Q4 2020 Duck Creek Technologies Inc Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the Duck Creek Technologies fourth quarter and fiscal year 2020 earnings conference call at this time. All participants are in a listen-only month after this feature presentation. There will be a question-and-answer session to ask a question during this session. You will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press * 0. It is not my pleasure to introduce Brian from icr.

Thanks, Andrew. Good afternoon. And welcome to Duck Creek earnings conference call for the fourth quarter of fiscal year 2020 which ended on August 31st on the call with me today is Mike jakubowski. Yep, executive officer and miniature Perry. Creek CFO a complete disclosure of our results can be found in our press release issued today, which is available on the investor relations section of our website today. It's call recorded and a replay will be available upon the conclusion of the call.

Statements made in this call may include forward-looking statements regarding our financial results products customer demand operations the impact of COVID-19 on our business and other matters, these statements are subject to risks uncertainties and assumptions and are based on Management's current current expectations. As of today. It may not beaten may not be update in the future there for these statements should not be relied upon as representing our boxes of any subsequent date. We 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 with a primary differences being stock-based compensation expenses amortization of intangibles change in fair value of contingent earn-out liability, and the related tax effects of these adjustments besides me turn the call over to Mike.

Thank you, Brian and good afternoon everyone. I want to thank all of you for joining us today for our first earnings call as a public company successfully completing our IPO with an image and milestone for Duck Creek cuz we execute on our mission to transform the global property Casualty Insurance Market with our modern low code platform. I'd like to also thank our new shareholders wage for their support and their belief in our ability to lead the insurance industry's transition of running court systems in the cloud. I'm excited to start by quickly reviewing our financial results for the fourth quarter month, which were very strong across the board. We reported total revenue of 58.3 million of 22% year-over-year and this was underpinned by subscription Revenue wage, which is a revenue derived from SAS of 24.6 million up 54% year-over-year.

and we were

Calling the quarter with adjusted ebitda a three million on today's call our CFO Vinny's your party and I will spend some time providing a few recent highlights on Duck Creek review our full year and fourth quarter 2020 performance and give some insight into how we're thinking about fiscal twenty one. But first, let me Begin by saying we hope that all of you and your families are safe and healthy light of COVID-19 the past six months have certainly been an unprecedented time for all of us. I'm incredibly proud of the strength of debt Creeks culture the resiliency of our people and am willing to give and support those in need despite the Health crisis in many related economic challenges. We have delivered two of the best quarters in the company's history since the onset of the coding pandemic Thursday, March are strong performance is due to both of robust and increasing market demand for our technology as well as the diligent execution of our country team. We seamlessly shifted wage.

Thirteen hundred employees to work from home over the course of two days and it continued to deliver on our sales targets our project and services goals and supporting our customers during these challenging times. In addition. We had many team members engage in their community Through volunteer efforts and through our Duck Creek gives back program where we have a focus partnership with the Red Cross through donations or matching program and also providing employees paid time off to volunteer since this is our first call as a public company. I want to spend a few minutes providing an overview of Duck Creek our product offerings off and our Market Opportunity by way of background on me personally. I've devoted most of my near Thirty Year career to the application of technology in the insurance industry this started with the creation of the insurance offered business with an Accenture after which I spent more than seven years at Allstate Insurance leading large technology and business transformation programs. And since then I've been leading to upgrade for the past month.

And years and it's a privilege to be the CEO of this incredible company as we continue our march to lead the industry the insurance industry to modern solutions for those that know me, you know, I'm very passionate about how technology can transform Insurance. However, I'm always grounded in the realities of the industry that we've served including the challenges caused by PNC carriers having a complex Insurance products varying service models in the highly regulated nature of our industry. The global PNC sector is a massive industry that represents more than two trillion dollars in annual premiums insurance carriers are reliant on core system software to manage the essential aspects of creating quoting and selling Insurance products billing and Servicing customer and importantly responding to what I call the true Moment of Truth when they have to process claims.

GMC carriers currently spend more than $80 billion annually of which app

Accidentally $15 billion dollars. It's our addressable Market opportunity for running an operating core systems and related Digital Services on Duck Creek on demand historically black or systems have been largely on-premise code drug driven applications that are highly customized in bills suited for the rapid pace of change required to thrive in today's PMT industry off to successfully compete in today's market carriers of all sizes are recognizing the need for a software platform that provides greater agility faster speed-to-market and greater flexibility carriers in a faster than ever before whether by creating new business models launching to Insurance products expanding into new regions or digitizing and streamlining customer experiences and traditional Solutions often cannot support these needs a factor became readily apparent to many carriers as they struggle to adapt their operations in response to COVID-19.

We believe the global PNC industry is just at the beginning of a generational shift to new technology platforms. We have led the way on this transformation since 2015. When our first customer when Life on Deck regard demand, which is our comprehensive software-as-a-service platform Duck Creek on demand enables our customers to drive profitable growth by helping them accelerate product Innovation wage costs are greater efficiency and dramatically improved their engagement with their customers We Believe Duck Creek on demand is Far and Away the most robust matures a solution for the global P&C Industries, and this is reinforced by our success in the market.

Fiscal 2020 was a milestone year for Duck Creek. We exceeded over two hundred million in Revenue driven by tremendous growth in our SAS revenues. We are now clearly passing earliest age of the market and we are seeing SAS to be the default choice for the vast majority of sales discussions in our fees with the prospects and clients to be clear. This was very evident down Market prior to the onset of covet but we believe the pandemic has reinforced this trend Duck Creek primary focus is to accelerate insurance carriers digital transformation by providing a SAS that is purpose-built to deliver Superior business performance and value to customers today over 60 carriers have deployed Daiquiri condom and 30 of which are running their school systems on our on demand platform or on-demand customers range from large tear ones. We have over five billion dollars of written premium to tear for regional insurers. We are proud to be part of

And with these customers on their digital transformations in revolutionising the way the court systems are run. We had significant success during the first three quarters of our fiscal 2020 including a wind with TG who chose. Creek on demand is part of their program a multi-year enterprise-wide effort focused on the long-term strategic positioning of AIG for the next one hundred years. We believe this is one of the most significant decisions ever made in the industry as follows other significant tier one customers who have selected Duck Creek on demand such as the Hartford Mutual we have also seen excellent momentum in tears to through for where we signed new on-demand deals with carriers including the doctors company Munich re specialty Insurance wage benefit group among others. We are particularly proud of our implementation of beauty. Specialty Insurance where we partnered with them and Accenture to launch a new product line for policy birth.

And claims in just ninety days.

Something that is unprecedented in our industry are our success across the entire Continuum of carriers speak to the power and flexibility of our low code platform month. In addition to these courses some highlights. We also saw a good traction with our Standalone products, which can add tremendous value for carriers without requiring a court system replacement what example using the insurance a tear to carrier pre-select a Duck Creek distribution management to streamline their onboarding compensation and relationship management processes for their agent Channel.

We carry this great momentum into the fourth quarter where we saw a very strong activity across our business during the quarter. We signed eight Duck Creek on demand deals life, which were with new customers many of these winds were also multi-product contracts continuing are trying to increase your wallet within our customer base.

I'm excited to provide a little more detail on a few of our key wins this quarter as well as some of our customers successes first a significant win in the quarter with Manitoba public Insurance a non-profit provincial Crown Corporation in Canada, who is selected the full Duck Creek on demand sweet to power digital transformation Manitoba chose a standardized on Duck Creek with our policy billing claim rating and insight solutions to replace her homegrown systems.

The combination of dog treats on demand maturity security and breadth of capabilities were key differentiators from Manitoba. Another exciting wind was for our full Suite of office on demand it a large tear to Specialty insurer the carrier conducted an exhaustive evaluation of the market to support their wide range of business lines the decision to utilize decree condemnation anchor there digital transformation initiative that it's focused on reducing costs and streamlining operations. And in Australia law cover a provider professional Indemnity insurer, the law firms that's elected the full. Creek on demand sweet for their system modernization effort law cover will accelerate their digital transformation leveraging duck. To improve the public service. They provide the legal Community. This is a competitive win and it showcases our ability to compete globally.

We also saw a continued momentum in selling our non-core stand-alone solutions to both new and existing customers over over public Insurance. One of the 50 largest public insurers in North America off selected Duck Creek reinsurance Management to automate critical financial and administrative functions required to manage the reinsurance processes. We also expanded our relationship with Med prep group a Berkshire Hathaway company and the national leader in medical professional liability insurance during the quarter medpro selected Duck Creek distribution management as an add-on to their Duck Creek same deployment. In addition of these new deals are Duck Creek service and delivery teams aided by our vast partner ecosystem remain focused on delivering a new Innovative project and partnership with our customers all while continuing to successfully execute in a remote model do the COVID-19.

During the quarter.

Westfield Insurance a leading tier 2 personal and commercial commercial lines insurer brought a new agent portal and course. It's in the market utilizing Duck Creek on demand policy billing and digital engagement to modern world class system dramatically improved their age and experience and bills on Westfield's strong reputation and Market.

Three insurance is a new kind of small business insurance brought to Market by Berkshire Hathaway using Duck Creek on demand. They launched into a number of new states with a new Innovative approach that would protect small business small businesses with one single comprehensive policy that the jurors of companies people property and operations and in Europe a GS Portugal completed an important project where they're leveraging Duck Creek policy billing and insights to modernize their core operations. We delivered this program in partnership with delight which showcases both our platform and our partners capabilities in Continental Europe.

We have also seen great progress with distribution management with recent production launches of both njm Insurance Group in Gainesville auto insurance. We believe that Creek is differential in our ability to hire the full depth and complexity of insurance via our local platform and then deliver these capabilities as a solution we continue to invest in our platform to push a pace of innovation and the balance of what's possible with the notes Advanced configuration tools available in the PNC market. So notable examples include the relay the release of our page builder configuration capability off the latest enhancements to our industry low code configuration tools this new capability allows non-technical designers to develop mobile responsive user interfaces with a drag-and-drop configuration office building beautifully designed user experiences to meet the growing customer expectations.

We also announced a release of our partner development portal. Creek. Which accelerates the ability of leading into your Tech providers to build meaningful integration to the Duck Creek platform using established patterns in the quarter. We saw several Partners take advantage of this new paradigm to dramatically reduce time-to-market for Integrations to Deputy condom at a great example was propped up when you created their transactional text messaging solution to fully text enable the Duck Creek platform. We have also extended are ready built Integrations with key industry providers like various and high-wage all of these Partnerships help customers deliver Solutions faster with greater confidence. Our robust ecosystem now has fifty partners and continues to grow.

During the quarter. We also debuted are virtual formation website v formation, which houses dozens of demonstrations customer stories and content to keep our customers current with the latest from Duck Creek developed in response with a cancellation of our annual customer event formation do to prevent the formation has been a huge success reaching five times a number of participants of our typical in person of that as we look ahead to the fiscal 2021 and Beyond we believe the future is incredibly bright for Duck Creek. We have by far the most robust and configurable platform for the PNC market and we have a rapidly growing Fast Business approaching a hundred million in a r r with subscription gross margins in excess of 60% off we believe is a clear indication of our leadership in the SAS Market.

We are.

Will continue to achieve high levels of sass growth as well as improve our subscription gross margins. If we continue to scale on demand and take advantage of the significant Investments. We've made in our fast platform a strategy to build upon the success a straightforward first expand our customer footprint by signing new customer new customers who are on-demand platform is mentioned earlier the same transformation of the P&C insurance industry is in its early stages in both carriers have yet to begin the move to the cloud II continue to successfully expand within the customer base wage either by extending the Creeks footprint in the new lines of businesses or selling additional Solutions across the Enterprise. This has been a consistent source of growth for our business as evidenced by our staff member retention rate. That is consistently above 110%

Finally and will continue to expand and strengthen our partner Network. The open architecture of our on demand platform has enabled us to establish a vibrant highly-engaged ecosystem of Partners Thursday. We extend our sales and implementation reach to sum it up that Creek delivered terrific fourth-quarter results to finish. What was a transformational year for the company we believe we establish ourselves is a SAS platform of choice in the global PNC industry, which puts Duck Creek in a great position to be one of the primary beneficiaries as this complex highly regulated multi-billion market undertakes a generational re-platforming of its core systems. We have never been more excited about the opportunities ahead of us and we're confident we can build upon our current success to cross much larger profitable and highly successful public companies that generate significant value for shareholders. We look forward to getting to know many of you that are in the upcoming quarters in years birth.

Leading you on Duck Creek success and progress. I will now turn over to our CFO. They need to Paris beginning over you.

All right. Thanks Mike today. I'll review our fourth quarter fiscal 2020 results in detail and provide guidance for the first quarter and full-year fiscal 2021. Since this is our first earnings call sucked briefly review our financial model. We've successfully transitioned a business from a historical license model to a subscription model over the past several years in fiscal 2020 approximately 96% of our bookings related to our on demand size platform with on-premise license sales generally limited to honoring existing contractual obligations this transition home impacted total revenue growth in recent years, but with license Revenue now representing under 5% of total revenue and subscriptions being our fastest growing Revenue area, Revenue growth rates are accelerating our contracts or multi-year commitments and are billed monthly initial sales are often for a specific line of business within the insurance company or four particular Solutions on our on demand platform. We have a lamp

And then expand model.

And a long track record of successfully increasing spend with our customers. We also have a Professional Services Revenue stream that just arrived almost solely from implementation work related to our core products and generally build on a time-and-materials basis turning out our operating results. We're pleased with the performance of the business both in Q4 and fiscal 2020 overall total revenue for the fourth quarter was 58.3 million dollars up 22% from the prior year. With in total revenue subscription Revenue, which is comprised solely of subscriptions to our staff products was twenty four point six million dollars up 54% year-over-year in Q4 subscriptions represented 70% of our software revenue and 42% of our total revenue.

License Revenue was four point five million dollars up 6% year-over-year due primarily to an ad on sale to an existing on-premise customer.

Maintenance Revenue our Revenue tied to on-premise maintenance contracts with 5.9 million dollars and as expensive expected was essentially flat year-over-year as we concentrate efforts to grow our SAS Business Services. Revenue was 23.3 million dollars up 6% year-over-year Services Revenue reflecting strong demand for implementation services and high utilization rates.

Will be reporting on two key metrics related to our subscription revenue on an ongoing basis and fast met Valerie tension rod calculate by annualizing subscription Revenue recognized in the last month of the. Was ninety five point six million dollars as of August Thirty One hundred twenty twenty up 85% from the prior-year wage growth has exceeded 75% in each quarter of fiscal 2020 based on the strength of both new cells and Nadal retention.

Valerie tension as of August 31st 2020 was 117% over the past four quarters. Arnett dollar retention has consistently exceeded 113% driven by a combination of high growth retention rates sales of new products to existing customers and growth of DWP for products already operating on our soft platform dead. Now, let's review the income statement and a bit more detail as a reminder unless otherwise noted all metrics are non-gaap and we have provided a Reconciliation of gaap to non-gaap Financial in our press release.

Adjusted gross profit in the quarter was thirty five point four million dollars or a gross margin of 61% compared to a gross margin of 60% in the fourth quarter of fiscal 2019 month subscription margins in the quarter were 66.5% driven primarily by scale benefits as we continue to generate strong subscription Revenue growth the gross margin, exceeded our expectations. I didn't pass and did benefit from favorable timing of when we began recognizing revenue from certain contracts as we move into fiscal 2021 margins made decrease slightly from this level a Professional Services margin was 41.4% in the quarter while they've has come down during fiscal 2020. It continues to track slightly above our long-term expectations. We believe the current level of reservations unsustainably high for our services organization. And as they moderate Services margins will be decreasing towards a range of high 30s to approximately 40%

Turn into Opera.

pending expenses

R&D cost for eleven point three million dollars or 19% of Revenue roughly in line with the prior to your. R&D costs increased 19% from the prior-year do mm bonus funding levels and continued investment in product Technologies sales and marketing expenses were eight point nine million dollars or 15% of Revenue also aligned with the year ago. This was both expected levels due primarily to Cove it relate COVID-19 related variances as expenses related to marketing events and TNT were lower than the prior-year.

We remain in investment mode currently and expect to continue expanding our Global sales footprint and engagement efforts to ensure were properly covering all opportunities in the market.

Gene expense was $13 or 22% of Revenue compared to 19% in the prior year. During the fourth quarter. We chose to downsize two of our office locations took in a non recurring charge of 2.8 million dollars, excluding this charge G&A expenses decreased as a percentage of Revenue compared to the prior-year based on scale efficiencies partly offset by higher bonus funding levels adjusted ebitda for the quarter was three million dollars or a 5% adjusted ebitda margin.

Non-gaap EPS for the quarter was two cents per share based on 129.3 million weighted average shares outstanding. This share count was calculated using a consistent exchange ratio for all pre IPO partnership interests, and assuming that all Common Stocks sold in the IPO was outstanding for the full fiscal year our end up your account as of August 31st, 2020 with 130.7 million shares.

On a gaap basis our gross profit for the quarter was 28.7 million dollars and we had a loss from operations of twenty one point six million dollars. We had a net loss in the quarter of twenty one point five million dollars gap earnings-per-share for Q 420 and fiscal 2020 are not being presented because they produce results that would not be meaningful to investors as they represent reserve for the 17 Day. Following the IPL during the fourth quarter the company recorded 19.7 million dollars of Cherbourg share-based compensation virtually all of which was related to the conversion of employee partnership interests in the IPO as further described in the financial tables of our press release.

Based on the amount of vested partnership interests at the time of the IPO future charges associated with this conversion will be significantly lower currently expected to be low to mid-single-digit Millions off each of the next two years turning to the balance sheet and cash flow. We ended the year with $390 in cash and cash equivalents and no debt our cash balance reflects approximately $321 million dollars of net proceeds from the closing of our initial public offering in August.

Hello in the quarter was 16.3 million dollars compared to twelve point eight million in the year-ago. The increase in free cash flow is primarily related to improved working capital due to increased accrued expect strong cash collections in the quarter and improve positions in unbilled receivables and deferred revenue tied to the transition away from on-premise licensing free cash flow for the year was $19,000 compared to 6.6 million in the year-ago. We believe our ability to generate cash while continuing to invest in our growth initiatives reflects the inherent scalability of our platform and our business model.

And that would like to kind of finish with guidance beginning with the first fiscal first fiscal quarter. We expect total revenue of $55 to $56 a month option revenue is expected to be 25.5 to twenty six million dollars adjusted gross margins in the quarter are projected at 58.5% and we expect adjusted ebitda between zero and one point five million dollars.

Non-gaap net loss is expected in approximately Breakeven 2 1 million dollars for a bit under $0.01 per share.

For the full fiscal year of 2021 we expect total revenue of $244 to $249 million dollars subscription revenue is expected to be 1018.5 to 116.5 million adjusted gross margins for the year projected a 58% and we expect adjusted ebitda of 325 million dollars on a non-gaap net loss is expected to be between three and five million dollars for fiscal 2021 or a non-gaap lost per share of approximately two to four cents.

In summary, I would say we are pleased with our financial performance in fiscal 2020 and our positioning as we enter fiscal 2021 fueled by continued good sales momentum package available cost structure and a strong balance sheet. We're confident in our ability to generate long-term growth and shareholder value. And with that would like to open up the call to Q&A operator.

Thank you. As a reminder to ask a question. You will need to press star one on your telephone to withdraw your question. Press the pound key. Please stand by while we compiled the Q&A roster.

And our first question comes from the line of Sterling body with JPMorgan. Yeah. Thanks. Hi guys. I think one of the biggest questions on investors Minds that we're getting is just kind of the tone of demand for system modernization within tier one companies for their core systems. We see a lot of interest in maybe some ancillary new digital go to market initiatives. But how would you characterize the appetite outside of the the big win which will be my follow-up question. But outside of that, what would you say the overall tone looks like for those off or system Replacements to to move to the cloud at this point?

Hi, Sarah.

It's my thanks to your question and thanks for joining us your question specific to tear ones and the demand that they're showing for courses and replace wage and and I would say at large we see that demand strong. We're actually pleasantly surprised with how many tier ones are looking for cloud-based solutions for their system replacement. Now what I will saying that you're one space is, you know, these carriers aren't rushing to Market to say that they want to re platform in essence the entirety of their book off. What they're doing is they're perhaps bootstrapping and new business line, perhaps they're taking a smaller line and saying, you know what this would be a good opportunity to re-platforming it and run it in a cloud. So, um, they're really starting with smaller books of business as an entry point, and then we know upon that success and proving the model that we have a great opportunity to expand from them.

So, you know, I think even in light of code that we're seeing tear ones, you know continue to show interest and actually really start to set strategies to run court systems in the class wage makes sense. And then one quick follow-up on the AIG when how should investors think about how that roll out will kind of come into the financials in the coming years, obviously an organization that big it's going to take time. So how should investors set their expectations on what that business opportunity will look like for you as a rolls out.

Sure. Well, let me just comment at a high level and maybe then he could add some insight on it. But in terms of the work that we're doing with a i g p a couple of areas in their business that have begun their operations. So we are already starting to those contracts are in place and provision environments and we're already recognized revenue on those arrangements and then in terms of AIG, we know that we have a broader opportunity in the overall account, you know, it's a very large organization. We're working across as I said, they're broad strategy of AIG 200 and we're excited about the opportunity to help them on an Enterprise basis. So we need you to work with their leaders and look for opportunities to expand within the overall account.

makes sense

Thank you. And our next question comes from the line of Christmas with Goldman Sachs. All right, thanks very much for taking my question and congrats on a great first quarter page here. So I wanted to ask about the partner ecosystem up to eight wins in the quarters a lot of a lot of dealers to curious if any of those were partner influenced and at a high level actually be thinking about further investments in that ecosystem potentially driving new wins over time and maybe in particular in international geographies wage is for the question. Of course, you know, I'll just start out and say that investing in the partner ecosystem was a key strategic pillar of Duck Creek after we moved out from Accenture. Of course, we have a very very strong relationship with Accenture on a global basis and we work very closely with them, but we've been investing quite heavily in terms of trading

It's killing some of the core ecosystem providers the system vinegar.

Raiders that are helping us along the way in fact several of our partners in the past like capgemini and mindtree bought prior Boutique, uh dead implementers to really intensive scale their practices very very quickly. And then as I mentioned in the prepared comments, we're thrilled about, you know, the implementation with them over at the GS. So we're starting to get some traction with our partners, uh, globally as well. So, you know, we think it's an important Dimension to continue to grow our business and we continue to invest in training and stealing resources within their respective practices that are helping us with those go-to-market emotions.

Great. Thank you. And maybe just want to file for Vinny. It looks like the Oscars March has increased nicely your year. I think you said the prepared remarks are some benefits there from some of the deals that that you're close. But curious if you can add any more detail on the the gross margin Improvement. And then as a related question, are you seeing any more adoption of the multi-tenant SAS offering that you have? Thanks. All set on the uh, the margin profile and and like and jump in on multi-tenancy. Um, so the subscription margins in the quarter of a 66 and a half percent that's kind of above even when we targeted for next year. The timing element of that is we did start revenue on a couple of large deals that were recently signed at aren't incurring a lot of cost yet. So, you know, I think if you want to look kind of to a More normalized Level, I think we'd expect you know, a bit of a continual Improvement, but that's going to be a gradual Improvement quarter-by-quarter and Q3. Yep.

Sample is 64 and a half percent. So we would expect it to move up a little from there, but obviously not two points. So it may come back down a little bit in the first quarter, but we think it's still, you know, overall scale down from where the year ended, which was at 64%

And then Chris to follow up on your question on multi-tenancy. And of course, it's it's a great question as it relates to overall subscription or SAS gross margins off as we stated previously. We've been investing heavily in our multi-tenant architecture which we launched last year and we've made progress where several customers are installed on our multi-tenant platform. I'm handling some production claims on the platform as well. However, it's still very early for us, you know, we have had several customers also launched in multi-faith this past quarter. So we're enthusiastic about that but I'll also say that it's very early for us and I'd like to highlight that the benefits of multi-tenancy wage are not required for us to hit our overall projections. We know that today we have to run in a hybrid mode. We have some customers in the majority of our customers in single wage.

installations and then we are

Launching new customers on our multi-tenant platform and I just want to emphasize that we are not required to scale on multi-tenancy to hit our economic profiles invested quite heavily in devops our overall fast architecture and a lot of automation. So we feel that we with that automation. We're getting a lot of efficiency out of or architecture and the reason why I bring that up adoption multi-tenancy, you know from a business perspective. It's functional Paradiso, you know, the carriers don't really see a difference but from the technology perspective, you know, I T has to implement using some different techniques and we also looking at our customers Readiness to adopt the overnight platform. So depending on their maturity and where they're at it might drive as to whether we go single or multi-tenant, but we know as we continue to expand we're looking forward to wage.

higher utilization of our multi-tenant attack plan

Great. Thanks so much.

Thank you. And our next question comes from the line of Brad with Bank of America. Hey guys, thanks and congratulations on your first quarter wage order to start. I wanted to ask about the the the partner Channel. Maybe we saw some decrease in your your services next and I know there's been an effort there to to kind of build out that channel for the globalist size to take on more of the the implementation work. How's that going you happy with the result. This quarter is am I right to look at that wage that Revenue that Services Revenue makes coming down as a result of those efforts.

Yes, Brad. Thanks for the question. And the short answer is yes, you know, we've been kind of restraining a bit some of our services growth. I certainly want to enable our partners to take on the work but I also want to emphasize that that our model is not to own and take on all these implementations ourselves. You know, we really just need each project with an expert model where we put in core Architects for business Architects and configuration Architects to really help with the overall solution. So we're we feel great about our core partners and how they're scaling their practices. They you know continue to report to us that their debt Creek practices within their firms. Their respective firms are among the highest growing areas of their businesses. Um, and we know we're going to continue to grow that footprint assigned goes on so, you know, that's why you're going to see us temper Services growth moving.

Forward as you know, the the system continues to thrive and and help us with these installations.

Got a great thanks Mike. And then one more on the multi-tenancy comments you made earlier would have the conversations been like not not just kind of for today. But you know, when customers are kind of describing their roadmap for life. You know, Duck Creek over time. Are they more open to moving more workloads, you know in into the multi-tenant option over time. What are some of the the puts it takes and and some of the month that you might be hearing from customers willingness to adopt or are they getting more and more comfortable with the first step being single tenant? And and that that's a logical Next Step. So it's more of a foregone conclusion. Just any kind of color on Thursday qualitatively how customers are viewing that thank you. You bet great question by the way, and here's what I'll say is I would say largely that some pass objections of bolts ass and perhaps even multi-tenancy around security and data isolation and some of those capabilities are behind us and yep.

We you know us implementing in in winning contracts at large carriers.

Tier one tier like AIG and like Liberty Mutual, you know, we have to go through a very very detailed process in terms of you know, how do we run and operate our staffs platform? I think what's happened now in terms of multi-tenancy is the conversation shifted a bit and it shifted around this concept of what we call in the industry of continuous integration a continuous deployment. And this is about the adoption of updates and change. We certainly have an aspiration. If you will to have much more continuous updates of Technology on a much more frequent basis and we are moving there with our multi-tenant environment. Usually we have is on the customer's side, you know customers are at varying level of maturity under ability to behave with CI CD continuous integration continuous deployment processes because some of their integration, yep.

Need to follow the same Pipeline and patterns and this is where we're thrilled to be working with RSI Channel who's working with our customers to modernize some of their processing on their soil. In fact cognizant is in si player that we're working with in lock step in terms of these mechanisms and they're doing a very very nice job with that. So, you know, we know that carriers are embracing this discussion, they're enthusiastic about it. But as I said, they're in varying places in terms of their level of maturity and how fast you want to move to that environment both cios want to move there. So they're very encouraged about the conversation. The real question is what pays so we're excited about the opportunity that we think it represents a great opportunity for us to continue and Thrive and grow. That's great. Thanks so much Mike.

Thank you. And your next question comes from the line of Sakakawea with Barclays?

Okay, great. Hey guys. Thanks for taking my questions here, you know, maybe maybe to start with you bike a few nice examples of International wins there in your in your prepared comments jury. Can you just give us an update about how you feel about your International presence and maybe relatedly how the competitive environment looks internationally versus the for example broad-brush.

Yeah, great question Sackett and obviously International represents a very large opportunity for Duck Creek. The majority of the global wage is outside of the United States. Um call about $35 37% of the premium is in the US about 45% in North America, but with that, you know that we know that we need to make more Investments to expand internationally. We feel very good about our track record of expanding in the UK and down in Australia and off Landing point for asia-pacific. So we already have presents if we have customers and some notable wins. And then now, you know continuing to have that expansion in a mental Europe. Here's what I'll say exactly is I would say it's a great opportunity. We're making Investments. I'm a little bit guarded in terms of how fast some of those investments in Continental Europe are dead.

Going to take hold.

Especially a bit in light of COVID-19, you know, the one advantage that we have in our industry is we have these very intimate relationships with current customers. And I think that's one reason why we've been able to close so many deals even in a covet environment because they know who we are they know our brand and you know, they they are very very open to doing business with them expanding in Europe. Obviously, we're a little bit less known. So in some countries, we've landed ten feet on the ground and we're building up our capabilities, but I think you know, we're not as close by in terms of how the market responds especially in this Cove it environment, but we know that our software has been successful. We have it proven out and now it's about scaling to go to market operations and we'll keep an acrylic close read on it.

Makes sense makes sense. Maybe for my phone for you. Vinnie actually want to talk about a Metro we haven't talked about as much which is which is a are are you know, I think that net new contribution this quarter was about twenty million. Probably one of the bigger ones that we've seen in the last couple of years, you know, are there any anomalies in there that you'd call out or anything to keep in mind about about that number or sort of that wage growth going out into you know into official twenty one and and the future. Yeah. Hi second. So i i q 4 was a bit of an anomaly. It's just as a related to the timing of when deals got provisioned and just you know to reiterate how we calculate AR. We're just annualizing Revenue recognized in the last month of the. Thursday. We start recognizing Revenue once a contract is sold and the customer has access to the system that generally takes but you know, usually it happens within about 30 days. So if we sign a deal a large deal

In the last month of a quarter it may fall in 1/4 of a or another the way the timing worked out in Q4 is we got a very large Q3 deal that actually got provisioned 6 to 4 and we got a very large Q4 deal that came late in the quarter that got provisioned within the corner. So we probably had unusually favorable timing. So the way it worked out about half are are our growth hit in Q4, that's not our expectation. We you know, but we can vary quarter-to-quarter based on when a deal gets provisioned. So I think we'll we'll tend to be a little backpack loaded not a lot back and loaded and you know, it could be, you know, an individual quarter could move a little bit one way or another based on an individual deal. But we do it we did have two large deals in the quarter that thumped up that fourth quarter error.

Got it. Very helpful. Thanks guys.

Thank you. And our next question comes from the line of Alex with RBC.

I think stick my pleasure and congratulations again for a really strong first-quarter out of the box. Maybe just the first one for you. My you know, a lot of investors are asking just about how to pipelines deals with how you know, both of the top of the funnel at the mid-stage and you know, if you think about your ability to to look at sales titles and how they're developing posts coded with an opportunity closed Thursday. How would you talk about those deals particularly given and what impact if any of the IPO has both on pipelines and sales Cycles?

Yeah, thanks for the.

Alex and when you look at when we look at our overall pipeline, we we classify the entire pipeline over five stages. So we have a a very disciplined process of how we look at it off and what we really refer to as a more mature side of the pipeline is the final three stages and we know that we're really in an evaluation or all the way through a Contracting process. We're in those final three stages of the pipeline and under you know, the time frame of COVID-19.

That is serving as you know, some kind of strengthening if you will of the overall pipeline. So, you know, we're just pleased with the overall outcome and what the results look like today.

Perfect. And and then maybe just a follow-up for Vinny. I wanted to ask about 2 metres. Obviously you talked a little bit about the the puts and takes in a given quarter which were very strong this quarter particularly and you've now had to kind of straight quarters of accelerating growth their remind us what we should think about, you know from a sapphire are tying it to forward fast Revenue off perspective. And then also just remind us where I know you're not guiding to the symmetric but how should you know, we think about dollar basement retention trending is it is it something that can bounce around or or is it something where would you expect to be above a certain metric over the course of time?

Yeah, good questions, and I'll I'll take the second one first and I'll go back to the question net. Our attention. We we've been pretty consistently, you know life if I went to to the widest range were probably you know in the 110 to 120 kind of range and you know, we've been averaging between that range over the course of this year. I don't expect any near-term significant variation away from you know, 113-115 117 kind of numbers the you know, any individual quarter could move on a single deal. So, you know an existing customer like an AIG or somebody like that who who is rolling out a new product or or has an ad on sale that could impact a quarter if it's nice sizable individual deal, but I think the average net retention rate. We don't see anything happening in the way cell cycles are running the way the pipeline mix looks that would indicate that it it's dead.

And to be reasonably consistent for the foreseeable future on our I think are are our number is sufficiently transparent that you can assume that, you know, the exit point that we are showing you is pretty close to the entry point for the next quarter, but for deals that signed in the last month of the. So what I mean by that time if we did, you know, if we did it two million dollar deal on the last week of August, it's unlikely to have been provisioned to recognize any Revenue in August that would start in September. Um, but that tends to roll year to year of cell cycles are reasonably consistent. So I think you can expect that. You know, the entry point going into a. Is the ARR from the dead Tire. Plus maybe a little bit from a from a sale that might not have been provisioned.

Perfect. Thanks so much.

Thank you. And our next question comes from the line of bobbing SRI William Blair.

Hey, Mike, Denney congrats really good core out to get a vehicle with Alex just said nice job. And then maybe I'll start at a high level Mike for you, you know, as you look at the new customer and you land in certain departments, I'd love to understand sort of whether that's more on the personal side of the commercial side my sense and I love some color clarification on this is that a lot of prep visual confirmation much of it has happened because of consumer like Behavior driving that like, I want to get a quote on my phone immediately or Price policy and Commercial is still kind of age and lead and not as Modern Age. Is that what you're seeing opportunity more in a commercial side when you land. How do you think about that just and and where the premium figure my my feeling would be commercial, but let's get some call in at

A great question and I would say at large we continue to see almost a fifty-fifty split a very consistent split between commercial and personal lines. In fact in in my prepared remarks. I talked about to tier-2 carrier winds that are implementing. The. One of them is predominantly in all personal lines predominately Auto carrier. The other one is predominately an all commercial lines carrier. So I think even in the winds and the quarterback running our full Suite you're seeing a balance of that and you know, I think there are a lot of carriers, you know across the globe that are even in the tears, two three and four space on personal lines that have not modernized their technology. They're looking to have straight through processing and more direct access and digital engagement for their

Customers so there, you know there there's demand out there in terms of overall premium. If you look broadly across the North American Market may be of the premium or a big large. The largest chunk of Premium is personalized Auto and then that is closely followed by homeowners and property and then from them in the commercial segment is workers compensation and then a whole plethora of commercial lines. So you're really do see quite a bit of balance that's out there across the industry across both commercial and personal.

Got it. It's really helpful. Then a quick question a little more tactical I guess on the new Deputy Thunderman platform you talk about some of the Winds and and some of the customers when I look at the base wage. You got you got a large base and you'd think about that conversion. I'd love to understand sort of what is their adoption in view because at some point they're going to upgrade if they want all the functionalities. How do you view that and then a skill sets that both your partners and your customers need to kind of move. I know it's low code no code which is great. But the whole skill set that goes into sort of thinking about this a whole new way. How do you think about that? So sort of what does that cloud up to you and look like the guys name, but he just in case moving on to that and is there a driver for that and and do they need to retool? Thanks. Yeah. Yeah. Yeah terrific terrific question. I'm going to start with the second question first and then I'll come back to the other premise page but on the second question investing in the S eyes, you know, the beauty of the Duck Creek platform is our low code platform and that is really what differentiates dog.

And the strength of that is the way that you can figure product rules rating rules product hierarchy and all of the business rules around like Risk appetite is off the same type of approach in the same tooling that you would use on Prim as well as on demand. In fact, we believe it's our low code platform that allows us.

To accelerate into the cloud much much more rapidly. So the good news is a lot of the core skills that are SI Partners have are very very transferable as well as our customers, which is great. The real work now is how you integrate with the platform. And how do you how does a customer obviously when the install. Create wage they have to integrate the core sweet to their Downstream Financial systems or general ledgers and then many different, you know systems within their overall organization and as well as third-party vendors, which is why we're investing so much in the ecosystem and the techniques that are used on the the multi-tenant SAS platform certainly are very different. So what we've done is we've created in Duck Creek University a whole set, of course work that really trains are partners and how to do those proper Integrations and how to do a job.

In a manner has our platform more readily and easily updated on a more continuous basis. So you are already going through that process of all of our size expect it because to be trained on Duck Creek means you have to be trained on those those processes and then going back to your first question on the on premise base from you know, a couple of things I do have some very very good proof points, you know, we've taken carriers like West Bend Over various and mutual benefit group lifted them up from on-prem and all three of those carriers are not only undertake migrations. They are running in production and upgrade on demand today. So we know we have the proof points when we look at the large the on-prem installed base at large. Okay, we know it is a future opportunity for duck create to migrate those customers to on-premise. The one thing that we do see with those customers is because we have a low code platform.

And we can push out changes and what we call our content layer. So these are changes like we see in our Bureau products keeping them current on ISO circulars for things like Commercial Auto and wage compensation for ncci. They can still adopt those changes even as an on-premise customer. So they tend to be quite happy and you know, and we're doing is working with that installed base Define the right inflection point and usually that's around a business value project for them to migrate into Duck Creek on demand over time. So, you know, we've been in discussions with many of those customers, but one thing that we do know is I want migration is we're not always in control when you do a customer has an on-premise install, you know, we as a software vendor lose some sense of control. It could be clearing the database directly. They the kids integrating using different techniques and yep.

Might have built a lot of complexity around that core and somebody has to pay the bill around simplifying that complexity and what we want to do is work with our customers when they have busy value projects and the position of strength to perform that migration. So we're in discussions with many of them and we know it's a future growth opportunity for that group.

Really helpful. Thanks guys. Thank you very much. Like my question is incorrect.

Thank you and going forward we ask that you please limit yourself to one question. Our next question comes from the line of Tom Sawyer a gentleman. Thank you for taking my questions. I'll I'll let you know the sentiments on congratulations for a successful first quarter. I wanted to kind of put a finer point there on the Vons question my regarding digital transformation and we we've all been kind of beat over the head with this term over the last, you know, six seven months and in particular, I'd love to hear how your customers you know, our I'm talking about that in particular. What does it really mean to them? How are they leaning into cloud with digital transformation and and specifically what offerings are they leaning on and then from a from a Trent you from a go-to-market perspective, you know Vinnie the follow-on there would be how much faster do you think you need to ramp up your sales team or perhaps you could just talk about the growth by what you'd like to wrap that up this year. That would be Thursday.

Helpful. Thank you.

Thanks, Tom for the question regarding digital transformation. You know, I will admit lots of carriers may look at their particular digital transformation a little bit different based on their strategic objectives for carriers that are personal lines in are really focused on customer service. They will think of a digital transformation around, specifically the customer experience. Um, so it's about providing immediate access and immediate access to the bill to changing the policy and you know wage for example would be if you were to add perhaps your sixteen-year-old daughter to your auto policy that changes the whole terms of the policy as well as a whole billing plan behind it and check that real time and making that transaction that at the surface level seems very, very easy. I mean adding my daughter to the policy underneath the water line and very very complex because your recap

Leading premium you're changing the overall billing sequence in in terms of the terms moving forward. So they'll think about it more from that customer point of view. But when you look at perhaps a commercial carrier, it's really about the relationship with their Brokers and agents and the efficiency of their Underwriters. So streamlining the underwriting process, you know one sometimes when we talked to Underwriters, there's a bit of frustration because so much of their time is not spent on really value-added activities that are really controlling risk of the outcome with sometimes it's generating documents or it's doing things on the overall policy that need to be done. So it digital transformation would be putting much much more Automation in 2014 things and automate the automating them perhaps using artificial intelligence and AI to automate decision-making and then making sure that the things that have to be looked at Birth.

By an underwriter are the right things that need to be looked at. So again, it's a

On the overall objectives of the carrier, but those are a couple of the things that we're seeing in terms of an overall digital transformation.

And just to hit your other question the I characterize it as you know, we spent the last couple of years largely focused on building the North American go to market organization. And we you know, we've scaled the sales force largely in North America to the point where it it's starting to become, you know, more efficient. I think sales and marketing a month would have been you know scalable for here. We're not for the fact that we want to try to take advantage and make sure we're covering opportunities outside the US so we're probably going to add you know, it would be in single-digit but we'll add some more direct sales resources primarily International. There's some support functions that go along with them, uh, that would be added to so headcount will continue to growth to grow largely in support of international. So I you know, I I've said before I don't think I would expect sales and marketing as a percent of Revenue to start going down within the next year or so, but after we've

Sales International which is largely this year effort. I actually think it'll start coming down a little bit as a percent of Revenue in the future.

Thank you. And our next question comes from the line of Pat Walravens with JMP securities.

Oh great. Thank you and congratulations last week one of your competitors made what I thought was a fascinating disclosure that that 85% of their insurance customers. We're stuck on version seven eight or nine, even though the most recent version version 10 has been out since 2018. So just with that backdrop, I'd love to hear your perspective on what that tells us about the nature of this industry that you're competing in and and what it might tell us about the opportunity for Duck Creek. Well, I think that's very insightful and I'm glad you raised. You know, really that overall metric and I think what it does what it does say is that, you know, given the complexity of Court transaction processing here that upgrades have just been too expensive and I think that is why customers and Prospects today are looking for a job.

Technologies and I think it's why cloud has, you know been so rapidly adopted in other Industries because as much as it's about compelling and new capabilities, which I think cloud technology accelerates, I love the fact that we can do things today with ten lines of code that you could take thousands of lines of code before. This is is much about staying current and you know, even though this on-premise installation of applications has helped the insurance industry modernized I think at large Industries a bit frustrated because once they're done with an implementation, they're finding a cost to do an upgrade or they're finding that their system is completely outdated. So I think with this new model is about saying current and it's about a better economic means of staying current and we're watching this unfold and many many other Industries. We have some great industry leads.

That are doing that so I think that's really what driving.

Part of the demand to get the majority of new core system decisions to be fast-paced decisions. And I think you know, it's really about modern modernizing choice of staying current. So I think it's a great indication for our future prospects.

Thank you. And your last question for the day comes from my account ending with Needham? Thank you. Good evening, Vinny. I'll just focus on margins for a second here. I think if the IPO you laid out a long-term Target Model something close to a 25% ebitda. Margin. I just want to get a sense what type of Revenue level would you have to achieve to get to that margin level? Could you remind us of what the levers are both on the gross margin front and on the operating margin front to get to that type of Target long-term. Thank you.

Yeah, I don't I don't think I want to go into the like exact specifics of the the revenue balance. We need to hit 25% that that was kind of a you know, a five to seven-year Target at you know, using organic is kind of comprable to what we've got. Now the the key levers we need to get there are really continued leverage of the of the on-demand platform. So the subscription margins which we do expect to move up from their current 64% And besides that we're not looking for more margin data services. We actually expect to move down a little bit from there. Um, so but but with the mix shift, we think that you know, overall margins will move up gross margins will move up a little bit and then took some International expansion largely in sales and marketing this this fiscal year fiscal 21, all of our operating expense areas are you know pretty highly leveraged Evil Dead

You know coming out of fiscal Twenty One. We'd expect decreases as a percent of Revenue across each of R&D sales and marketing and G&A probably a little less in sales and marketing than the areas. But well, we'll see length of debility in in all of the operating expense areas and it should be pretty consistent as we as we grow the business.

Thank you. I will now turn the call back over to my house key for closing remarks.

Okay. Thank you everybody for participating in our first earnings calls a public company. We certainly appreciate you investing your time with us and let me wrap again highlighting the fact that we ended up the first official year twenty-twenty with a record quarter in spite of the many challenges as a result of COVID-19, and the related effects of the economic environment were obviously very excited about that creaks growth opportunities as the industry continues to transition to run court systems in the cloud. Again, I appreciate everyone joining today. Thank you, and please be safe healthy and well, take care.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating and you may now disconnect.

Thursday