Q1 2021 Guidewire Software Inc Earnings Call

And one financial results conference call at this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation.

And should require operator assistance during the conference. Please press star there on your telephone keypad and.

As a reminder, this conference is being recorded and is now my pleasure to introduce your host Alex. Thank you Alex you may begin.

Thank you operator, good afternoon, and walk and the Guidewire Software's earnings conference call for the first quarter fiscal year 2021, which ended October 31st My name is Alex years, <unk>, Vice President Investor Relations and with me on this call as Mike Rosenbalm, Guidewire as Chief Executive Officer, and Jeff Cooper, Chief Financial Officer, a complete disclosure.

Our results can be found in the press release issued today as well as and our related form 10-Q and.

10-K filed with the EPS 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. This call includes forward looking statements regarding financial results.

Total customer demand operations and the impact of cold and 19 on our business and other matters. These statements are subject to risks uncertainties and assumptions and are based on management's current expectations as of today and should not be relied upon as representing our views.

And then any subsequent day, please refer to the press release and the risk factors and documents, we file with the FCC and cleaner and most recent annual report on form 10-K, and our quarterly report filed on form 10-Q with the FCC for information on risks uncertainties and assumptions that may cause actual results to differ materially from those set forth in such statements.

We also will refer to certain non-GAAP financial measures to provide additional information to investors a reconciliation of non-GAAP to non-GAAP measures is providing and her press release reconciliations and additional data are also posted and a supplement on our IR website with that I will now turn the call over to Mike.

Thanks, Alex.

Thanks, everyone for joining us today.

We're all very excited with our start to the fiscal year and feel great about the momentum we have established and our business.

Do you want and typically acquired quarter for us and coming off a strong fourth quarter, we were happy to see both a R.R. and revenue come in above the high end of our guidance range is more importantly, we made significant progress and all key areas of our business.

Specifically further strengthening our cloud momentum and executing our connections customer conference, which as you know was done as a virtual event this year.

We believe were well positioned for the year and well positioned to continue to execute on our mission to be the platform PNC insurers trusts to engage innovate and grow efficiently.

Before getting into the details of our first quarter I'd like to take a step back to review the unique position Guidewire has established and the pursuit of this mission the opportunity. We see ahead with Guidewire cloud and what we're focused on to continue driving successful customer outcomes and the PNC industry.

Since our inception, we have focused on serving the more than two trillion dollar global property and casualty insurance industry over the last 19 years, we've established ourselves as the most capable and complete PNC platform in the world many.

Many of the largest insurers and the world rely on Guidewire software to support the most complex and robust environments and to do so at scale.

Today, we touch approximately 20% of the industry's direct written premium with at least one of our core products and we've completed over a thousand implementations at over 400 PNC insurers.

While this penetration is impressive these metrics also inform us that there is still considerable white space available and considerable opportunity for both guidewire and especially our customers.

We believe the imperative for modern core technology, and the PNC industry is stronger than ever to stay competitive PNC insurers are responding to rapidly evolving policyholder and agent expectations by rethinking customer interactions with user friendly digital experiences.

Insurers are also looking to technology to help them grow by bringing new insurance products to market and expanding geographically enjoy.

Insurers need to do these things as quickly and efficiently as possible with effective I T and enterprise systems, all optimized through modern data systems, and analytics, which make machine learning and artificial intelligence powered solutions possible.

We believe this imperative presents a tremendous opportunity for Guidewire, and specifically Guidewire cloud, which brings a new level of speed agility and ease of upgrade to insurers.

As we help leading PNC insurers modernize and innovate.

We are executing on multiple vectors, including delivering a six month release cycle that enables customers to adopt new capabilities faster accelerating our cloud momentum with each new cloud win and successful go live and growing our industry, leading ecosystem of partners and marketplace applications. We continue to.

To make great steady and determined progress and each of these areas.

A measure that progress can be seen and our recently held customer conference connections re imagined where we welcomed over 7700 registered members of the PNC community.

At the event, we announced the release of bats, and showcased customer stories and more than 65 online sessions, which have already been viewed over 50000 times, making it by far the biggest event in our history.

Banff demonstrates the reality of our new six month release cycle and built on the cloud Native services introduced in Aspen and the Guidewire cloud platform.

And Bam, we've introduced a number of new capabilities that cloud customers can benefit from now.

Advanced product designer, which empowers insurers to build the flow and manage and churn products quickly and that a new eight <unk> to support integration with third party systems additional cloud native services and science risk and sites.

We unveiled a new developer program available at developer Dot Guidewire Dot com, which represents our first step towards better supporting the unique needs of the tens of thousands of developers and the Guidewire community.

We announced cloud direct and new breakthrough program that allows the vast majority of our current on premise customers to upgrade directly to Guidewire cloud.

The transition expense required to upgrade to Guidewire cloud has been discussed here previously and cloud direct is a tangible example of the investment and development. We are focused on to accelerate our cloud transformation by making the process faster easier and less expensive for our customers.

Half was also a major release from insurance now, where we introduced a new consumer sales portal and extended our marketplace program. So it can support insurance now.

This announcement aligned with the introduction of a number of partner apps for insurance now customers and it's a very important signal and things to come as we gain more and more engineering and business leverage from the combination of insurance now and Insurancesuite.

Finally, we outlined our ability to help insurance carriers unlock more value and insight through closed loop analytics, our customers can now access their own core data through guidewire as cloud data platform generate contextual insight and enrich that insight through behavioral data captured and sciences data listening and.

Brian and finally applied predictive analytics to the combination, allowing everyone and an insurance company to make better decisions at every step and the insurance lifecycle.

The system is designed to absorb these insights and adjust them overtime, making the system smarter with usage and time and a close loop cycle.

Connections also gave us an opportunity to outline our vision for Cortina and future releases, one highlight with claims autopilot and new approach to claims management and automation that will leverage AI analytics and digital to enable and automation first approach to claims handling and claim center and the low.

Last year, we have spent a high percentage of our focus on the policy side of our product suite and I'm very excited about our potential to also radically improve customer efficiency and experience and the claims side of our customers' businesses.

Connections was also a great opportunity to hear from our customers, we heard from peak and insurance, who is using our analytics platform to improve speed to market and create predictive model driven pricing peak and realize that the growth efficiently. They needed analytics capabilities that are integrated with their core platform and with Guidewire achieved double digit improve.

Movements and their loss ratio.

We also heard from the Veeva, Italy, who described their ambition to significantly grow their opinion see market share by leveraging the latest digital technology to rethink insurance from a customer's perspective.

Let's see if and France is another and sure focused on transforming their business to one that is customer centric by upgrading from decades old in house systems to Guidewire cloud for a seamless customer experience across all their lines of business.

And finally, we heard from U.S. day, where we are playing a key role and a modernization journey that leverages guidewire cloud to better serve their members and an agile and flexible way by using the best that the industry has to offer and position themselves for the next 100 years.

Q1 was also a very important quarter for us with customer deployments. We saw 18 customers go live on implementations for 45, Guidewire products, including 11 insurance suite cloud product go lives at seven customers. A handful. Notable notable events include TV insurance part of TD.

Bank are successfully went live on claim center and the cloud.

Which was a large joint effort and an important reference customer and Canada. This is just the first leg of our journey with TD as we now turn our attention to the Policycenter and Billingcenter projects.

Well Bill toss insurance, a wholly owned subsidiary of C.S.A. Insurance Group went live with Policycenter and Billingcenter less than four months after signing the cloud agreement and Q4 and is now our third production customer on the Guidewire cloud platform Todd.

Toggle a member of the farmers insurance family went live on Claimcenter be the ASP and release of Guidewire cloud platform. They were our first customer to go live and production on the ASP and release additional.

Additionally, a tier one and sure went live on Guidewire cloud platform be Aspen with a greenfield deployments that as part of a much larger guidewire cloud modernization and finally, just this month cooperative insurance companies went live on insurance now with commercial farm farm umbrella and personal umbrella lines.

Turning to new sales activity in the quarter.

Average mutual insurance and existing on premise customer selected Claimcenter and Guidewire cloud as the first step and their migration to cloud. In addition, buckle insurance, a startup and sure offering policies specifically built for rideshare drivers adopted Guidewire claim center.

Notable expansions in the quarter include a tier one specialty insurer broadening its use a claimcenter to include the London market cash.

Colonnade purchasing our digital products and safety insurance, adding digital capabilities to supplement their used to claim center.

I'm also pleased to see our partner ecosystem continuing to grow.

And the area of systems integrators, which continues to be an important contributor to our increasing market leadership. We ended the quarter with approximately 730 consultants from 28 partner companies, who have now earn the advanced certifications required for Guidewire insurance, we cloud implementations. This is up from approximately 620.

Just three months ago, and we believe that this growth continues to be an exciting proof point for the opportunity our EPS I partners see and the future of Guidewire cloud.

We're also seeing great momentum with our marketplace partners innovation beyond Guidewire as the true measure of a platform and our open eight p. I first approach enables and sure text to innovate on top of our platform and for customers to more easily build these innovations into their core workflows. Today. There are over 600 applications offered from Guidewire and 95.

Yes partners that enable customers to engage innovate and growth efficiently.

This quarter, we also invested in two and exciting and share tax San Francisco based.

Hover, who has developed a smartphone app.

Which actually were accurately produces three d. exterior property models and is used and student to dramatically improve the homeowners claim experience and Denver based fibril, who has developed and AI assisted inspection solution for underwriting loss control and claims management of residential and commercial property, which is.

Back to continue to make similar investments to accelerate innovation and develop and even more robust ecosystem on and around our cloud platform.

In addition to attracting the attention of insurers partners and marketplace participants, we continue to gain visibility and accolades in the industry analyst community.

Forrester Research recently recognized claim center and their Forrester wave for claims management systems Claimcenter received the highest score and the current offering and strategy categories as well as the highest market present score, reflecting the size of our customer base and our growth in.

In addition for the six time in a row Gartner has named Insurancesuite as a leader and its magic quadrant for PMC core platforms for North America is very gratifying and validating to see independent analysts recognize our platform and the customer success. It consistently delivers and summary. This is an exciting time for guidewire.

With a lot of activity as customers seek to leverage technology to engage innovate and grow efficiently the transformation of our customer base and ecosystem to the cloud is key to this by combining the deep and and capability of Guidewire with the benefits of cloud, we're offering tremendous value for our customers and further advancing our global leadership position, we're making.

Excellent progress and important areas as we execute on this mission and we look forward to sharing more proof points and success is as the year plays out now I would like to turn the call over to Jeff for more details on our financial results and our outlook for Q2, and the rest of the year Jeff.

Thanks, Mike we were pleased with our first quarter financial performance.

Our our total revenue operating and operating income all finished above our outlook provided last quarter.

Activity levels across all parts of the company are high, especially as we exit our first virtual connections conference.

Q1 is always a seasonally slow quarter and per our usual cadence most of the years deal activity is still in front of us as such our financial expectations for the year remain consistent with what we discussed last quarter and during our analyst day, albeit with a bit more data to reinforce that view.

On today's call I start with a summary of our first quarter results before turning to our outlook.

For the first quarter Aerostar ended at 513 million up 11% year over year and ahead of our expectations.

On a sequential basis.

Our our declined slightly due to the large contract consolidation and the Sun Sun setting of support for acquired is yes on premise customers.

Both of these factors were discussed last quarter, when we provided our outlook.

Total revenue was 169.8 million ahead of our expectations due to stronger than expected subscription revenue and license revenue.

Subscription revenue was 37.2 million up 33% year over year, and driven primarily by cloud activity.

Subscription and support revenue was 58 million up 18% year over year on the strength of subscription revenue.

License revenue was 65.3 million license revenue benefited from 15 million and incremental revenue from deals with duration longer than our standard to your initial terms for annual renewals.

This is 1 million higher than the 14 million that we discussed when providing our outlook on the Q4 call.

As previously noted the incremental revenue was primarily due to the large contract consolidation that took place in Q4 with much of the associated revenue being recognized in Q1 as a result of renewal accounting under a and C. Six so six.

This was because many of the components of that deal were up for renewal and Q1, requiring revenue recognition in Q1 versus Q4, when the contract was executed.

Services revenue was 46.6 million down 13% year over year.

There are a number of factors driving this decline.

First we have seen a small number of projects delays associated with co bid, which impacted the quarter and has an impact on our expectations for services revenue for the year.

Additionally, as we were doing 100% virtual delivery and professional services, we have seen billable travel expenses decline.

Which has a comparable downward impact on expenses.

Finally, we continue to see new projects being led by our partners, which is a positive trend that we expect to continue this.

This is critical for our ability to scale, our cloud migrations and new implementations and future.

Now, let me turn to profitability for the first quarter, which we will discuss and the non-GAAP basis.

Gross profit was 91.8 million overall gross margin was 54% down from 56% a year ago.

Subscription and support gross margin was 48% down.

Down from 62% a year ago as a result, and significant cloud operations hiring over the last year to support new and future cloud customers.

While we are well on our way towards building out the cloud operations team that we will leverage as we continue to see growth in our cloud products. We do expect continued head count additions through the end of this year.

Services gross margin was 2% down from 10% a year ago.

The decline and services margin is due to the factors impacting services revenue, which I already touched on.

Operating income was 2.8 million exceeding our guidance range due to higher than expected revenue and expense favorability.

We ended the quarter with 1.4 billion and cash cash equivalents and investments and.

And we did initiate our stock repurchase program and the quarter investing $5 million on the repurchase of 49000 shares and the quarter.

Now turning to our outlook for the fiscal year and second quarter.

For the full year, we are reiterating our outlook for air our total revenue operating income and cash flow from operations.

We anticipate air or to be between 560 and $571 million at the end of the year.

We expect total revenue to be between 723 and 733 million.

As we look through to the components of revenue I wanted to make a couple of comments.

We continue to expect subscription revenue to be approximately 165 million an increase of 38% from fiscal 2020.

The higher than expected term license revenue in Q1 and visibility into term license new sales activity for the remainder of the year gives us increased confidence and our term license expectations, but.

But this is offset by lower services revenue expectations, which we now expect to be approximately 185 million.

We still expect total gross margins for the year to be approximately 55%.

As our license revenue mix is expected to grow slightly and the positive impact of this mix is offset by lower services margin.

Operating income and cash flow from operations expectations for the year are unchanged at negative 5 million to positive 5 million and 60 to 70 million respectively.

Turning to our outlook for the second quarter, we expect error or to be between 518 and 521 million.

Total revenue is expected to be between 168 and 172 million.

Subscription revenue is expected to be approximately 38 million an increase of 34% from a year ago.

Support revenue is expected to be the same as Q1 and.

And services revenue is expected to be approximately 42 million.

Non-GAAP operating loss is expected to be between five and 1 million.

In summary, we recognize that like prior years much of our sales activity. This year is expected to occur in the next three quarters. We are energized by the activity. We are seeing coming out of connections. We hope many of you were able to participate in our virtual event as we opened the audience up to the Investor community. This year.

Connection content is also available to be consumed on demand on our web site.

Operator, you May now open the call for questions.

Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad and confirmation tone will indicate that your line is and the question queue. You May press star two if he would like to remove your question from the queue for participants using speaker equipment and may be necessary to pick up your handset before pressing the star key.

And the interest of time, we ask participants limit themselves to one question and one follow up one moment. Please while we poll for questions.

Thank you. Our first question comes from Sterling Auty with JP Morgan. Please proceed with your question.

Yes, Thanks, Hi, guys, Mike in your prepared remarks, you talked about a number of go lives and activities with customers and I think investors are wondering you know when you look at those are there any of them that are tier one where they're migrating but core biggest book of business into the cloud and in particular.

USA I think you said you've heard from them, but I think investors are curious if that's going to be the you know the the lighthouse account that begin the domino effect to drive those big books of business into the cloud.

Yeah. It's a good question, so and I'm glad you asked it because it was up and thinking about what's the most important thing that we can be doing as a company in order to accelerate sales and accelerate adoption of the cloud. It's really just getting these customer go lives. These proof points established in the quarter are the first.

Order was a very very important and a milestone for us but.

Because it you know we now have a live production customers on the Guidewire cloud platform.

As I mentioned, the the project with USAA is going very well and I would encourage you to take a look at the at the connections materials that we were able to publish a post the event where you can you know there is a couple of those that just haven't really really positive comments about the partnership and the momentum.

We've been able to establish there.

Getting to your specific question, what we've seen so far with Guidewire cloud platform and and it's you know sort of a testament to how flexible and agile and you can be with the system are that new lines have gone live right. So the production implementations or new lines and.

The next thing to expect is that some of our existing cloud customers, we will be making.

The the jump over to the Guidewire cloud platform and that Sorta ski resort based approach.

To the to the actual version number and that will be where you should expect the first sort of major existing book of business sort of implementations going live on that platform I expect those and becoming a in the next couple of months or quarters and will continue to build on the proof points, we need to accelerate.

And cloud sales.

All right Great and then the one follow up would be around and churn suite, a and particular and talked about the investor and analyst day, you know at the end of life, but for investors that didnt inherit can you kind of remind us the timing of when that happens and how big that book of business is that might be motivated to move to the cloud directly.

From version eight.

Well, so that there's a variety of compelling events associated with particular version of Java customers running particular database versions of customers running version eight.

All of those events and I would say you should think about occurring over the course of say this year, maybe a year and a half.

And and and I also want to stress that you know.

We work. These these project decisions very complicated for customers and we work with them to see to structure. The upgrade around what makes the most sense for them.

And all of those sort of compelling events are taking place over the next year year and a half.

In terms of you know we called out in the in the prepared remarks, the vast majority of our customers being non version eight version nine or version 10 I.

I don't have off the top of my head the exact percentage that is version eight.

But were you you should you should you should model greater than 50% of our customer base falls into that category.

And so our ability to sequence the proof points associated with large customers on guidewire cloud platform with the compelling events associated with these version upgrades and these core infrastructure upgrades I think it's really important for us and like I said in order to be able to accelerate cloud adoption and the customer base.

Makes sense. Thank you.

Yes, thanks for the question.

Thank you. Our next question comes from both voluntary with William Blair. Please proceed with your question.

Hey, gents, thanks for taking my question and good.

Good to see those cloud wins and start to ramp up.

Just following up and I'm starting to question, maybe a little differently.

You've talked about sort of getting scale and leverage at a certain number of customers and the cloud and so so I'm I'm not asking the question of.

Which situation drives more migration and flywheel effect.

And how many customers do you think it takes to sort of get a sense for the comforts. So it's not one big book of business, but it was a four of the top and three of the top down and.

Two of the tops and whatever the number is that you're seeing sort of breaks down from those barriers like like we saw with Salesforce and the early day tried it took a couple of very large customers and people they've got to realize okay. We're gonna put CRM and services and the cloud I Love just on how you think about the number of customers as opposed to the book of business of a specific customer and then.

When you couple that with what we see leverage on the gross margin line, what sort of numbers do we need to sort of see but just talk to income of that leverage on the gross margin line given the investments you've made.

Yeah, I'll take the first half of the question and I'll, let Jeff comment on the on the gross margin question.

No I don't I don't think of it as exactly a count of customers you know when it when I look at the our existing cloud customer base I think we have especially when you consider USA.

We have enough of a large tier one tier two tier three you know sort of customer base in order to.

Effectively pre.

Prove out the system such that we can prove to our customer base that this is vetted and this is reliable and this is something that they can trust you know and so that you know and unfortunately, I think just turns into a a series of project timelines associated with go lives.

And upgrades and establishing those proof points and we are well on our way.

Towards achieving the sort of critical mass that's necessary to convince everyone.

This is something that they can trust right. So we have the spectrum of customers and now it's just a question of executing on those projects and that's why I was so excited about the milestones that we've been able to achieve and the last six months, you know announcing that number going to ship Guidewire cloud black.

Form delivering aspin announcing that we're going to go to the six month cycle, and then delivering Bam and then getting the customers live on Guidewire cloud platform.

That is just so important and so you know if you if you can imagine the way I'm operating the company. We're just looking at a pipeline of project activity that is all sort of sequence and will all result in more and more guidewire cloud platform cloud customers and that kind of leading to Jeff.

Is what drives the improvement in the margin right that the more customers we have shifted over the more cloud customers. We have shifted over to this new approach to more efficiently delivering the cloud and delivering these upgrades the more of the margin improvements are going to kick in so Jeff anything do you want to add on the on the margin side.

Yes, no I agree I think if you think back to analyst day, we talked about this year being a critical year for us as we really build out the cloud operations function and also gain insight into these new ski resort releases and the potential margin benefit we can garner by running those and our operation environment right. So.

With Aspen worse, we're in the early days, we're starting to see proof points and our expectation is is very consistent with how we thought about it at analyst day with respect to starting to see some of those benefits more meaningfully as we exit this year.

Yeah, No. That's helpful. I guess, a follow up I'm just just on the services comment you made.

Mike There, which was you know you sort of seeing services come down a little bit some.

Some projects get delayed and that potential because of any surge as people are saying is there any hesitation.

Or is that largely because it's going to partners and not just on the mix shift, which part of sort of maybe a little bit hesitation and while there is slightly and the tunnel with vaccines and things like that sort of how people are still waiting for that or was it really just a shift to the partners. Thank you.

Yes, so I will say that theres been any delays or anything like that I mean, and well I wouldn't say that excuse me I want to be clear I wouldn't say that there's any hesitation okay.

The you know Cove it doesn't help US you know.

I was talking to our head of sales the other day, we're working through it and we're making it work and and we've been able to sell deals which is a testament to all the hard work that goes on and our sales organization and on our customer sites to get these projects sorta coordinated and kicked off and get these deals completed but.

But you got to imagine this is a very very complex enterprise sale.

And typically we would be onsite with customers for big workshops, and large meetings and.

And that getting back into that sort of approach to.

Coordinating these multi year efforts is something we're very much looking forward to a as we as we think about the light at the end of the Cove and tunnel, but you know I wouldn't say that there's any hesitation at all about our ability to execute that's not what's behind that that change yeah.

And to be and the cobot and I want to be clear the cobi commentary related to services is more on the year over year compare as we look kind of the Q1. This year versus Q1 last year as we think about the adjustment to the expectations with respect to services revenue that is more a function of our partners continuing to take more and more of this work and it is.

And we've talked in the past our willingness to invest a bit and helping our customers overcome what does the common objection to go into the cloud, which is the amount of services work that's required in order to get there and so with some of these early customers, we're working hand in hand, and investing and those relationships as well.

Great that color is really helpful guys. Thank you so much I appreciate you taking my question.

And thank you.

Thank you. Our next question comes from Chris Merwin with Goldman Sachs. Please proceed with your question.

Keeping on the theme here I was wondering if you could give us a sense for.

How many of your cloud customers are up and running on Guidewire cloud platform and maybe just any qualitative color.

Color about how easy are challenging it is take a customer sales running insurance suite, nine and the cloud and and get them over to to the cloud platforms such that they can get the benefit of all the updates you roll it out.

Oh sure.

And it's one of the things I highlighted and the and the keynote at connections.

We have three customers live on Guidewire cloud platform, right now and production and like it couldn't be happier with that milestone and achieving that objective in the first quarter, because like I keep saying, that's what it's going to drive the confidence and the approach going forward and that's what's that confidence what is what.

Sort of unlocks I'd say, our ability to sell this more effectively.

And you know in terms of the.

The work necessary I think you mentioned the nine it's not exactly the way I think about it right for.

For the most part what we're doing is we're making we're taking customers from from V 10 to the Guidewire cloud platform and Aspen and now Bam.

And you know whatever the latest version of the of the ski resort releases at the time that it makes sense to move them.

To that version of the product the you know and that's obviously one of the things that we're paying close attention to is what is that effort and.

I would say that it's gone very very well in terms and measuring that effort and estimating the complexity of the of slotting that into the customer projects.

And such that it gives us a lot of confidence that we're going to be able to continue this pace.

Going forward.

And so you know outside of like providing some sort of a.

Objective measure of that expense. It was was it was sort of less than than we thought it would be and very much in line with our hopes for how easily easily we could make that transition. So that is going very very well.

Great and then maybe just thinking and cloud direct.

And as part of the day after lease you able to talk and a little bit more detail about how you're able to reduce these costs for customers looking to migrate to the cloud what's being done differently.

Yes, again any way to quantify the savings just as we and and we think about that being added and Senegal or something that can facilitate.

Migration thanks.

Well sure I mean in the past we were seeing and that this was really a two step process that customers and needed to upgrade to version 10.

The insurance suite product and then subsequently we would upgrade them to Guidewire cloud.

And after working through all of the details of the hundreds and hundreds of projects steps associated with.

That program, we were like we were able to define a way to do it and one step right and that makes it faster. It makes easier I think really more importantly, it makes it less complicated in terms of sequencing. The you know the you know the various teams associated with checking the various steps and the overall complexity of a profit.

Correct.

You know, it's just a less complicated undertaking for a customer to think about and I think more importantly from me.

And and for you. It makes it such that the customer can think about that step as one thing right. Because you know I think when I when I started at the company a little over a year ago, you know effectively were telling everybody and the customer base to think about just getting to version 10 of insurance suite and then.

Subsequent to that we would have a conversation about okay now you're ready to move to the cloud, but now because we can do this and one direct staff. We can go out to the version eight the version nine and the version 10 customers, obviously and just talk about what the project looks like to get them directly to the cloud and that's a really positive.

Message.

Like I said just to the customers in terms of reducing the complexity and the time necessary, but it also creates a better and it just creates a better dynamic for us to be having the conversation about cloud and the first place.

Great. Thanks, so much.

Thank you.

Thank you. Our next question comes from Matt Van <unk> with BTG. Please proceed with your question.

Hi, Thanks for taking the question maybe building on the last one and I think that the customer example, you you mentioned on the call earlier about Quad direct was someone buying a semi body and going live and four months, some policycenter and Billingcenter maybe.

Maybe just help us out thinking about you know kind of how typical that could be what.

Maybe what that specific situation might have looked like.

Under the co insurance suite.

Relevant and how that's changing with cloud direct and and maybe what.

From an absolute timeframe. This can speed up the additional customers moving forward.

Yes. Thanks for the question. So I think you're you're touching on your question touches on something that's important to understand about the market opportunity and Guidewire and Guidewire cloud and general.

Oh. These you know these initial implementations and Guidewire cloud have been net net new lines of business for customers and on this one of the things I was talking about in terms of understanding the the insurance business dynamic that's driving a lot of this activity and and the potential for delays.

Carrying value to our customer base. So these insurance companies. They they want to grow they want to bring new insurance products to market they want to expand with existing products and new geography is when they want to bring and new product to market.

You know they are seeing guidewire cloud as a mechanism to do that quickly and they're seeing that impact and instant instantiating that and new insurance product on a guidewire cloud.

Policycenter and Billingcenter claim Center instance is the fastest way to get that product to market and then now that approach that project that we can complete and like I said and just four months, that's very different than taking and existing system and existing book of business that.

In many cases had been running for decades.

Decades, and transitioning that over to a new instance, the project necessary to make sure that guidewire is configured such that it can receive all of that existing book of business and the various complexities associated with the premiums and the customers and the claim.

Names that are running on that legacy system, that's a much much more complicated project.

That has to do with you know we we can you can have the best possible you know core system and the world, which we do but it still requires a degree of a study and testing and and planning and that is very complicated and that's what is behind these multiyear projects.

That we talk so much about sweet we.

We have many of we have done and as I said thousands of these implementations in our history, but we have you know that is not something that you can do and four months a that is something that we do with our customers based on the schedules associated with their business and how fast they want to run those projects and our job.

And there is to provide a cloud infrastructure and a cloud product that's capable of handling the scale and complexity of those types of implementations, but.

But it's definitely something that we're seeing.

And our customer base and in the market is that there is more and more interest in these new innovative lines and getting those lines up and running quickly and doing it on the same platform that you can run the whole book of business at your at your EPS at a at a PNC enterprise on semi Thats great. Yeah, that's great and then maybe.

Shifting gears, a little bit towards the competitive from you know obviously.

It's been you and and a couple of others kind of leading the way for many years, but the insurer tech market is really kind of changing those those dynamics pretty quickly I'm just curious in terms of.

But I guess the two elements you just mentioned in the previous answer for net new lines of business is that a different set of competitors that you're going after and then on the more traditional side has anything changed are you seeing when rates you know fluctuate at all our decisions being put off and the current environment or.

Is that side of the business still kind of in line with what your expectations were.

Yeah I'll answer the second part first so competitive dynamic hasn't changed we've touched on it and previous quarterly calls you know we have not seen that competitive dynamic change at all Q1 was no exception to that.

With respect to ensure tax I think what we're seeing is that it.

The especially the CIO, who are responsible for integrating these systems into their existing enterprise. They it is much much more logical for them to do this on a platform that is going to end up being the same platform that is running their overall book of business.

You know I don't have a visual for you guys. Because we haven't opened up these calls yet on zoom, but you know the the architecture diagrams that our customers operate with Guidewire and the center are very very complicated and so a policy system is not implemented as a satellite.

In a you know and in an enterprise architecture, it's right there and in the middle of the enterprise architecture and its connected to almost any other system that you can think of a theirs.

Theres, some theres 50, sometimes 100 integration points necessary to execute on a on a policy and billing and claims system implementation and so when you think about it what you really want is a is a platform that is capable of providing the fast agile innovation on the product side.

But at the same time can support all of the robustness you need for your core book of business and being able to do that on one platform from Guidewire is a real real selling point of our solution and so this is why you know when people say insurer tax.

I actually I don't see and shirt tax as a potential you know vector of competition I see it mostly as a positive I see you know the these companies coming up with a mobile solutions like the couple that I.

Talked about previously and the and the prepared remarks that are just going to enhance the value.

That our customers are going to be able to get out of running guidewire I'm not so much that they are there to and you know that they're thinking about are capable of competing with us from a core system and perspective, but just that they want to help augment the value that we're providing as that core system provider.

Great. Thank you taking the question, yes, thanks for the question.

Thank you. Our next question comes from Richard Rishi Jaluria with D.A. Davidson. Please proceed with your question.

Hi, guys and thanks for taking my questions nice to see a continued cloud momentum and the business I wanted a follow up first on some of the earlier gross margin and questions that got passed a and and really specifically dealing with a subscription gross margin. So if we do the math you are somewhere in the neighborhood and.

Mid Twentys, and maybe maybe higher twentys and subscription non-GAAP gross margins, which is actually down there and I know, Jeff you talked a lot about there's there's some accounting here, especially with migrations from from term to cloud, but I'm still surprised to see the gross margins on the subscription line continuing to it.

To decline maybe help us understand what besides that what else is going on here given that you're you're at a much larger scale than you were when gross margins were higher on that line and then maybe more specifically outside of just more a bath and and cortina adoption and as well as just more customers what other levers.

We should we should we expect to see that lie and go up towards I guess more typical SaaS gross margins. Thanks.

Yes, and I look I think and as we've noted in the past that this is largely the big investment we're seeing on the cloud operation side as we start to see the newer releases and gain efficiencies out of the kind of head count driven impacts the margins that we're seeing now.

And that starts to have a more meaningful impact, but it's not going to have an impact and this year. So this.

This is very much in line with how we cover and thinking about it and and talking about things at analyst day.

The one you know there there are variety and things that go into this but the one kind of more technical component that we've talked a bit about in the past is is a lot of our early cloud deals are large cloud migration deals, where we end up allocating a portion of the overall total contract value to term license and away from subscription revenue and so you.

We think about those as those are all we're making big investments and those customers as cloud customers and that does have an impact on the kind of margin profile for those customers as we worked through the initial term and the contract and then once it once it renews there will no longer be that allocation towards term license and as you know they have to kind of use both systems.

They work through that migration period that has a small and that does have an impact we talked about I think three percentage points last last quarter and that's going to continue to have an impact as were migrating customers, but the big impact here is really that investment that we're making throughout this year that we you know we expect too low.

Leverage for all of our customers going forward and the cloud operations function.

All right great. Thank you so much.

Thank you. Our next question comes from Ken Wong with Guggenheim Securities. Please proceed with your question.

Great. Thanks for taking my question guys.

Mike one one common theme I notice coming out of connections.

Was that there was a much greater focus on data initiatives and and how cloud and enables the data project for customers and obviously a lot of the art automation you guys talk about versus in the past where it seemed like the the talking points were cloud for cloud sake.

How did that and messaging align with how PNC carriers are looking at there I T priorities or is this something and as as customers start to focus more on what they can do with data is that something that could potentially accelerate cloud adoption with low lumpier take there.

Yes, thanks for the question and I completely agree I kinda never want to be selling cloud for cloud sake, I wanted to be selling cloud because it accelerates initiatives that our customers and makes them more successful and I think data and analytics is part of the conversation whenever I talk to any cuts.

Summer about their technology initiatives going forward and I think what we have delayed.

Delivered now with the Guidewire cloud data platform is very very unique you know that if you think about on day.

One a customer and production has access to every transaction that is flowing through guidewire and a very modern data platform and the use cases for that you know our our vast and the opportunities like we say to sort of improve the way.

Good day that you're making decisions that every step of an insurance like lifecycle are very real.

I think the other side of that is that we also think that guidewire will be deployed with digital and in every single circumstance that there isn't going to be and implementation of guidewire that doesn't have a consumer facing or agent facing digital interface, and so that being built into the cloud product.

Just makes the overall value prop of Guidewire insurancesuite implementation much stronger.

And I think we've given you know were worse you are you are hearing from us.

How excited we are about that but I think it's going to start to really kick in as customers start to think about and talk about the value that they're deriving from from the transition to cloud because it's much much more than just where the software runs and who upgrades it but it's the key capabilities.

Cities that were able to deliver because it's a cloud services because it's a cloud services were running we can run that cloud data platform and we can give them access to that data and that's a key value proposition.

Got it got it thanks for that and Jeff maybe a follow up on the services side of things yes.

Yeah, I think most of US were expecting that you know after after after last year and the year before were services were reduced pretty meaningfully and now adjusting for Fourq kind of life. After cove. It that we were probably approaching a floor. There I guess as we look at the now reduced guide. There is is it fair to assume that thats, probably probably the.

Bottom up for services or is there any potential.

Income that could that could surface and the and in coming months that might bring that lower that you can think of.

Yes, Ken and I mean look we're working hand in hand, with our partners and and continue to try to push as much work as possible to our partners and we're seeing great pickup and their ability to to take and lead. These cloud projects, which is a great thing for the for the long term.

Yeah, we will we will commit to updating you on our on a quarterly basis and help you understand kind of the puts and takes and what's going on there.

The way I think about services is ideally, what's the lowest services and how we need to drive our air our targets.

And that's kind of what I'm focused on although we we do want to make sure that we provide that visibility and transparency in terms of how we expect that business to grow and evolve over over the future. So.

So what we provided is our best our best view into what we see at this point in time and the year with respect to where we think we'll get to by the media.

Got it very helpful. Thanks, Jeff.

Thank you. Our next question comes from Tom Roderick with Stifel. Please proceed with your question.

Hi, gentlemen, good afternoon, and thanks for taking my question, So and Mike you just responded to a question earlier with and interesting assets or regarding eat a line of business and new kind of greenfield growth being a driver of cloud adoption and and I guess as we sit here and December kind of nine months into this pandemic.

And I guess, the way that customers interact with agents and the way. The claims are assessed and process. All these things are you know the seemingly very different than than what they were looking like a year and two years ago, so perhaps or spend some acceleration, but maybe you can kind of comment on your conversations with your counterparties ex ads and big carriers on this concept of digital transformation and is this.

Accelerating their view for opening up these new lines of business and and framing up.

Gross opportunities for themselves, which which would theoretically accelerate your your cloud pipeline.

And Tom Thanks for thanks for the question, Yes, it's it I think it's really exciting that.

We are part of these growth initiatives for these companies and those growth initiatives. I think you should cat or you should think about them and like sort of one or two ways, one and as we're going to create a better digital interface a better smoother mechanism.

Mechanism for agents are for consumers to quote get insurance quoted to actually complete transactions, that's a phenomenal driver.

For Guidewire projects.

The other side of it is just bringing completely new products to market through completely new channels and there's a very significant amount of conversations I have with customers that are looking to experiment with new channels.

To bring innovative products to market and you just need flexible I T systems in order to be able to do that or I would say I should say in order to be able to do that quickly and effectively and cheaply enough to be able to do the types of experiments that are sort of and necessary to validate that a channel or.

Product is viable.

One of the things that I think a lot about you know just because just and as an approach to building software is that you want to sort of get the cost to try something as low as you, possibly can because that gives you an ability to try more things and can you never know that you're going to go.

It it right or that the channel and you pick or the product that you pick or the unique set of circumstances that you choose are going to work and so you want and get that cost to try down as much as you, possibly can because that gives you an ability to try and more things experiment more and find the thing that is going to actually work. So to the extent that guidewire cloud can be a partner with.

These insurers in bringing these new products to market quickly and quickly enough to have meaningful impact on their business. That's an that's a really really exciting and proof point for us one of the quotes that I saw sort of floated around the company was one of the executives and one of our customers. Just said this is the new way that we.

Launched products that our company is through this approach and you know and.

Look I and you know right there.

There. The fact that you can do this with a platform as robust and proven as Guidewire is really really important big.

Because they these these companies don't want a sort of Frankenstein approach to all of these different systems because they all that ultimately have to be integrated back into the financial systems and the reporting systems and the analytic systems and the on and on and on the list goes on and on and if their day.

Moving now all of that work anyway for their legacy modernization with Guidewire for us to be able to bring something to market that enables them to do that quickly. It's a phenomenal value proposition something I'm really excited about so yeah.

Yeah, I don't know hopefully that helps to give you a little more flavor as to what we're seeing and and the conversations we're having.

Yeah, that's that's great color and as you talk again, a little bit about some of these.

Yeah, I guess ski resort releases here, but talking about Banff and being released out here in November I'd love to hear a little bit more about you know the six month release cycle, the complexities of that that you're starting to see and understanding how customers are thinking about it or embracing it from a you know training and adoption standpoint, maybe you can talk a little bit about some of the early feedback.

From that six month cycle, and how customers are working within the bounds of that.

Sure and I and I'd be remiss and not to say that how proud I am of everybody in our product development organization for being able to pull it off.

I think it's one thing to say Hey, we have an intention to do a six month release cycle. It's a completely different thing to actually do it with Aspen and then follow it up six months later with Banff and as one customer told me I connections you did it in the middle of a pandemic and that is truly remarkable that and.

You know the feedback has been very positive I think most people think you know your first glance, you think oh guidewire as hard to upgrade so if we provide a release every six months does that mean that it's going to be hard to you know is it more difficult to take these releases what actually ends up happening is the releases are easier to take.

Because our mindset about what we're putting into these new innovations and new characteristics of the solution take into account. The fact that we have the customers running on Aspen and so Banff becomes easier to take you know than it otherwise would have and we waited for two years and so the initial feedback from his most.

Really based off of this the transition from cloud to Aspen and that's been very positive those projects have gone very well those upgrade projects resulted in like I said before three customers going live on aspens and very very positive sign.

And.

Yes.

And then.

And ages of getting that release out to customers and getting that worked and the projects and we'll have an update for you on the next quarterly call, but you.

You know the whole system is really coming together in a very positive way for us that's really truly exciting.

Really helpful. Thank you Mike appreciate it.

Thanks very much.

Thank you. Our next question comes from Brad Sills with Bank of America. Please proceed with your question Oh, Great Hey, guys. Thanks for taking my question I just wanted to ask about the the higher outlook on term license. What are you hearing from customers with regard to their plans for kind of running their road map with Guidewire a low.

Thanks for term license on Prem alongside their their plans to migrate to the cloud, you're obviously seeing traction and bold and think it's the first time and while we've seen upside and term license. So I guess, what's driving that and you know how are customers. How is the conversation with customers with regard to maintaining their existing term license on from system.

While thinking about the longer term move more gradually towards the cloud.

Let me touch on it real quick and see if that has anything to add.

Yeah for the I'd say for the most part customers are either deciding.

To make that decision to move to Guidewire cloud, which would effectively replace their term license with a cloud subscription or they're looking at these as I keep talking about and especially on this call. These sort of net new lines of business.

That they can spin up more quickly as a way to experiment with.

And get used to the approach necessary to be successful with the cloud implementation always in mind always keeping in mind that you know that that that experience and this proof points will.

Help them make the decision about when and if it makes sense and move Guidewire cloud with their term on Prem implementation.

And Brian the only thing I would add is as we see term license deals work their way through our pipeline. It's one of the interesting things I'm noticing is almost a lot of them will have.

Committed cloud pricing and them. So a lot of customers you know they may not be quite there yet, but even as they embark on and term our on premise journey with us they're thinking about how that will eventually go to the cloud so and that's a real strength of ours to have a really strong on premise offerings that we have today from by.

And with the with the cloud offering that we're building and and rolling out the customer so kind of having a bit more flexibility with with when customers want to take that as a big strength of ours.

That's great. Thanks, guys and then one more if I may on the analyst day, you guys mentioned more investment moving towards R&D investment and towards the cloud could we see a point where the assets. There are more features and insurance, we cloud versus the on premise solutions and and then Theres a feature and advantage or incentive if you will to move.

More closely and more aggressively to the cloud. Thank you.

Yeah, I'd say, we're already there right and it think about it like this the feature advantages and what we call. These cloud native services.

Think of this as characteristics to support rating to support rules generation. The data platform that I talked about previously those features are only available as cloud services and.

And so I think those things will build overtime.

Overtime, we will keep advancing as we can and as it makes sense for our business and our customer base the characteristics of Insurancesuite self managed or on Prem.

But there will be a feature advantage to the cloud and our customers understand that right. I think that there are just certain things that you can do as a cloud service provider and with these services that you just can't do and and non prime modality, our customers understand that and it makes sense and so I think that will grow as a a mek.

And as him to convince customers to move over.

And and to take advantage of those capabilities.

Great. Thanks, Mike Thanks, Jeff.

Thank you.

Thank you. Our next question comes from Joe Vruwink with Baird. Please proceed with your question.

Great and just one from <unk>, maybe a bit of an overarching question that dovetails west what's come up earlier, but it seems like a lot of advance and strategies have popped up over the last 12 months and and they seem individually pretty important and so the end of life milestones.

Sales for the cloud direct path. So you avoid the two step database Nov a bi annual release and its just came up and I guess my question is when.

When you step back and consider everything is there one thing that is a particularly important and or maybe has the potential to drive bad decisions to invest earlier or maybe it drives go lives faster just.

Just relative to maybe your expectation for some of those things just 12 months ago.

Well, yeah, I don't know if there's one thing you know, it's just certainly feels like a combination of you know shipping and delivering the Guidewire cloud platform. These services that support it and then getting customers live with that with no real production yeah.

Use cases that Pete would that we can point to and customers can reference such that they feel confident.

That this is a viable alternative for them you know I've I've again I've said this previously on calls like this I have so many conversations with customers that basically summarize as we understand what you do what you are doing we applaud you for doing it. We're your biggest fans and we want you to succeed and we're right there with.

To you.

But were really conservative organization, and we want to see X Y Z proof points established in order for us to.

To make this decision for our company and so you know I'm sort of and execution Guy and that's why I think it's I kind of loved this job is because executing on this plan as I said sort of deal with a determined and diligent and steady approach is the right thing for our customer base and I think we're on the right.

Frac and so you know.

If you Force me if you pin me down and said, what's the one thing that really matters. It's those production proof points, it's establishing those production proof points that enable us to say to the customer base here look here's the customers that are doing it and that's starting to happen right now and Q1 was such an important.

Quarter for us in that regard.

Great. Thank you.

Thanks.

Thank you. Our next question comes from Michael Turrin with Wells Fargo Securities. Please proceed with your question.

Hey, there thanks, and good afternoon, and just one from me maybe two parts on it and on Air Art, you mentioned the impacts that caused that slight slipped out of Q1, you're guiding for consistent 10% to 12% growth for the fiscal year.

Wondering if we could maybe just take a step back and you could share with us what some of the key factors, you're watching our which could help that they are growth number pick back up overtime beyond the consistent profile youve seen and and Jeff. Maybe you can also just help level set where we are in terms of ramp contribution or impacts we could see from that vantage point as some of the newer cloud.

Customers also layer onto the model. Thank you.

Yes so.

Maybe I'll start my and you can go ahead and I think.

Sure there are a number of levers that we're watching very closely with respect. They are the first is new bookings activity and how that bookings activity translates into year, one air our as we think about bookings and the average total contract value of what could be a longer period, and then that translates to your one they are at different levels, depending on the pro.

While the deal we've talked in the past that migration deals.

Off and translate to year when they are at much lower levels, because they're already paying and term license and some other things. So so first and foremost is always kind of keeping an eye on what the bookings activity looks like the next one that we track which is you hinted on is how much activity, we are going to get from grass deals that were sold and prior year.

Here's what does that look like in the year and in the past we've talked about this year.

Being roughly similar contribution from those two factors to our gross error or that we expect to add over the year and then the third the third vector is is air our attrition. The one thing I would note on air our attrition.

It's in line with how we ex the built out our expectations for the year and how we we saw that last year. This year, we are seeing a little bit of that coming more in Q1, and Q2 versus Q3, and Q4 and we work very closely with our teams and look at every single renewal and if there's any sort of impact or risk.

Out there and so those are the drivers that we focus on on a very regular basis.

Great. Thank you.

Yes. Thank you.

Thank you our last question comes from Tyler Radke with Citi. Please proceed with your question.

Hi, good afternoon, and this change going I've thought highlight today I just wanted to quickly touch on.

And Oh, that's the plan and we see into Quadrophenia and mission margins and usually improves seasonally light to with and up and yet and then the yen margin guidance was unchanged could you kind of help us understand the put and takes there and what kind of cadence that we should be looking at to us.

And I'll just for the year and then have you been and expectation up like keeping expenses be turning as we start to collect head and neck 69 months. Thank you.

Yes, so with respect to overall operating margins, we did see a fairly significant over performance fees to be the expectations about half of that came from me and the revenue and the timing of revenue.

There were some unusual items in the quarter that.

Benefited us from an operating expense perspective, there was a a credit from me Ws were tied to signal the usage that we have there that we were expecting that would hit in Q2. It ended up hitting in Q1. There were some other more project based work that was a bit delayed and which is why the overall operating expenses.

In Q2 were a bit lower than what we expected, but as we inspect budgets for the full year.

Pretty much consistent with the expectations that we set at the beginning of the year. So so didnt didnt change our overall outlook.

Even though we did see a bit less expense in Q1 than we had originally modeled.

Oh, and and do you like in any expectation for keeping and returning.

Oh for T. recurring.

And so TD, there's a couple different components, a teeny teeny is obviously, a big expense within our sales organization and other other parts of the organization.

We have modeled in that that we'll return some and this fiscal year. So we do have some of that built into our models and then billable to any with respect to our services organization and traveling to customer site.

I believe we have a little bit about modeled into Q4, but but that's that's really and there is and that we're not expecting and a lot on that side I would note that in prior years that billable Genie has been kind of close to 15 or $16 million. So that is a pretty big shift this year compared to prior years.

Great. Thanks for fitting me.

Thank you.

Thank you there are no further questions at this time I would like to turn the floor back over to Mark Rosenbaum for any closing comments.

Hey, Thanks, very much a just wanted and say thanks, everybody for joining us.

Really really happy with the momentum we've established in Q1.

And happy with the prospects and the outlook that we have for the year. Appreciate that you joined and also just I'd put in a plug if you really want to understand Guidewire, we worked real hard to get some of the.

Content posted online and public access on connections and I think it's a great way to really understand and assess especially from a customer perspective, the value that we're delivering and so that's.

That's all out there now and published if you're interested so thanks, everybody for joining and have a great day.

This concludes todays call you may disconnect. Your lines at this time. Thank you for your participation have a wonderful evening.

Good bye.