Q2 2021 Guidewire Software Inc Earnings Call
Greetings and welcome to Guidewire second quarter 2021 financial results Conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded and now.
Like to turn the conference over to your host Alex Hughes, Vice President of Investor Relations. Please go ahead.
Thank you operator, good afternoon, and welcome to Guidewire Software's earnings conference call for the second quarter and fiscal year 2021, which ended on January 31st My name is Alex Hughes, Vice President of Investor Relations with me on the call at Microsoft Guidewire as Chief Executive Officer, Jeff Cooper, Guidewire as Chief Financial Officer.
Complete disclosure of our results can be found in our press release issued today as well as and our related form 8-K furnished to the SEC both of which are available on the Investor Relations section of our website.
Today's call is being reported and a replay will be available following the conclusion of the call.
Statements made on this call include forward looking statements regarding our financial results product customer demand and operational impacts 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 expectations as of today and should not be relied upon as representing our views as of any.
Subsequent date, please refer to the press release and risk factors and documents, we file with the SEC clearly our most recent annual report on form 10-K, and our quarterly report on form 10-Q to be filed with the SEC for information on risks uncertainties and assumptions that may cause actual results to differ materially from those set forth in such day.
And then.
We will also refer to non-GAAP financial measures to provide additional information to investors a reconciliation of non-GAAP to GAAP measures is provided in our press release reconciliations and additional data are also posted and a supplement on our IR website with that I'll now turn the call over to Mike.
Thanks, Alex and thanks, everyone for joining us today I'm pleased to report another strong quarter as our team continues to steadily execute on each of the key pillars powering our business. This includes driving a fundamental transformation of the company to a cloud service continuing to lead the market for P&C insurance core system modernization.
And developing and analytics capability that enhances the value we are able to deliver to our core customers, while providing us growth opportunities and the quarter. We saw strong deal momentum for a broad selection of guidewire solutions across customer tiers and geographies.
We executed on a few key deployments on Guidewire cloud, we had strong performance and our analytics business and we continued to grow our partner ecosystem. We all feel great about our progress to date and our execution on the quarter makes me increasingly confident and not just our full year financial outlook, which Jeff will talk more about and.
A minute, but also and the long term potential of our company and to serve the P&C insurance industry.
I'd like to take a moment to comment on the P&C insurance industry and the role it plays and our economy and our lives I think that the severe weather event and the United States, and especially Texas is a great reminder of how important and beneficial the transfer and sharing of risk is to the function of our society. When I saw all the videos and new stories showing burst.
And flooded houses I asked our team how dire the situation was for our customers ensuring this risk.
Answer was quick and for me reassuring. This event and its costs were of course large but this event is exactly what the industry is the airport, helping people families and businesses recover and get on with their lives.
That answer was as I said reassuring, but also from me it was motivated having an opportunity to support and industry that helps families and businesses manage risk.
Giving us all some resilience and the face a crisis is a big part of why the team here at Guidewire loves what we do.
Turning to the quarter on.
And I'll walk through our sales highlights and then touch on some operational milestones.
Cloud sales activity and the quarter was strong with five insurance suite cloud wins, and one insurance now win economical mutual insurance company, a Canadian P&C insurer and two time winner of the Guidewire Innovation Award chose to migrate policy Center and billing center to the Guidewire cloud to simplify their technical ethos.
System and accelerate speed to market.
Kentucky Farm Bureau, a tier two insurer and the second largest P&C insurer and Kentucky.
Agreed to upgrade their on premise full insurance suite instance to the cloud and added predictive analytics.
Mountain West Farm Bureau, and $3 60 insurance, our property and casualty insurance company doing business, and Colorado, Montana, and Wyoming decided to adopt the full suite and the cloud, including reinsurance management predictive analytics and science, representing a significant customer expansion.
Royal Sun Alliance, or RSA, and existing claim center and digital customer and the U K decided to upgrade to Guidewire cloud, representing our first insurance suite cloud win in the U K.
Our long standing Guidewire customer and global insurer selected policy center and the cloud for a new greenfield opportunity representing their first cloud based deployment and and important tier one insurer.
And finally, bowhead and specialty underwriters and new underwriting platform based in New York selected insurance now due to its cloud maturity and confidence and our ability to deliver.
We also closed two very exciting self manage deals and the quarter, which highlights the unique benefit of our approach to our cloud transformation.
While we still expect the majority of our bookings to come from cloud we are seeing some insurers who for a variety of reasons that are not yet ready to transition to a cloud based core system and still have legacy systems and need of modernization.
These companies recognize that eventually these applications will move to the cloud and our approach offers them and opportunity to modernize now and smoothly migrate to our cloud when they are ready.
We will work with these insurers to standardize their self managed implementations with and eventual upgrade to the cloud and mind. This dynamic is enabled by our design approach, which optimizes for the installed base of Guidewire customers, but its benefit to net new customers is proving to be important enough to call out.
Covia France's largest P&C insurer is a good example of this dynamic Covia selected claim center combined with digital and Guidewire for sales force. This important win in Europe highlights, both our global strength with tier one carriers and the value of our platform for large carriers seeking to modernize on prem today.
With a longer term aspiration to go to our cloud we're thrilled to establish a presence that Kobe and look forward to expanding our footprint over time as we demonstrate success and this critical account and.
In addition, James River group, a tier two insurer based in Bermuda selected all of insurance suite, including digital and data after a comprehensive RFP process.
Market leadership and platform investments were critical to this win which will start on Prem today, but we hope to have the opportunity to upgrade to them them from the cloud and the future.
Sales activity and data and analytics was also strong in the quarter.
And we were very pleased to see the momentum of our offerings, both as part of the core and as Standalone solutions analytics is proving to be a key driver and a number of our core deals as insurers look to strategically leverage analytics across multiple touch points within the insurance lifecycle.
We tend to think of core system modernization as mechanisms to upgrade and de risked decades old systems and to provide better support for new digital experiences, but analytics and specifically new approaches to embedding analytics driven insights within core workflows can also improve decisions and efficiency. We also.
You saw a strong sales performance of analytics on a standalone basis with five deals, including one for a predictive analytics platform and for for Science. This included a range of insurers from a large tier one two and insurance broker focused on the London market.
Switching gears to customer success, our teams continued to drive solid customer deployment activity with 12 customers going live on implementations for 35 Guidewire products globally.
I'm, particularly pleased to see the important milestones with cloud deployments and less than nine months U S. A a was able to publicly launch their small business focused product on the Guidewire cloud platform. This milestone demonstrates our ability to work successfully with the largest and most complex insurance company as they execute on there.
Business imperatives, and cloud journey, and I look forward to continuing to execute and build on this very important relationship.
A meager one of the first customers to align with us on our cloud strategy went live with billing center on Guidewire cloud. This is the first step and our partnership with amicus and migrate all of insurance, we talk loud and Mika has been and incredible partner and this journey with US and this milestone is a proof point of the progress we've made towards establishing our cloud service.
EMC, while not yet and production with their cloud implementation successfully upgraded their preproduction instance from Aspen from the ASP and relates to ban.
This is an exciting early demonstration of the faster more frequent and more efficient customer upgrade cadence that will enable us to deliver greater value to our customers prior to Guidewire cloud platform customers would start and complete their implementation journey on a single major release and only consider and upgrade years. After the initial go live event.
And this is since we had a customer taken upgrade during the pre production implementation process, which will allow them to go live on a more current or at least this is an exciting event as it marks a new pattern for us and it is more aligned to customer success and value.
Finally, we saw warrior Invictus holding company and new insurance now customers that we won last year complete a successful initial go lives.
Shifting to the ecosystem, we continue to see tremendous enthusiasm and excitement across Guidewire global partner community and marketplace with over 12000, Guidewire focused consultants, our Si partners remain important to facilitating implementations and accelerating customer success with value added solutions.
Rover the enthusiasm for Guidewire cloud is growing.
We finished the quarter with nearly 1200 consultants from 28 partner companies, who now have earned the advanced certifications required for Guidewire insurance suite cloud implementations. This is up from approximately 730 at the end of Q1.
At the same time the momentum with our marketplace partners. Also continues there are now over 690 applications from Guidewire and over 100 partners doubling the number of partners over the last two years as we continue to grow this marketplace, we unlock greater value for our customers by enabling ensure text to innovate on top.
Of our platform through our open API first approach.
I was pleased to see second quarter momentum in Europe, where we added a number of new companies to partner connect including Sprout AI and tractable.
Who both use artificial intelligence technology to streamline the claims process sprout AI offers AI driven realtime claims recommendations to settle investigate or repudiate acclaim and tractable provides and AI estimating platform that uses photo capture and other metadata to generate burst repair estimates.
This quarter, we also announced the first partners and marketplace apps for insurance now customers and one of the first to join as cloverleaf cloverleaf accelerates the insurance process by extracting detailed policy and claim data from insurance now and loading it into a prebuilt reporting and analytics business intelligence solution.
Finally, it is gratifying to see all of our hard work continued to be recognized by industry analysts and the second quarter selling gave guidewire three or four excellent awards and its policy administration systems report for EMEA Policy Center, one for its breadth of functionality customer base and depth of service categories.
Guidewire was also named best in class.
I T group and its 2020 U S. P&C core systems report for vendor stability client strength client service and product features.
And we enter the second half of the year, both the progress we've made to date and the growing customer enthusiasm gives us increasing confidence and our strategic direction and our ability to execute and May we will build on this momentum by releasing Cortina the third release and our new Guidewire cloud platform six month release cycle, and we plan to run a connection.
Event to coincide with that release this virtual event will be a great opportunity for you to hear more about our progress and to hear directly from our customers now I'll turn the call over to Jeff for more details on our financial results and our outlook for Q3 and the rest of the year.
Jeff.
Thanks, Mike.
I'll start with a summary of our second quarter results before turning to our outlook.
Second quarter, a RR ended at $520 million up 10% year over year and in line with our expectations.
As Mike noted it was a strong quarter for new sales with a diverse mix of wins.
One highlight worth noting was a number of existing customers that committed to upgrade to the guidewire cloud.
Migrating our industry, leading installed base of customers to our cloud is a key pillar of our long term strategy.
And as we've noted in the past migrations oftentimes have a relatively small initial year a R. R impact, but add meaningful a R R and future periods as these contracts fully ramp over time.
With that backdrop, and given the amount of migration activity and the quarter. We were pleased to see a RR finished at the upper end of the outlook provided on our Q1 call.
Total revenue was $180 1 million ahead of our expectations due to higher than expected license revenue.
We added two significant term license customers and the quarter, which contributed to strong license revenue.
We also recognized $4 2 million and incremental revenue from term contracts with duration longer than our standard two year initial terms or annual renewals.
Additionally, and somewhat Counterintuitively cloud migration deals also add license revenue.
This is because when we sell on migration to an existing customer even though the intention is to migrate to the cloud the customer will generally need to use their on premise software during a migration period.
As a result, we allocate a portion of the total contract value to term license revenue, which is recognized upfront with.
With the remainder being allocated to subscription and support which is recognized ratably.
A byproduct of this accounting treatment is that migration deals will contribute less subscription revenue when compared with a new subscription deal of a similar size.
Outside of license revenue the other components of total revenue were very much in line with our expectations.
Turning to profitability for the second quarter, which we will discuss on a non-GAAP basis gross profit was $104 million.
Overall gross margin was 56% compared to 59% a year ago.
Subscription and support gross margin was 43% compared to 56% a year ago. As we continued to see the expected impact of building out our cloud operations team.
Services gross margin was negative 2% compared to positive 1% a year ago.
Operating income was $7 5 million exceeding our guidance range due to higher than expected total revenue and savings related to slower than expected hiring and lower travel and entertainment expenses due to the pandemic.
We ended the quarter with $1 4 billion and cash cash equivalents and investments.
During the quarter, we invested $39 million on the repurchase of 310000 shares.
Turning to our outlook I will discuss the full year outlook.
And then I will discuss our expectations for the third quarter.
For the full year, we continue to expect <unk> to be between 560 and $571 million.
We are increasing the midpoint of our outlook for total revenue, which we now expect to be between 500, 7500, 725 and $733 million.
This reflects the increased strength, we now expect and term license revenue, which is driven by self manage wins like we saw at Covia and James River and from cloud migration activity.
As I previously mentioned cloud migration sales initially benefit term license revenue at the expense and subscription revenue since we must allocate components of the total contract value to various deliverables.
Given higher than expected term license and migration activity in the first half of the year. We now expect subscription revenue to be closer to 162 2 million.
This adjustment is the result of timing of new cloud deals and not any shift and our cloud bookings expectations for the year.
Our services forecast has strengthened a bit.
But we have also removed all billable travel and expense from our forecast due to ongoing COVID-19 related travel restrictions.
Billable peony blows through services revenue at zero dollar margin.
As of last quarter, we still had about $4 million of billable TNT and our expectations for the fourth quarter we.
We now expect services revenue to be closer to $183 million.
We still expect total gross margin for the year to be approximately 55% with subscription and support margins at around 40%.
Services gross margin for the fiscal year are expected to finish and the low single digits.
We are raising our operating income expectations to between $2 million and $10 million due to an increase from the midpoint of our revenue outlook and due to the timing of hiring combined with less travel and entertainment expenses. This year.
Cash flow from operations expectations for the year are unchanged.
Turning to our outlook for the third quarter, we expect <unk> to be between 533 and $536 million.
Total revenue is expected to be between 155 and $159 million.
Subscription revenue is expected to be approximately $40 million.
Support revenue is expected to be closer to $20 million and services revenue is expected to be approximately $48 million.
Non-GAAP operating loss is expected to be between 29 and $25 million.
In summary, it was a strong Q2 with continued cloud activity broad geographic success and key new customer wins.
We look forward to building on this momentum as we work to close out the back half of the year.
Operator, you can now open the call for questions.
At this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is and the question queue. You May press star two if you'd like to remove your question from the queue.
From participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
One moment, please while we poll for questions.
And our first question is from Chris Merwin with Goldman Sachs. Please proceed.
Okay. Thanks, so much for taking my question.
Wanted to ask about the Guidewire cloud platform, obviously and another release coming up here and can you talk a bit about the progress, you're making and migrating customers to that platform such that they continue to get the benefit of the six month release cadence you know anything you can share about what could go from a go to market perspective to try to focus customer and on that and.
And as you migrate more of those customers to the platform and we think about that gross margin ramp and the cloud over time. Thank you.
Yes, thanks for the question Chris.
And I think my.
And my quick and high level answer is things are going on very very well with the rollout of this platform our ability to deliver our releases and answer the operations that sit behind that in terms of developing new innovation and pushing it into that platform.
We're working with every single one of the existing cloud customers on plans to migrate.
To that.
Platform and two that release cycle.
And that'll take us.
Probably.
And when all is said and done a couple of years to be completely finished with all of those migrations, but it's it's it's not sort of if it happens it's when it happens and you know just lining that up with each customer has to do with their product their priorities their initiatives and how those things.
And our slot together.
As you're probably aware and we work very very closely with those customers and we will continue to see progress on those existing customers migrating to that platform.
And so that that's all very very positive in terms of the net net new customers.
The perspective is that.
And this is what you're buying when you buy guidewire cloud as you buy and Guidewire cloud platform and that six month release cycle and Thats, what youre going to Orient yourself to going too.
You know I don't want to say that.
It's not beyond possibility that someone might go lives.
On a on something other than that but it would be a and exception and like I said that would and we would be immediately working to move them to that to that new platform and so that's being received very very well.
From the customer base.
You know that they understand the philosophy they understand the initiatives. They can see that we're sort of building momentum and experience every single day and all of that's going really well and.
And I would say at a really high level I've said this before this is our mechanism for instantiating.
A degree of multi tenancy and to our architecture and starting to enable us to produce the service delivered the service at better and better margins now that can take time for that to flow into the financials.
But from my perspective, our step one was delivering.
Delivering the service proving that we can execute on it and and getting customers live on it that that is now complete and now we're sort of and phase two of scaling it out continue to execute and over time, we're going to see that deliver the margin improvement that we saw.
Talked about in the past and Jeff I'll, let you add anything to that if you if you want.
No I think you've got it okay.
Perfect. Thank you and maybe just a quick follow up for Jeff.
And then he said that migrations are and having as much of an impact on <unk>.
<unk>, given you know and you've always talked about the ramping nature of those contracts. So is it fair to say that youre starting to see a divergence again and fully ramped <unk> relative to rare right now fully ramped as annual metric, but just directionally are you starting to see that positive divergence again.
Yeah. It's a good it's a good comment Chris and we are seeing a bit of a divergence there.
And we'll be in a position to talk about that and more detail at year end, but that would be my expectation as we see migration heavy activity that there would be a bit of a divergence between those two metrics.
Yes.
Great. Thanks very much.
And thanks, Chris.
And our next question is from Rishi Galeria with D. A davidson.
Hey, guys. Thanks for so much for taking my question and good to see accelerating cloud momentum two questions I wanted to first start out with.
And comment that you had made on strength and in Europe. I know you had mentioned in the past that Europe has been a little bit more challenged partly macro and partly just on willingness to move to the cloud can you give us a little bit more color on why and why it seems a European businesses is moving on.
Or are they may be more willing to embrace and moves to cloud and you know what we saw a couple of quarters ago, and then I've got a follow up.
Okay, Yeah, Hey, and thanks for the question well, it's certainly great to see two great wins in Europe.
Sure the I think for everybody and Guidewire.
We're very very excited to have the opportunity to earn the business at Covia, it's sort of exactly the type of customer tier one and insurance company that leads its market in France.
And that is a very very positive sign.
And the other side I would tell you no I touched on this and the comments it maybe it's a little bit of.
You know there's this kind of attitude that we have is that we can we can deliver this modernize core platform.
And the way that is going to allow them to modernize and now with a view towards cloud and the future.
We'll see.
If if this sort of this momentum and the quarter indicates some sort of larger trend in Europe.
I don't know, whether and I'm ready to say that yet, but certainly this this points and the right direction and and and helps us build momentum.
In the region with our service with our company and with the cloud and you know as.
I think you're aware that the market and Europe is it's.
It's almost not a really a european market and its almost a country by country by country market and it takes us.
Very significant amount of time to invest and learn the local requirements and expectations of each.
Insurance company and each market, we've been very successful and the U K and Germany, it's great to see the success and France.
I hope.
And expect that this will will help us continue that momentum so.
And mostly I wanted to just say that this is just a real real significant win for us.
With a tier one carrier that we're all incredibly excited about.
Alright cool, Mike that's really helpful. I appreciate the call.
And then Jeff I wanted to go box below the gross margin question and maybe get a little bit more granular on on the subscription gross margins.
Local and based on on the comments and your guidance on it that that tells us that subscription gross margins are going to decline from where they are today to the back half of the year, probably in the mid to upper teens, but at least sub 20%.
And maybe yeah, and I and I get the complication zone.
On the pack up those costs allocated there and some gets recognized as term license.
And on all of those pieces and parts and ongoing curve for awhile and not news. So maybe can you talk a little bit about why why why subscription gross par from to decline from where they are today and maybe and I know all the moves that you're making in terms of multi tenancy and report.
Tina coming out and Charleston, but at what point can we start to see subscription gross margins improve again, and then effectively what were your total support and subscription gross margins towards that.
Upper 60 is that and talked about the analyst day. Thanks.
Sure Yeah. Thanks, Thanks, Rishi I think we obviously don't break out subscription margins, but given the history of the math that you have around our maintenance revenue or maintenance margins you can understand that our subscription margins today are kind of and that low 20% range.
This is this has been and ongoing reflection of the substantial investment, we're making and our cloud operations team to support both our current and future future cloud customers. The shape of the overall subscription margin is very consistent with our internal expectations and how we thought about this we're continuing to add folks.
Those customers will come on board this year and start to flow into subscription revenue in future periods, given the ratable revenue recognition. So it's not anything unexpected when we compared to how we have modeled the business and.
And the and I think some of the commentary we provided at analyst day, which is still very consistent as is as we look to next year is when we would expect to see subscription margins start to move back up and the right direction and start to demonstrate some expansion, it's hard to come and give.
And give you a specific quarter, but kind of as we think about the annual basis. That's when we start to see margin expansion as we move into fiscal 'twenty two.
Got it thank you so much.
And our next question is from Sterling Auty with J P. Morgan.
Yeah. Thanks, Hi, guys. Just one question from and from my side and kind of curious in your discussions and in the quarter. How many customers are you seeing that our unprejudiced customers that are deciding and this environment to still upgrade to your on premise solutions.
Oh, Okay, Sterling and I think I understand your question. So you know.
We've got on Prem customers on a variety of what I guess are now legacy and <unk>.
Versions of Guidewire.
Some of those customers might side from a variety of reasons to move to the latest on Prem or self managed version of the product which is version 10.
And not make the decision to go to cloud.
And there's like we've talked about this before on this call as a variety of reasons from and to do that sometimes it's just organizational readiness and general.
And so in terms of how many.
It's a.
It's a fair number.
But I guess.
That the flavor I would give you for the nature of those conversations is that.
You know I would say every single conversation I've had.
Has has sort of ended with the.
The tone that eventually they will make the decision to go to cloud and they may not be ready now.
But they will be ready and the future and the orientation of Guidewire.
Round Architected cloud solution that facilitates that move and a seamless way and they.
And is not lost on them, Okay and.
You know, sometimes I wonder whether or not that.
It's two customer friendly, but honestly if you think about this sort of history of Guidewire and the customer focus and approach.
These things are just very very complex.
And very important.
Systems for these insurance carriers and I want to do everything I can to make sure that we're delivering a solution and that's appropriate to them and so you know it's it's a fair number that are upgrading to 10.
With an eye towards migrating to the cloud and the future.
And we're working real hard to do everything we can to ensure that those customers come to the logical conclusion to move to the cloud now.
And but it's not it's non zero does that help.
It really does thank you guys.
Okay. Thanks.
And our next question is from Ken Wong with Guggenheim Securities.
Great. Thanks for taking my question guys I wanted to just expand a little bit on Sterling's question. There in terms of those customers that are.
Migrate on upgrading to <unk> and I think in the past you talked about new customers coming in.
And Thats committed cloud pricing into the contracts are you seeing that kind of behavior with these customers that upgrade to iOS 10, where perhaps you guys have talked through some sort of committed cloud pricing to the extent that day decided to migrate down the line.
Yes sure Ken.
All all of our customers or many of our customers are engaging with our sales force and some capacity and exploring what it would look like to embark on our cloud migration.
No in general we have not seen customers as they embark on a migration kind of embed cloud pricing into that arrangement and it's not unusual for us to kind of embark on a new car sales contracting process and part of a migration process. So we haven't seen any of that behavior, but we have absolutely.
<unk> seen our sales force be out in front of most of these folks and helping them think through the pros and cons and the puts and takes in terms of migrating the version 10 versus going through our cloud today and.
And being on our latest release that will be future proof going forward. So those conversations are active and ongoing.
Got it got it thanks for the color and then and then Mike You mentioned five standalone wins for data analytics.
I guess, what I'd always associated.
Youre kind of non core systems products with just attached type modules shall we think on data and analytics as a potential new front door to the to the Guidewire franchise.
Yeah, I would say certainly it's a new front door to Guidewire the company.
And potentially the you know the franchise of insurance suite insurance now.
And predictive analytics as its nominal tools phenomenal platform.
You know it does it does a lot of great great.
Great and interesting things for insurance companies.
Want to take advantage of the data assets that they have and make better and smarter decisions.
We're also seeing continued and really growing interest in science for cyber risk modeling as well as.
As I've talked about previously the extension of that product to modeling small business risk for a variety of commercial insurance use cases.
All of those.
Situations I think create the potential to establish.
Established and new customer relationship.
And potentially sell more of the guidewire sort of product suite going going going forward.
You know my sense, just from a business perspective is that the franchise of Guidewire and so heavily weighted towards core that we're going to see more benefit and the opposite direction.
But certainly you know the analytics first.
And use cases as possible.
And what's probably more interesting and I tried to highlight this and the sort of prepared remarks is that analytics and those those tools.
And as a.
As a real value creator.
In the work that we do to explain how much value a carrier is going to be able to get from our modern core system.
A significant amount and that can be driven by analytics and improvements in the operational metrics that they use to run their company.
And that's really really exciting.
And you just see like I said I think we saw we can all kind of visualize Oh, Wow I need a new digital interface to be able to interact with customers more effectively and that's a big driver of these things, but taking more advantage and data and making smarter decisions can help us sell the core franchise as well and so for all those reasons I.
Think this is the business that <unk> like to see a growing like this on a standalone basis.
And it's just going to help our company. So thanks for the question.
Thank you very helpful.
And our next question is from Brad Sills with Bank of America.
Oh, great. Thanks, guys for taking my question.
I wanted to ask about the cloud direct program and the impact that might be having on kind of reducing friction and the installed base to go to the cloud release.
Can you comment on that it seems like that could be significant and.
Are you actually seeing elevated interest as a result of that program.
Yes sure. Thanks for the question, so I would say.
I think it's our customers are recognizing it as a <unk>.
Very kind of valuable tool and.
And the Arsenal to think about what they do with and what options they have.
The most important thing that it's done is it's given us an opportunity to have.
And let's say direct twice, but sort of a more direct conversation about going to cloud using cloud direct.
It's sort of it's sort of offers us and the inability to make the overall upgrade expense of our customers lifecycle with guidewire lower and that creates.
A compelling opportunity for us to have that conversation with the customer assesses now's the right time for us for them to make that shift.
And sort of changes the math, a little bit more I think in favor of making it logical that they would make the decision to move to the cloud. So for all those reasons, we're very positive on it.
It's been well received by customers and deeply appreciate it and I think it will and <unk>.
Has already led to sort of you know.
On a different sort of conversation that we can have with each each of the customers, it's considering what to do around that upgrade.
That's great. Thanks, so much Mike and then one more if I may please just on the data success that you're seeing here, that's interesting and it seems that customers are relying more and more on guidewire strips as a strategic solution vendor could you comment on some of the use cases, you're seeing are there any commonalities there any any themes, whether it's cyber risk score or.
New product development and are just operational analytics and any color that would be very helpful. Thanks again.
Yeah sure so.
So science as the core.
Based on the acquisition that the company did a few years ago and I think that that continues to.
Produce great customer wins.
And our cyber risk and cyber insurance and general.
Is a very very important thing in my opinion that every single company and the world should be thinking about.
It creates and insurance opportunities is that many many carriers and insurance companies are thinking about offering and our science solution provides a path for them to underwrite that risk.
And it's more effectively and smarter choose the right risks at the right price point, it's a it's a really compelling offering.
And I think as we see that net insurance market growth will continue to see science science grow but.
Like I said before we extended that approach.
We've extended that approach now to include small business risks, we take that same idea of.
Listening or sort of gathering data.
From the internet or whatever data sources, we can put together in order to create a data asset that customers can use to price small business risk and a very very unique way. This is something we've been talking about for the last couple of years.
And at our connections event and with customers and to see that sort of uptake bolt on a standalone basis, but then also with our core insurance suite customers you know that.
That's very exciting.
On the on the predictive side like my opinion is theres almost no and to how useful this approach can be.
And in insurance business process.
Whether or not and just if you.
A really simple ideas plain comes in and how do you estimate the total exposure to a carrier you know theres different ways to do that but predictive analytics offers a and approach to doing that and a very seamless pre integrated way and so companies are customers, who are going to use claim center for managing their.
Ames processes.
This is just a very logical sort of add on to that approach and I think we've done a number of things and the last couple of years to sort of build a business unit around this and bring some specific focus to it and put some specific product investment and sales investment into this business unit and it's really nice to see.
That that that that investment and starting to pay off and the form of growing sales activity.
Thanks, so much Mike.
Thank you.
And our next question is from Tom Roderick with stifle.
Hey, everybody. Thanks for taking my questions I appreciate it.
No.
Mike it's been a full year going into sales.
Sales reps being on locked down and just changing the way you've gone to market and I. Appreciate it last year and she started going through this year you had a pretty rigorous pipeline review and sort of trying to manage through communications with your customers. So you did a really nice job sort of finishing that your strong and just sit here with two quarters under your belt and you've you've maintained.
Our guidance and kind of scary and it's a little higher than the midpoint, that's great I'd love to hear what sort of metrics year over year watching as you sort of track some of these tier one and tier two deals through the pipeline what customers are seeing as they go through this experience as well this year with the benefit of some additional data behind them and just.
Those conversations are going and it gives you the confidence and closing the year strong the way you did last year.
Yes, thanks for the question.
I really appreciate you, bringing it up because I've sort of given myself. This COVID-19 can never be and excuse kind of mental state.
But certainly COVID-19 doesn't help sell really complex enterprise.
Sales and everybody here at Guidewire is excited to be able to go and meet customers and talked through projects and.
Sort of work through all the hard stuff associated with taking one of these opportunities and and turning it into a a green lighted sort of Greenway project.
For our customer.
And you know that this is a hard thing to do really complex long enterprise sales cycles, and our team and you know on even you know you got to say that this is true on the customer side, everybody has pulled together in order to be able to transition as smoothly as we can to sort of zoom based selling.
And planning and execution and it's worked reasonably well, but we all know that it will start to work a little bit better. Once we are free of these restrictions and can safely travel and we're all excited about that now in terms of me thinking about the second half of the year.
It's just kind of on.
You know me looking at the numbers looking at the coverage that we have and the deals that we have open and the potential that we have building on the momentum that we've established with the products and with the sales and especially with the customer success.
And you just add up all those things and it makes me feel.
Good about sticking with our projections for the year.
You know and then hopefully knock on wood, we everybody executes effectively and COVID-19 restrictions start to relax and I will see you know.
But that can only help us I think.
But we're not that's not something we count on and I, just think it's something that might help.
But to sum up your question about my just my being positive about the company.
And the second half it's just all these things now we put together a plan.
And especially around this new product and this new approach and getting the customers moved over and live on it.
And it's like USAA being able to launch a product and nine months on Guidewire cloud platform is just such a phenomenal success and I think we can use that based on the pipeline that we see to go out there and have a great second half so.
Hopefully that gives you a little color about how I'm thinking about it but I feel pretty good about how we've executed so far and what that points to for the future.
Yeah, that's that's great detail on the pipeline, Mike and I appreciate that and and I'm glad you brought up the USAA example, because you know not a ton of <unk>.
Data points as you've gone through the ski relief and the scheme reserve release cycles, but as you're starting to go through a.
Various iterations of this would love to hear how your customers and the ones that are getting live and be the ones that are and then.
Trying to get live and other products how is this.
Increasing the level of conversations you might have in other words is it adding touch points with the customer and that might that.
And that might create further add on sales cycles is it and driving further stickiness.
And again I know, it's early but just some early reflections as you've gone through.
Non through Banff and into court Ciena here and in human and through.
And through the early releases of the six month cadence.
And I really appreciate that question, because I think it's pretty insightful and I'll give you a very long I think and I think a medium to long term answer on.
And our relationship with our cloud customers is so significantly more connected.
And more.
Kind of in sync.
I can't imagine that it is not going to help us and ways that we don't even imagine yet.
And one of the things that we've done this year.
To help ensure our success with these cloud customers as we've instantiated a.
Real customer success function.
And the company that operates pretty rigorously around.
Around validating almost every single step and the and the complex projects that are on that underlie these implementations.
You know and the instantiation of that group and.
Has really changed the dynamic of the conversation that we're having with our customers and a very very positive way.
I think it's too soon to say that we're going to that's going to pencil and to some outcome for the company, but it absolutely can't hurt.
We just have such a better connection to those customers and the real people on the ground who are driving those projects every day and I think we used to have this.
And our in our on Prem customer base and we.
Don't Misunderstand me and I think we still do and we have a great track record for customer success, but it is just that sort of day to day week to week connection about what's going on with each one of these projects.
That really gives me a lot of confidence that we're going to have just that much. We're gonna have more ability to provide more value going forward with this model.
You know on that.
There's probably people listening to this call who are sort of at.
At cloud companies, just kind of normal for a cloud company, just because you're running the service and you have that visibility to how people are using it but you're starting to see that take hold here at guidewire and a very positive way that that makes me very excited about our long term potential.
And that makes a ton of sense great detail. Thank you.
<unk>.
And our next question is from Michael <unk> with Wells Fargo Securities.
Hey, there.
Thanks, and good afternoon.
On the a our number came in within the range you're targeting at growth there has been fairly consistent trending and and the low double digits understand and I. Appreciate your forecasting similar levels there for the remainder of the year, but if you think about maybe one to two potential drivers of upside that you would highlight is it just more cloud maturity is there anything and the macro.
Low environment that you'd call out if we get to a quicker recovery that could drive.
And maybe more of a seasonal spike on the back half of the year, but what are some of the maybe the bigger indicators you're focused on that that that could drive upside versus what's currently forecast.
I think probably the most important thing is just continued execution on our cloud transformation and proving out.
We can get live customers successful implementations up and running reference full customers up and running on that service that builds the confidence that is really I think that the key to establishing the trust that I think is necessary in order to win these customers and it just.
And we look at the pipeline and the second half you look at the math associated with the upgrade potential and our customer base and certainly there is room there.
To support.
There are.
Growth accelerating.
But the.
And the flip side to this is these are incredibly big decisions incredibly complex projects.
Sometimes low heat for deals that last decades, and so calling that in a particular quarter or even a particular half is challenging.
But I guess my.
My summary of it is things are going well right. We like our key I can turn and reiterate like this idea that we put together a plan for the company about what we're going to do with the product and what we're going to do with the customer base and that plan is going very well, we're going according to plan and those you know.
And the analytics connected to that starting to pick up.
There is potential but b, just because of the nature of the cycle.
I think it's premature for us to call on acceleration, but you know we're doing all the right things and and I feel comfortable with the outlook that we've provided for the second half and probably Jeff My one and give you a little bit of color from his perspective, but that's that's my perspective on everything is like things are going really well.
On this and on this transformation and that's what's really going to create the potential to start to accelerate our growth.
Yeah, Mike I think you hit on all the main points.
As you all know that the three things that we track quite closely and as we inspect our our guide is.
Is how many new deals we sell and how those deals will then translate into first year IRR, how much uplift we will get from deals sold in prior periods as the realization of ramps and then if there's any a or our attrition and how and how that and we monitor that very closely and as Mike noted everything.
And is largely shaping up consistent with the expectations that we had as we went into this year.
Obviously very focused on closing new business and the back half of the year.
That's all helpful. Just maybe just as a follow on going back to gross margin our subscription and support number the segment breakout continues to slide, but you're holding to the 55% target for the year. So it doesn't sound like that shape is too far outside and maybe what you were expecting when you gave the initial guide for the year is there anything else you can add.
And beyond that the color you provided earlier around where you might maybe you expect this to stabilize and if it's some level of either cloud scale or our milestone and youre looking for that can help push and push the overall profile back upwards.
From a margin perspective overall.
Overall, the overall growth.
Yeah Yeah.
Yeah, I mean, there's a lot that goes into that mix and so obviously embedded in our guide is a little bit higher performance on the term license side that comes at a very high margin profile.
And so that that has a positive impact as we look to this year and adjust our expectations for the year.
Services. We noted this year is going to be kind of in the low single digits and then as I previously noted on the call.
And we're investing very heavily to build out our cloud operations team. We are seeing good traction with Guidewire cloud platform. It is providing me a lot more visibility into the concrete steps that we can take to drive scalability and future margin expansion and so we are comfortable as we look forward to next year to start see subscription margins.
Moving on.
<unk> and.
And the right direction, but it's still an investment year this year for us.
Got it.
And I appreciate all the detail there. Thank you.
Thank you.
And our next question is from Matt Van Vliet with B T I D.
Yes, Thanks for taking my question guys.
Wanted to ask about kind of the.
The capacity of the development team now that you're into kind of the third iteration of the Guidewire cloud platform and.
A lot of that's maybe the foundations kind of built does this open the team back up to creating.
Creating more of these data and analytics and digital add on products or Conversely has has the move to the Guidewire cloud enabled year to continue the momentum of the partnerships that we continue to see and press releases and and your talks with third.
Software providers.
Providing those kind of point solutions at the end.
So maybe just thinking about what what the balances internally of developing from these newer features versus leaning on the partner ecosystem.
Yeah. It's an interesting question I don't know whether or not I think about it quite like that partners versus internal but let me give you my perspective on how things are going on with the product and what we should expect and the future and why probably I think that the answer to your question is.
As bolt on.
Certainly we've made it a big big investment and push around Guidewire cloud platform I don't think that we are quite done and maybe never will be really completely done.
But the basis is established and I think that we have when we look out two releases, we can see the trend towards more of an investment in some of the more application centric areas of our product and the innovation.
And that really.
Is at the heart of claim Center policy Center billing center underwriting et cetera.
So that investment is instantiated and working there is more to do but but you can you can see it changing and the long term plan.
And I think that that will certainly help.
And with things like analytics on the partner side look I think that we are just making guidewire much easier to integrate with.
And I think that that is going to unlock a lot of partner opportunity.
Just the you know the philosophy of Guidewire being a cloud service that has a P is that release to release to release will continue to function and work just makes it so much easier for partners to connect to us and I think it's going to unlock a lot of innovation and the partner community and I.
Think it is going to make it easier for our customers.
Plug in and these innovative ensure tech solutions into their guidewire environments, which is exactly what they want to do.
No I don't think it's like we have to trade one of those things for another Ah.
Big Big part of the value that Guidewire cloud platform provides is it makes the integrations easier and so that's going to work internally and it's also going to work externally so sort of I see the answer to your question being bolt on.
It should be.
More and more fun and innovation on the product side and Guidewire and for our customers who are with US on this journey as we continue forward down the ski resort releases.
And then on the global Si side of our of the partnership community there.
Or are you seeing any areas of strengths, where they're seeing projects really starting to pick up and different regions of the world or Conversely, and are there areas that and or just sort of frustrating.
Frustratingly slow to get back to where they were.
And just help us think about kind of what what the maybe partner solicit it or kind of partner sourced deals what those trends are looking like.
Yeah, I would I would say haven't seen a change and that perspective.
Obviously, the global systems integrators are an incredibly important part of the ecosystem. Both in terms of helping us prosecute deals wind deals.
Effectively execute on projects.
Bringing us deals and.
It hasn't really changed and I wouldn't say I've seen sort of any sort of <unk>.
Change and the slope of the curve relative to that I would say that as we.
We highlighted the real important.
Measure is how wind up those partners are and the consultants that back those partners are to our cloud certification and.
And really making sure that everybody that's out there implementing guidewire as up to date on how to do it such that the the implementations can be seamlessly upgraded release after release after release.
The uptake from the partner community has been phenomenal there and I think points to a lot of success going forward.
Alright, great. Thank you for taking my questions.
Thank you.
And our next question is from Tyler Radke with Citi.
Hey, thanks.
I was hoping to low <unk>.
Ask you Mike about the go lives you saw on the quarter I think you talked about 12 customers going live and you just give us a sense for how many of those were on Guidewire cloud platform. You know the ski resort releases and then just how you expect that number to trend going into the back half.
Well so the biggest go live we had in the quarter was and Mika that I've talked about and the in the remarks in the prepared remarks.
One of our earliest customers who in.
In the quarter went live.
It's sort of interesting with these things are sort of happening almost continuously now and so as we're thinking about how to talk about this on these calls.
This being a month after the end of the quarter.
We're sort of debating how exactly we talk about this going forward, but the activity is very strong.
The momentum that we're seeing is very strong.
The sort of.
Those are the 12 number is the whole of Guidewire.
All of our on Prem all of our cloud customers are meagre was our major sort of go live event.
That day.
And the USA also being able to sort of publicly go live with the insurance net.
And the small business insurance initiative powered by our platform was another major milestone, but hopefully that gives you at it you'd probably want to think about it as sort of relating to the ratio of guidewire as on Prem installed base relative to our cloud momentum and sort of over time, as we sell more and more cloud and more.
And more of the new customers go to cloud and the go live activity will just more and more be on Gw's CP and.
And it won't be relevant anymore for us to even call it out that way right because it'll just have become the majority we certainly when we project.
Al just.
Do the numbers out for the next number of quarters and on.
That's the future that we see.
For now I think the reason I like to talk about it as just because it's such an important driver of customer success, and innovation and especially margin as we've already touched on and the Q&A. That's why it's really important.
So does that help.
Yes, Thank you and.
Jeff just.
Quick follow up for you.
So understand that our guidance for the full years essentially maintained it sounds like you are seeing a little bit of more strength and the.
And the term license deals I guess is the way to think about it I think at the analyst day, you talked about cloud <unk>.
And as a percent of total being 35% to 40%.
Just in terms of of that.
Metrics should we think about it at the lower and or maybe a little bit below it given the strength that youre seeing and the term business.
Yeah and.
And obviously, we have and updated our disclosure on that but my my high level view is as we did see a bit more term license activity and the first half as we inspect our pipe our pipeline and our bookings activity for the year. There is no shift and and how much is going to go cloud versus on Prem, it's still pretty consistent with how we thought about the year.
Year or so.
Pretty consistent in general we did we did just covia was a big one for US one that we've been working on for a number of years.
That one we have been.
Weighted kind of earmarked to close this year getting that done and Q2 was a big positive thing that caused our first half to on prem and be a little bit higher than what I had expected going into the year, but my expectations for the year really hasn't changed much at all.
Okay helpful. Thank you.
Thank you.
And our next question is from Joe <unk> with Baird.
Great Hi, everyone. Thanks for squeezing me on.
I wanted to go back to just the existing customers that have already Inc.
Grace and deals and really the question is on the magnitude of this and the level of visibility that is providing from a growth into FY 'twenty two and you know Mike you brought up.
Cancel for upside based on how certain things fall, both pipeline and and why do you have visibility on I guess I'm wondering when you consider what do you have visibility on in terms of these migration deals.
Is it greater coverage or either ahead or behind kind of what you've budgeted and you sketch out what I think you've kind of talked about.
Ultimately getting back to mid teens, IRR, but maybe more on the near term. It's it's low double digit <unk> growth or the nature of the migration deals any better or worse that might deviate kind of the trajectory of our growth.
So so I think.
And one of the things that we've talked about in the past is as we model this year.
We actually expect relatively equal weighting between new <unk> thats coming from deals that were sold in prior periods I E coming from ramps from prior deals prior years and Ah Theres being added from new deals that we sell this year.
And that's going to continue to build and especially the migrations have a pretty big impact on that because they may add a relatively small amount of initial year, a or are in the year and which is sold right. So so we are seeing that play out.
As expected in line with our expectations and so as we roll forward into next year into future periods. It all depends on how much. We can also accelerate and start to see the acceleration of new modernization activity and other activities as the market and general gets more comfortable with cloud based core systems, but we are expecting to see a bit.
More lift from deals that were sold in previous periods I E coming from what we call. Our <unk> backlog. So that it's still kind of consistent with the expectations that we've been talking about for a couple of quarters and talked about at analyst day.
Okay, great. Thank you very much.
And our next question is from von Sheree with William Blair.
Hey, Thanks, guys and I'll be pretty quick here I just wanted to.
To go back to Tom Roderick question.
But you answered about closeness with customers I guess you know when you. When you think about the managed services model for cognizant and whomever implement guidewire and for you guys. It's recognize the term license, but they hope that they manage they interact with the customers did that create a distance between you and customers do you feel and are those guys on the systems integration, which are which are important and the managed services.
Model.
Willing to let go and what to them is a recurring revenue stream how should we think about that interaction because obviously you on your hosted cloud and interacting with customers is very different traits and having a third party manage it and even if they are part of us managing it for the customer and your cloud, but still your cloud how should we think about those Mike.
And it's a great question I think look and I think there are certain there is certainly going to still be and opportunity for.
Partners to take and managed services approach.
It's just the nature of what you're doing.
I think changes and shifts much more towards actual value add for an insurance company than running and upgrading infrastructure.
I think.
What we're doing with Guidewire cloud is identifying all of the com and things that are being repeated across the whole customer base and the.
Hundreds and hundreds and hundreds of instances of guidewire that are running and being upgraded and being integrated to and being patched and we're looking at all those things that are sort of individually being done.
And saying how do we do that centrally how do we do this on a multi tenant platform how do we do those super Super Super efficiently.
And.
That enables maybe you could say that that makes the managed service opportunity go away I don't really think it does I think it enables that managed service to shift towards value added activities towards creating differentiated different digital experiences and creating smarter analytics systems. It enables people to make.
Better insurance decisions more and real time.
I just tend to think that the.
The insurance is the mechanism of insurance is a digital product and the efficiency around which we are able to deliver that digital products to our customers.
Creates opportunity for more innovation and the industry and so.
I, just think that the nature of that changes.
And in and a very positive way overall for the industry based on this shift to cloud that's how I see it.
Gotcha Gotcha Gotcha and.
The next question I was just really quick is.
You've obviously had some nice deals.
And the cyber space any of that driven by sort of the solo and impact like I know, it's a tiny small it's a small portion of DWP today, but when you think about the opportunity and cyber and the risks and were exposed with Poland has that come up and conversations are you seeing any benefit of that or is that too early still because but because of our fiber supposed to be huge.
It took a while and sort of play out and I think now with sort of some of the recipe, but I wonder if that's going to drive more thought more talk more types of insurance policies and and that sort of segment.
I would say, it's early and the and you know I'm, a year and a half into the sprawl and so and I'm sorry.
Learning how quickly these sorts of markets evolve.
But these incidents the cyber incidents continue to happen over and over and over again and so you know.
When you know the way I think about it is okay, we know how and how in the news is this how big a risk is this to each corporation and what's the approach of the insurance industry.
To sort of meet that risk I, just think it's going to keep increasing.
And I don't think that it's going to have any kind of big step jump.
You know in terms of one incident drives are completely different and new.
And our risk to need to be underwritten, but the trend. Unfortunately, maybe is that this risk is just continues to increase and so that creates more and more of a market for for ensuring that risk.
It's just unfortunately, one more.
Event in the long consistent string of these events.
That every company and the world is exposed to and.
I think and.
And it's almost like I said, I feel bad, saying and it's like Unfortunately, our role and this is.
Is to help ensure it.
Through our insurance customers, but I do think that it will continue to increase.
Yes, and unfortunately bad actors don't go away and there is no.
And then you can't moving exactly.
Alright, Thanks for taking my questions guys really appreciate and I appreciate the color. Thank you. Thank you.
Ladies and gentlemen, we have reached the and question and answer session and now I'd like to turn the call back over to CEO, Mike Rosenbaum to close remarks.
Okay.
All right everybody.
And I appreciate everybody joining us for the call.
<unk> been a great quarter.
And we will talk to you at the end of Q3, so thanks very much.
This concludes Tonight's conference you may disconnect. Your lines at this time. Thank you for your participation and have a great evening growth.
Goodbye.