so it's something that we discussed discuss excuse me with each and every one of our customers and you know each one we'll have a plan that that makes sense for them and for their overall.
Corporate strategy.
Great. Thanks, so much.
No problem.
Okay, I think that is.
Yeah, I think thats, a the last call right.
Yeah, Okay great.
We ended the question answer session I would like to turn the call back to Mr., Mike Rosenbaum.
Okay. Thanks, everybody for participating in the call today, just wanted to say you know this was a really phenomenal quarter at a really critical time.
For the world really in for an especially for Guidewire. We're excited about the continued demand we see in our but you know for our platform in the advancement of the cloud strategy and what is optimistic as ever about the long term vision and opportunity for all of our stakeholders. So I really appreciate everybody joining today and thanks very much.
Thank you for joining US today. This concludes today's conference you may disconnect. Your lines at this time. Thank you for participation have a great dead.
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