Q2 2021 Duck Creek Technologies Inc Earnings Call
Good day, and thank you for standing by and welcome to the Duck Creek Technologies second quarter of 2021 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask the question. During the session you wanted to price.
Star one on your telephone please be advised that today's conference is being recorded if you require any further assistance. Please press star Zero I would now like day on the conference over to your Speaker today, Brian <unk> from ICR. Please go ahead.
Good afternoon, and welcome to the Duck Creek earnings Conference call for the second quarter of fiscal year, 2020, one which ended on February 28th on the call with me today is Mike Jakosky Duck Creek, Chief Executive Officer and of any chip Perry.
Duck Creek, Chief Financial Officer of.
The complete disclosure of our results can be found on our press release issued today, which is available on the Investor Relations section of our website.
Today's call is being recorded and a replay will be available for on the conclusion of this call.
Statements made on this call may include forward looking statements regarding our financial results products customer demand operations the impact of COVID-19 on our business and other matters.
These statements are subject to risks uncertainties and assumptions on our based on management's current expectations as of today.
It may not be updated on the future. Therefore, these statements should not be relied upon as representing our views as of any subsequent date.
We will also refer to certain non-GAAP financial measures to provide additional information to investors.
A reconciliation of non-GAAP to GAAP measures is provided in our press release with the primary differences being share based compensation expenses.
Amortization of intangible assets depreciation of property and equipment and related tax adjustments.
Let me turn the call over to Mike.
Thank you, Brian and good afternoon, everyone I'm excited to say the Deckers delivered excellent operational and financial results for the second quarter.
We had great momentum on the market and a growing number of cloud wins continues to reinforce Duck Creek position as the leading SaaS platform for the global P&C industry.
I'll begin with a quick overview of our financial results for the second quarter, which were well ahead of our guidance for all metrics.
We reported total revenue of $62 7 million up 19% year over year and that was underpinned by our subscription revenue, which is on revenue derived from sales of $30 6 million.
Which yielded 51% year over year growth.
Also profitable in the quarter with adjusted EBITDA of $3 million.
Overall, we are very pleased with our performance in the quarter.
The robust demand across all segments of the P&C market and so on.
On the number of notable wins, including two tier one customers that expanded the existing Duck Creek on demand deployment by increasing the adoption of our platform.
And the exciting core system win with the new customer to on premise customers of chose the convert and expand the Duck Creek deployment of migrating to Duck Creek on demand and <unk>.
Several non core wins with distribution management and reinsurance modules.
I'll provide some more detail on the great wins at the moment.
First I'd like to step back and highlight what we are seeing in the market.
The global P&C industry is one of the most complex and highly regulated markets on the world with products that span the significant number of diverse categories of different regulatory bodies.
It's also on the industry that is undergoing significant change with the entry of new competitors and increasingly sophisticated customers, who now expecting simplify digital experience and tailored product choices.
The means.
This new industry paradigm represent exciting opportunities for carriers to increase innovation and re imagine how the operate however, one of the key constraint limiting most carriers as the stock which is typically legacy on premise based solutions that are brittle and very flexible.
As we've talked about on prior earnings calls core systems modernization of the number one spending priority for carriers in large part because.
Modern core systems are vital to driving better business performance.
We increasingly hear from customers and prospects with the view of SaaS cloud based core system platform first and foremost is the competitive differentiator as well as providing the low total cost of ownership.
This is exactly the vision, we had when we began developing duck Creek on demand in 2014.
We believe that of well design SaaS core platform could accelerate innovation and the power business users the dynamically react to changes in the market and customer preferences said differently. We believe Duck Creek on demand could transfer on core system. Some of the performance constrained to a performance advantage for carriers of any size.
One of our great insights was the modern core system needed to be built with the business user at the center of the experience. This is why we built up Creek on demand is a low code platform with the Power's business users to quickly on seamlessly meet the needs of the customer.
Providing a powerful yet intuitive user experience that is fully compliant with the carrier business rules and regulatory requirements was a significant achievement for our development team and.
Central aspect of the competitive strength of the Duck Creek on demand platform.
The breadth of customer conversations, where harman has been particularly exciting for us in recent quarters.
The level of executives of carriers of all sizes of <unk>.
The need for true digital transformation and they are.
Looking for a technology platform that they can build their business on for the long term.
Well. This is the process that will take many years to play out across the industry.
Seeing real urgency among customers to develop a comprehensive long term cloud strategy.
Re platforming CT systems to the cloud is the one.
Once in a generation undertaken the carriers know that the must get right on.
The customer wins on the second quarter on exciting demonstration of our success and customer demand for our SaaS platform first.
Burst ameritrust, the leading specialty commercial insurance underwriting selected Duck Creek billing on demand our SaaS solution. After an extensive on highly competitive evaluation process.
This competitive win is a great example of the strength of our products on a standalone basis to meet the needs of highly innovative and complex customers, while setting the stage for future expansion opportunities.
Second we had two tier one carriers that are existing duck Creek on demand customers expand the adoption of the platform with meaningful upsells in both instances. These customers are rolling out of Duck Creek the on demand in new areas to drive growth in their business. These wins are great. Examples of the significant ongoing opportunities for <unk>.
<unk> within tier one carriers as they see success in the initial deployments in both cases. These expansions represent meaningful addition, ensco pure original projects.
Third we had multiple wins for distribution management and reinsurance management.
And insure embarking upon a greenfield project will be deployed reinsurance management as part of the strategic initiative.
Additionally, a leading tier two multiline insurer with a significant independent agent network is adopting distribution management to better manage their agent relationships.
Both are great examples of the opportunity to build relationships with insurers with on noncore add on solutions.
Finally, two of our existing on premise customers decided to adopt the predawn demand.
Like to provide some color on these wins as they are great. Examples of how we think about the conversion opportunity with our on premises customers.
First of course specialty as a leading specialty insurer. The recently completed a recapitalization and carve out from instar group.
Historically, it had been running Duck Creek policy and billing on premises for a portion of the book as part of the carve out process. The company is taking the tech forward approach to the strategy.
After an extensive evaluation process of core specialty chose to deploy Duck Creek on demand for the full suite across multiple lines of businesses, including the launch of new product lines as well as converting many of their existing products that are currently running on their on premises Duck Creek deployment.
We're excited to partner with core specialty and help them leverage leading technology.
As they maintain a vigilant focus on niche markets local distribution on superior underwriting knowledge.
Next the distinguished programs of longtime Duck Creek customer will modernize their technology and will shift the multiple product lines. The Duck Creek on demand as part of the overall digital transformation.
This is an important step in their modernization effort that will ship premium from our legacy platform and our on premises installation. The focus is to improve the efficiency and overall operations of one.
We are excited to partner with them on.
Both of these wins serve as the blueprint for how we think about on premises conversions.
From the beginning we are not focused on converting customers to the cloud just for the sake of converting them at the time of renewal, we want to be of strategic partner for our customers. The position Duck Creek the on demand to accelerate the strategic initiatives. We believe this collaborative approach will generate sizable opportunities to expand while always.
Keeping our customers needs of our number one focus.
In addition to our strong sales activity. We also continue to partner with our customers to help them deliver on their business objectives and in some cases with deployment of times that are much better than the industry average one great example of the exciting buildout of he saw it of notable tier one insurer for the small business insurance.
This is a highly innovative approach to serving the small business insurance segment with a true digital platform and engage of model. We partnered with the carrier to deliver a new commercial auto product to production in just four months showcasing the power of our SaaS platform and extensive insurance functionality of Duck Creek policy on them.
Similarly, we are very proud of our recent core system go live that was delivered in just six months per hollered insurance, a leading insurer in Australia <unk>.
Together with one of our Si partners Exceedance, we leveraged the power of our low code platform to enable Howard to meet the aggressive timelines and quickly deploy a broad set of insurance products, including personal motor landlord and homeowner insurance lines and bring these products the market through a new broker distribution network.
The time to value of many of our implementation cycles is an important differentiator and generate significant value for customers.
From a product perspective, we continue to release new innovations on a regular basis. This.
This is of new and exciting shift in the approach that we are embracing.
During the quarter, we released several significant updates to our SaaS platform that will enhance carrying yourself sufficiency automation and will drive meaningful efficiencies for our customers.
One Great example of mutual benefit group of tier four regional insurer, who migrated their on premises installation of Duck Creek to Duck Creek on demand is the more effective platform to support the new target operating model.
On a recent webinar the shoe.
Sure how they can more quickly respond to requests from agents new partnerships with third parties and deliver new products by embracing the power of the Duck Creek on demand platform.
This kind of innovation is showing the power of a SaaS model to create a true digital transformation.
The successful implementation, we've done together with the LTI one of our Premier systems integration partners and is of great demonstration of the value that our partners domain expertise and industry knowledge can be delivered to our customers.
Before I turn it over to Danny I'd like to welcome the newest member of debt Creek Senior management team Courtney.
Courtney Townsend recently joined Us as our new Chief people Officer, where she will lead our efforts to grow our team foster and develop our culture and promote diversity equality and inclusion within the company. We are building Duck Creek, the driving transformation and insurance and that will require duck Creek to continue to expand with the right team.
Maintaining our strong culture Courtney has great experience scaling of multinational teams, which is a key priority as we grow our international footprint I'm excited to partner with Courtney on this critical part of our growth strategy.
Let me wrap up by reiterating how pleased we are with our performance. So far in fiscal year 2021 Duck Creek on demand that has clearly established itself as the preferred SaaS core systems platform for the P&C industry.
And is being adopted by customers across all segments of the market, we are well positioned to build upon our early success in the digital transformation of the P&C industry to become a primary beneficiary as its move to the cloud.
We are excited by our success to date and the opportunity ahead of us to build a much larger increasingly profitable business over time.
I'll now turn it over to our CFO, the and each of part B.
Over the years.
Thanks, Mike.
Today I'll review, our second quarter fiscal 'twenty, one results in detail and provide guidance for the third quarter and full year of fiscal 'twenty one.
Total revenue for the second quarter was $62 $7 million of 19% from the prior year period.
Within total revenue subscription revenue, which is comprised solely of subscriptions to our SaaS products was $36 million up 51% year over year.
In Q2 subscriptions represented 76% of our software revenue and 49% of our total revenue.
License revenue was $3 $6 million of 61% year over year due primarily to the timing of term license renewals maintenance revenue on a revenue tied to on premise licenses was $5 9 million up.
Up 1% year over year and in line with our expectations.
Services revenue was $22 6 million down 8% year over year.
Services revenue was in line with our expectations as we faced a particularly hard year over year comparison, and some of our larger servicing servicing the instruments are scheduled to start in the second half of the fiscal year.
SaaS IRR, which we calculate by Annualizing recurring subscription revenue recognized in the last month of the period was $118 million as of February 28, 2021 of <unk>.
75% from the prior year.
<unk> continues to show strong momentum and reflects the strength of our SaaS business.
As a reminder of SaaS IRR because of snapshot in time of the subscription contracts that are generating revenue during the last month of the period and can be impacted by timing.
For example, our largest deal on the quarter began generating revenue within the quarter and is included in the <unk> number as of February 28.
The SaaS net dollar retention as of February 28, 2021 was 121% above our recent historical range.
Over the past two years on a quarterly SaaS net dollar retention has been in the range of 113% to 118% driven by a combination of high gross retention rates sales of new products to existing customers and growth of DWP for products early operating on our SaaS platform the.
Strength in the SaaS net dollar retention in Q2 was the result of some large sales within existing accounts in recent quarters. We currently expect SaaS net dollar retention to return to our historical range. Later this fiscal year as our pipeline includes the relatively balanced mix of land and expand opportunities.
Now, let's review the income statement in more detail.
Several of these metrics are non-GAAP and we provided a reconciliation of GAAP to non-GAAP financials in our press release.
First on GAAP basis, our gross profit for the quarter was $35 $1 million and we had a loss from operations of $6 4 million, we had a net loss in the quarter of $6 4 million.
Or <unk> <unk> per share based on a weighted average basic share outstanding count of 131.0 million.
Non-GAAP gross margins in the quarter was $38 $1 million or a gross margin of 68% compared to 57, 7% in the second quarter of fiscal 'twenty.
Subscription margin in the quarter was 67, 7% driven by scale benefits as we continue to generate strong subscription revenue growth and certain timing items.
Descriptions gross margin performed well on the quarter versus our expectations margin moved down slightly from Q1 as expected and we expect the slight additional decrease in the second half of the fiscal year as.
As we continue to add resources and scale of operations.
As a reminder, there can be quarterly variations due to timing of when revenue recognition begins for certain contracts and the timing of expenses at the early stages of the new deployment. We believe our subscription margins are an important demonstration of the scalability and performance of our SaaS platform.
Professional service margins of 39, 4% in the quarter came in slightly above our expectations and declined from the strong performance in the prior year period as expected the.
Sequential decline in professional services margin is in line with our plan to gradually bring down margins to a sustainable level by increasing hiring to achieve of sustainable utilization rate.
Turning to operating expenses R&D costs were $12 $5 million or 20% of revenue up slightly from prior year as a percentage of revenue R&D costs increased 25% from the prior year based on continued investment in product technologies.
Sales and marketing expenses were $10 $2 million per <unk>.
16% of revenue consistent with the prior year as a percentage of revenue.
Sales and marketing expenses increased 19% from the prior year period.
The growth reflects continued investments to expand our global sales footprint and engagement efforts, partially offset by COVID-19 related savings on teeny and events.
G&A expense of $13 2 million or 22% of revenue up from 18% in the prior year period and in line with expectations.
The increase as a percentage of revenue is primarily attributable to public company costs, which don't exist in the prior year period.
Adjusted EBITDA for the quarter was $3 million or a 5% adjusted EBITDA margin.
Non-GAAP net income per share for the quarter was <unk> <unk> based on approximately $134 8 million fully diluted weighted average shares outstanding.
Turning to the balance sheet and cash flow, we ended the quarter with $364 million in cash cash equivalents and short term investments and we remain debt free.
Free cash flow in the quarter was negative $1 6 million compared.
Compared to negative $3 6 million in the prior year period the.
The improvement in free cash flow is due primarily to a decrease in capital expenditures.
Yeah.
I'd now like to finish with guidance beginning with the third fiscal quarter.
We expect total revenue of 62, 5% to $64 5 million.
<unk> revenue is expected to be 31 to $31 5 billion.
Adjusted gross margins are projected at 58% to 15, 5%.
We expect adjusted EBITDA of between negative $500000 in positive $500000.
Our non-GAAP net loss is expected to range from two five to $1 5 million or a loss per share of <unk> <unk> to one.
For the full year fiscal 2021, we are raising our outlook to the following.
We expect revenue of 250 to $254 $5 million.
Subscription revenue is expected to be 120 to $121 5 billion.
Adjusted gross margins are projected at 59% to 59, 5% and we expect adjusted EBITDA of $6 $5 million to $8 million.
Our non-GAAP net income is expected to be between $500000 and $2 million for fiscal 'twenty, one and our non-GAAP income per share will range from breakeven to <unk>.
Please note that effective this quarter, we have made two adjustments to the methodology used for non-GAAP net income.
First to arrive at non-GAAP net income we are now calculating taxes by applying a tax rate of 24% to non-GAAP income before taxes.
Please note that this is currently of noncash tax rate.
The second now that we are guiding the profitability for the full year non-GAAP net income per share is being calculated using a fully diluted share count.
To summarize Duck Creek continues to perform at a very high level on our results reflect growing customer interest in adopting duck Creek on demand as an essential part of their strategic plan for cloud adoption.
This is the trend that we expect to benefit our business for years to come and to support high subscription revenue growth rates for the foreseeable future. We believe we have the ability to deliver an attractive combination of strong top line growth and improving profitability in the coming years, which we are confident can generate meaningful value for shareholders and with.
That we'd like to open up the call for Q&A operator.
As a reminder, task of question you will need to press star one on your telephone to withdraw your question press the pound key please standby, while we compile the Q&A roster.
Our first question comes from the line of Sterling Auty from J P. Morgan. Your line is now open.
Great. Thanks.
Thanks, guys. This is Jackson ader on for Sterling Tonight.
The first question.
Mike You mentioned a couple of migrations right. The on premise to the cloud, but can you give us an update on the strategy. There I don't know if theres any kind of a formal migration of our conversion program and so any update on on what youre thinking about the existing on premise customer base of the month.
Sure Thanks, Jackson well.
Well I will say and I've said this in the past that our strategy is to align to our customer strategy in terms of their overall business strategy of what theyre looking to achieve.
Perhaps launching new products going into new lines of businesses et cetera, we find that those are better inflection points. If you will to position our SaaS solution.
So we're having strategic conversations with all of our customers and really understanding what are their ambitions in terms of what they want to achieve moving forward. So as I've said in prior calls we're not going to go after aggressively converting customers just for the sake of lifting up on premise and moving them to the cloud now we're <unk>.
We encourage by the progress we now have five customers.
Debt have committed of Duck Creek on demand three that have already migrated on our full and production and two that are in the process and we know that working with our customers that they will ultimately benefit by a larger and broader business case.
And when I look at it.
The new deals when we're converting customers in the cloud actually look like almost new deals in fact, the two that I talked about in the prepared remarks, not only are we moving the existing book of business of some of the existing products. We also cross sold some additional duck Creek products into the base and Duck Creek on demand.
So we're expanding the scope and we're also aligning the delivery and the.
<unk> of that platform with some of their broader business initiatives. So we're excited about the opportunity sitting in front of us, but I also want of Tempur everybody's enthusiasm on this in terms of pace, we're going to go at the pace when theyre ready. So it's difficult for me to forecast how quickly they will occur over time.
Okay great.
Thanks for that update and then any of the follow up for you on the net dollar retention.
So expecting it to go down kind of maybe into that.
100 teens range like you mentioned that you've seen in recent quarters.
Is any of that due to the fact that maybe the initial land is getting a little bit bigger than you've seen in the past or is it just some oddities in terms of.
Getting some existing customers that just happened to jump up really big in this last quarter.
Jackson I think it's I think it's more just about mix.
Over the last couple of quarters and the mix has been skewed in recent quarters to expansion deals in the existing base.
But we don't expect that to be on ongoing immediate trend.
Our pipeline is split reasonable reasonably balanced between land and expand deals and we think we will start moving back down towards that more historical range. So I think I think this quarter was a bit of an upside aberration in terms of net dollar retention.
And really just deal specific as opposed to any ongoing trends.
Excellent alright, thank you.
Sure.
Thank you. Our next question comes from the line of Chris Merwin from Goldman Sachs. Your line is now open.
Okay, great. Thanks, so much for taking the question.
I just wanted to ask about the two tier one customers that expanded their offering in the quarter I think you make sure you're through upsell. So just was curious if you could provide any other detail. There just was it specifically going into other lines of business or where there was the actual expansion in terms of the modules that they were taking just any other color you can share on those two deals would be appreciated. Thank you.
Sure Chris Thanks for the question.
We're pleased with obviously the momentum of on demand and adoption within the tier one community I think it really showcases the advantage of our SaaS low code.
Offering in the marketplace.
In terms of the two deals that I talked about we saw that these were expansions that were tied to the core assets that they already subscribe to as part of our on demand service.
So in this case it was the expansion of them using.
The product into a new product line as well as expansion to the committed DWP level. So we think it's a great example of just ongoing expansion within an account.
And then one thing that we're very very pleased with is that this is more than just carriers adopting our SaaS platform for the first time. They are seeing success, they're seeing success with their initial implementations and because of the success buying more so again, we think it's a great example of future upside within tier one carriers.
<unk>.
Okay perfect. Thank you and maybe just one follow up I wanted to ask about international I know, that's an area, where you've been investing in Europe in particular.
Anything you can share about progress there notable wins.
Or just timelines about about when we might start to see.
The impact of some of the investments Youre, making there I know the long term project so just debt.
Curious any amount of markets you can share with the with us. Thanks.
Yeah, Chris as he said it is of long term initiatives. So we think it's really of longer term growth lever for Duck Creek, we're making good progress in our investments. We're pleased with the high quality people that we brought into our business in both Asia Pacific and in the EMEA as well our investments in the product.
And we continue to invest in our products, specifically, we'll be launching of multi currency capability within our billing product that's going to be helpful. In some localized content for EMEA in the Asia Pacific.
And then in terms of overall momentum I would say that not a lot has changed since the last time I talked about it on the earnings call.
We're thrilled with the go live that we had at Hollered insurance.
Australia, they're very notable and highly respected carrier and I think a proof points of our success is always great, but as I said on our prior call. We think we got a little bit of a headwind with COVID-19, just because us to build the brand in the local countries and the continued to expand where we're not known as <unk>.
Going to take a little bit longer and we really don't expect some of these <unk>.
<unk> to really be felt until fiscal year 'twenty, two so but again I'm pleased with the progress so far.
Great. Thanks, a lot of Mike.
Sure.
Thank you. Our next question comes from the line of socket Calia from Barclays. Your line is now open.
Okay, Great Hey, guys. Thanks for taking my questions here.
Mike maybe just to double click on a prior question just on conversion activity and again to be clear you said consistently that this is being driven by the customer.
But maybe you could just talk about what you're hearing from those conversion those handful of customers that have converted thus far on what drove the decision to convert and maybe qualitatively. Mike can you just talk about the cadence of future conversion activity understanding that it's driven by the customer.
Yeah, certainly and I would say that we are getting nothing but very very positive feedback from our existing customers.
We just did an announcement and I talked about in the prepared prepared remarks with mutual benefit group.
They're a small carrier in the state of Pennsylvania of regional player. They do both personal and commercial lines and migrated the Duck Creek on demand and it's really giving them a lot of benefits in terms of how they interact with their agents how they can better enable their claims adjusters and would they really love about the platform.
Is the incremental delivery of new capability and functionality.
With them, we're deploying new capabilities in a very repeatable basis, sometimes as quickly as every two weeks. So we're on a whole different cadence of release of technology to them and I think they are just very excited.
With a very small.
Up internally that they can have access to this type of continuous deployment technology and I think it's really meaningful for them and then in terms of cadence going forward I would say it's difficult for me to forecast because again were really looking for the strategic inflection points from carriers.
As opposed to really driving.
Our straight up conversion when we just drive interest rate of conversion a it puts a little more price pressure, perhaps on it because they already have servers. They already have infrastructure. Some of them don't have a means of how they're running that off so it's just not a good point in time for them.
And some of the strategy around aligning around their strategy is based on my own experience I was of prior CIO for a large tier one insurer and at times I head software vendors kind of keep me behold into strategies of converting and doing something that perhaps was not in my immediate budget or plans in <unk>.
Not going to be the way that we roll we're really looking for the strategic alignment with their business initiatives do they want to bring a new product to market do they want to launch in a new channel, maybe perhaps bring an existing product to market direct to consumer and we know that those are great inflection points and then we could.
Talk about value of our SaaS solution. So this is very intentional but back to your question. It's very difficult for me to predict the cadence of that because we don't always know when theyre going to get funding and budget on.
Unlocked for some of these strategic initiatives. So it will look more like the cadence of new deal origination for us as we go forward.
Got it got it thats helpful. The need for my.
Follow up for you again, just the sort of stay on the topic of conversions and understanding that there have only been a handful of them.
But just to make sure. We're all sort of level set can you remind us sort of what you've seen in terms of economic impact when when conversions happened I mean, clearly it sounds like the the conversions that you've seen.
It can also lead to some cross sell as well. So just any data points you can give us in terms of what the conversion could mean to the financials.
Yes, hi.
So let me give you a kind of an apples to apples comparison from an economic perspective, and then contrast that with the with the two we just did recently so generally speaking if you had an equivalent on premise deal same DWP same products et cetera.
The there'd be a revenue uplift to move on demand of call. It two to two and a half ex so thats two to two and a half ex of an.
An annual term license plus its maintenance versus the on demand fee.
Now just as a reminder, you can't do that often income statement because license revenue is recognized all upfront.
But just if you were looking at just kind of an apples to apples comparison, it's about two to two five times. The revenue. So it's obviously revenue accretive its gross profit dollar accretive gross profit margin not accretive because obviously the licenses nearly all of profit at the margin.
But it's certainly accretive from both the revenue and profit perspective on on a dollar basis.
In the in the case of the two that we just did more recently.
Just can't even consider them conversions because of the magnitude of the upsell.
So they were contributing what was on our income statement at this point for those was a relatively small amount of maintenance with the license already having been recognized and they went with there are much bigger deals. So these conversions happen to look much more like a brand new sale as opposed to conversion economics.
Got it it makes it very helpful. Thanks, Yeah that does thank you.
Okay.
Thank you. Our next question comes on the line of Brad Sills from Bank of America Securities. Your line is now open.
Great. Okay, Thanks, guys and congratulations on a nice quarter.
I wanted to ask about just the general question here on the industry. This is one of the few industries where.
Forget about cloud there is the vast majority of the of technology, that's being run for core systems is legacy.
And Theres a lot of custom built a lot of mainframe still.
So my question is do you think the cloud is going to provide a catalyst for the industry to kind of move over towards the end how so I mean, what are you what are you hearing from customers.
In terms of App modernization.
What is the cloud do for for that.
That adoption cycle. Thank you.
Oh, thanks and the.
The answer the short answer is yes, we do think the cloud is a great enabler at this point in time for carriers to revisit the overall technology stack and to your point.
The majority of what we are replacing out there are legacy systems, not always sometimes carriers, what theyre doing is consolidating some legacy systems and in the case of one of the customers that we just talked about in the prepared remarks.
We're converting our legacy platform as well as what's on premise of Duck Creek into our cloud, but I think this is of great inflection point for carriers, especially on a post COVID-19 world where many of their.
The employees are working remotely they want access to all of the data the processes. The information just via a browser.
And all of the data at their fingertips and the cloud technologies just gives them a new means to do that and then also as I said in some of my earlier remarks.
The speed of implementation using the cloud is making a meaningful difference and I noted of tier one that went live on the new commercial product in just four months and we just know without cloud technology. Those type of timeframe would really not be that feasible when you're worrying about infrastructure.
Sure in lifting and putting up infrastructure as opposed to just leveraging capability on the cloud that's already available to them. So we think that's really just changing the conversation as carriers look at their core systems.
That's great. Thanks, so much Mike and then one more if I may of any for you. The subscription gross margin continues to show real good scale and the results year over year.
Can you remind us if theres a target you have in mind for subscription gross margin and one of the puts and takes in terms of kind of where are you today and how do you achieve that over time, what are some of the key levers for subscription scale, especially as youre wrapping in the cloud where are the investments, whereas the scale coming near term and long term. Thank you so much.
Sure Brent.
So we've said we think over a longer term, we expect subscription margins to get into the low seventies.
We're at 60, we're at $67 seven this quarter.
Although that was higher than we expected and probably not normalized for where we are right. Now so we're probably on a normalized basis running around in the mid <unk> right now the scale that up 567 points on part of it is just pure scale benefits, we can spread more customers across existing staff and.
Technology.
So we think it's just kind of a natural progression up user.
Using automation tools getting more leverage around the existing staff and we think it will be from from kind of the mid sixties, a fairly ratable step up as we go quarter by quarter out into the future. So we think we can see gradual improvements from here.
We did mention this before we do think we're probably going to step down a little bit from this quarter's rate in the second half of this year.
Just because we benefited from both cost timing and revenue timing in the first half of this year, we had some deals generating revenue that werent fully cost burdened yet and we were.
We're not a little bit behind in our hiring plans and we are continuing to hire aggressively on our SaaS operations group.
We think.
As we get through the second half of this year on out into next year, we will see.
Stage of steady progression of.
Thanks, Vinnie I appreciate it.
Sure.
Thank you. Our next question comes from the line of Tom Roderick from Stifel. Your line is now open.
Hi, gentlemen, thanks for taking the questions.
Mike Let me start with the question for you here I mean, there's obviously a handful of levers that are that are driving some of this fantastic AOR growth.
You've talked a lot of that product and customers moving to the cloud what I'd love to hear a little bit more about as the customers. Once they are in the cloud does that element of being in the cloud sort of helped to accelerate the percentage of DWP that they start putting towards.
Towards your platform in other words, I think historically, we might see that take five to seven years for him for a sizeable carrier to move all of the DWP over but the cloud would seemingly makes it easier. So I'd love to just sit here a little bit more about the expansion efforts as you go across different line items and products and how fast that DWP can move.
Once you get them to the cloud.
Beth.
Thanks, Tom.
The answer is yes, I do believe the cloud accelerates how fast we can continue to grow DWP on the overall platform.
Please know that there are some limiting factors that are out there in the industry that sometime temper, how fast that can occur over time.
I think we're best in class and leading the industry in terms of our ability to do this with speed. So users. There is two ways I want you to look at it there are some carriers that have a more simplified product set.
But of more I'll say of more homogenous book of business that they need to scale onto our new platform. This is many of the personal lines carriers.
And they get scale more quickly, but what you need to know is that these products, especially on the personal line side are still regulated state by state. So they have filings by specific states. They have to get in some states. They have to get those filings cleared ahead of time. Some states are file and use of that they can go and catch up on the filing.
And their ability to react to that get those filings complete will sometimes kind of regulate if you will how fast we can move on and then theres. Another type of of carrier that has a whole disparate set of products product lines.
Maybe they do personal lines and commercial and so on specialty lines and there the long pole in the tent for putting more premium on the platform is the implementation costs right because implementations tend to be wrapped around the specific product line that you're implementing for so for instance, as one of the of carriers I talked about we put up a commercial.
Auto that was the initial product and now we are in discussions around what that might mean for broader products across the company and those each would be of different project, but I think.
<unk> that we can do such an implementation and about a four month timeframe. So the more of that you can execute that with more velocity the more.
We can start to scale premium on the platform, so, perhaps maybe a little bit more than you bargained for Tom, but that's really the way we look at it and if we can continue to speed implementations and health carriers be more agile in terms of their product development and filing process. We know we can do this with more speed going forward.
Yes, that's really helpful. Mike I wanted to follow up on your point just on the implementation sort of being the long pole of the tent.
Can you sort of talk a little bit more about the the the buildup of your partner practices, what theyre doing on their end to sort of keep there are teams really fully aligned with the the product innovation that you're bringing to the marketplace and making sure that they are appropriately trained and staffed for the big wave.
Of cloud just talk a little bit more about the partner implementations, how that's going and how it's part of the practices are building out there.
Yeah, Thanks for that and as I've indicated earlier the systems integrator partner community and that overall ecosystem is a really large tenant of our overall strategy and we're not going on.
Report on a recurring basis on all of our accounts, but we have over 16 systems integrators and delivery partners that we work with.
And they are investing quite heavily in their overall practices in fact.
In our prepared remarks, I was delighted that I could talk about hollered, and how exceedance helped us there and with mutual benefit group LTI helped US there. So now we're getting really a lot of diversity of partners and we love the diversity because now customers can look at their overall strategy and look.
At our variety of partners and really choose who's best fit and aligned with their overall strategy now Tom back to your question around what are they doing we're thrilled with how much they're investing in their practices and we see that show up just in the hundreds of resources that are coming through Duck Creek University.
And allowing us to bring forward, our training and really learning the latest on our cloud technologies on our SaaS platform.
And at the same time, we see many of these carrier or I'm sorry of these partners.
Developing accelerators things that they can do to really make delivery cheaper faster and easier on behalf of the customers and I think the more investments, they're making collectively they are investing in the overall ecosystem and the success of our joint customers.
Yes, that's really helpful. Thank you Mike I appreciate it I'll jump back in the queue.
Thank you. Our next question comes on the line of Buzz on Tsui from William Blair. Your line is now open.
Hey, guys. Thank you for taking my questions on.
Nice job I wanted to just follow up on Roger's question, there a little differently.
And bringing the idea of content rights of content has been critical.
Templates of been pretty critical as you think about implementation.
How do you think about the partners' ability to drive more of that to.
The ease of implementation.
And I guess are you seeing any changes in that especially around the commercial and that sort of content and content templates space I'd love to us on how the partners playing to it and sort of what the competitive environment, especially in commercial.
At least my perception that you have a pretty material lead in the commercial lines content space, how should we think about that.
Yeah.
You are right with.
Investment in content really for those listening that is about strengthening the very vertical aspect of the line of business aspects of being the best of workers' compensation or being the best at inland Marine insurance and really going much much deeper.
To your point, we have a lot of strength in our content and in our line of line.
Our line of business specific bureau of products.
But those expand outside of just the features and functions that you need within those lines of businesses, which were very very strong at but also some of these require very specific integrations to outside third parties.
For instance, we announced the integration with the split limit studios that helps us with pay as you go or billing workers' compensation. So it's all it's allowing workers compensation insurance to build more effectively.
And then we think about investing in content on a regional basis as well. An example that we invested in is ebix. They have a platform called the Sunrise exchange that we integrated.
In the.
The Asia Pacific of the Australian region and that allowed.
Carrier to get live with more velocity and speed of plugging directly into Sunrise. So we're going to continue to make those investments because we know the more of that we can have these integration points pre plumbed out of the box the more of that we can speed.
The.
Patient time, so and in fact last quarter, we announced six new partners in our solution partner program and that's why we continue to invest in that side of the business now our systems integration partners also invest in integration as well some of that isn't product ties, but it shows up to the customer.
As a reduced number of work days when they actually have to go do an implementation. So we're constantly encouraging them to invest in those practices have those accelerators and make those implementations cheaper and easier.
Got it got it and then I do have a follow up but just on the competitive environment I guess as you think about commercial lines on the content, which again I believe you guys certainly have a moat around the have you seen any change of behavior largely from the largest competitor out there or the larger competitor out there.
Are they doing more on this basically trying to come back in the space. How do you think by the Covid, but any changes I guess in that competitive space, where certainly you guys have a great deal of our proprietary knowledge.
Integrations.
I appreciate the comment and the observation of our advantage.
In this area and I would say no theres nothing that our competitors are doing of note.
I would say some of the stronger competitors, we actually see in this industry I won't name them, but have somewhat of a legacy based architecture, but they're really strong in the functional depth.
Of it but when I go look at our more.
The common competitors. This is not a business problem that you can solve overnight and I might have referenced this on past calls, but as part of our ability to support that bureau of content we are too.
Actively support thousands of insurance forms that are pre integrated with our software out of the box. We can pre fill those forms an issue those out to an insurer and perhaps when we bind a policy and when you have thousands and thousands of forms and you need to have some real deep industry acumen, that's a tough hill to climb.
For competitors and to your point, that's why we have such a moat around that aspect of our business for sure.
No. That's really helpful. On I guess, one quick follow up I had.
You talked a little bit about international investment.
I'd love to understand sort of both international and U S.
How you guys are sort of think about investing to grow the middle market opportunity.
Have a good number of middle market customers tier three.
Tier four type customers, but obviously you have a good set of tier one tier two but the international if you think about Europe, especially just give us some color on sort of what the investment looks like and how you plan on sort of penetrate that middle market.
Space, a little more of would be helpful. Thank you yeah.
Yeah.
I'd say one thing we're very very proud of the Duck Creek is the fact that we have a single platform that not only scales to carriers across a multitude of lines of businesses your comment around.
Our superior capabilities in commercial lines and then also we've done some great things with personal lines carriers as well, but also of common investment that scales to carriers of all sizes I talked about mutual benefit group, whose.
Just about over $100 million of premium of regional player and then we work with very complex large tier ones like AIG as another example, but to go back to your question the investments, we're making in the middle market.
These are carriers that really look for rich out of the box functionality that works for them. So I think that is why we've done so well in the middle market in North America, you know those carriers that have several hundred million of premium commercial carriers, all the way up through a couple of billion of premium.
We've done really really well on that segment of the market and that's another reason why we're investing internationally and more localized content.
For some of the markets that we want to pursue and we have a team that has carved off and they are explicitly focused on that business problem and we think that our platform provides us an advantage there, but again some of those investments take.
Years to make over time, we think we have an advantage with our low code platform, but some of these are also regulatory forms very specific interfaces in the market that we have to worry about and we are of a team that's working on that problem today.
Gotcha Gotcha. Thanks, taking my questions guys I. Appreciate the color also appreciate the depth of you went too, especially on my first question. Thanks guys.
Thank you.
Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key.
Our next question comes from the line of Brian Peterson from Raymond James Your line is now open.
Hi, gentlemen, thanks for taking the question just one for me Mike I, just wanted to get into kind of on a hardening insurance market, we're seeing premiums go up.
What do you typically see in terms of purchasing it from some of the customers as they think through that and how should we be thinking through the ramifications of what the.
That could ultimately do DWP. Thanks, Pat.
Thanks for the question, Brian and those that don't.
I don't understand the insurance market when we talk about of hardening of the market of hard market means of carriers are increasing their prices are we say taking more rate.
Cause they're trying to improve the profitability based on their loss history, and we're seeing that as a trend today broadly across the market back to your question around what we've seen what we are seeing is it's a good time for Duck Creek carriers are.
Taking rates up when they're doing at the carriers that are having more success or those that are more surgical in the rate taking theyre doing more analysis around what aspects of their book of business do they need to raise rates on so instead of taking a blank of 5% increase in premium they will get much.
More surgical and perhaps take a 15% rate increase for a small segment of the book maybe leave another segment of the book with the zero percent increase and then maybe of 5% increase in other segments and when they want to be more surged.
Surgical with their strategies, they want better access to data they want a platform that allows them to make these rate changes with more velocity to test them deploy them out of production and we give them a means to do that and I think that is one reason why it is so popular now for these mid market commercial insurers that are looking.
At this hard market and they know that they need to modernize our platform to be more successful moving forward. So we're engaged in some very thoughtful conversations with them to give them more agility as youre thinking about how they're going to work their way through this hard market.
Great. Thanks, Mike.
Yes.
Thank you. Our next question comes from the line of Patrick Walraven from JMP. Your line is now open.
Oh, great. Thank you and let me add my congratulations.
Mike can I talk a little bit about your API modernization journey.
And I guess I have two two questions on that one is how is that progressing if you look at it by sort of claims policy billings.
And then secondly, more broadly I don't know if you've read this book the.
Founder and CEO of Twilio wrote called the ask your developer.
But he's basically arguing over time that the.
Okay.
You know sort of API based models are going to do to product clouds, what what the cloud did the on premise and so I'd just love to hear your thoughts about how that might play out of the insurance industry.
Pat I'm thrilled with the question, it's not often I get asked about API in insurance.
We will first and foremost say this is very.
Strategic for Us, it's very near and Dear to my heart as a technologist and I think youre spot on around the the API is reinventing if you will new platforms and how carriers.
Can use the cloud and what I'll say is we're very proud of our overall system all the way through the user experience. However, we have a number of customers that use our cloud platform as a headless overall system, which means they are talking to us through an API set.
Because they want to embed the transaction processing in a broader strategic user experience or maybe co into.
Integrate if you will within an existing user experience and that's quite popular.
We've been on just the journey and I'm going to say, it's a continuous journey of that's never done and we have a whole team that continuously enhances our restful API is modernizing our API is going through our whole API stack, we have a means of which of the Apis are documented through Duck Creek salute.
The solution center and the way that we train people on how to use our Duck Creek API through Duck Creek University.
Because it's a big part of being successful on top of our overall platform. So we're very very proud of it and we're going to continue to invest because we know that carriers are going to continue to try to drive products to market using an API and go into a market and the profoundly different way.
That's super helpful and it is one area of further ahead than another if you look at like claims policy billing.
You know I do.
Don't believe that that's really the case, perhaps historically policy has been ahead, but I think this past year I can't even express to you how much investment we put into our overall claims.
And what we call our party file API to make sure that everything has a balance view because we're really looking at the whole suite and parity across the suite. So I think we've done a nice job and here's the beauty of the cloud platform too as we continue to iterate on these API and deploy them continuously so it's not like a one.
Once and done big upgrade strategy all the time, we continue to refine these and pushes out to customers. All the time, so we're thrilled with the overall advantage.
The cloud gives us to have a more.
Consistent release cadence on schedule with our customers.
Awesome. Thank you.
Thank you.
Yeah.
Thank you. Our next question comes from the line of Alex Kibali from D. A Davidson your line is now open.
Yeah.
Hi, all thanks again for the color and congrats again for a solid quarter.
The volume here on for Rishi.
You mentioned that the.
Well I guess I wanted to hear if you could potentially quantify any of the cost savings that you've seen over the last four quarters or 2020 calendar year per se.
What are your plans flow going back to the office and back to normal expenses for the coming calendar year end.
That's been factored into the the.
The guidance the adjusted EBITDA guidance itself. Thanks.
How 'bout of I will give just high level about going back to office and then I'll have Ginny talk about the expense side of it.
But I've been saying this on the past several earnings calls that I am very pleased though that the way that our business has been performing in a very virtual manner.
We do plan on opening our offices in the fall with some trial openings in July but we also know that we're moving to an environment, where we're going to have a lot more flexibility for.
Work location for our employees going forward and that's a big part of our culture and our commitment I have of personal belief that when everything reopens up that the talent will move across companies and we certainly plan on being on the winning side of talent acquisition and we know that we got to have some workplace flexibility policies.
To entice some of that talent to come the Duck Creek.
But with that we have seen some expense savings most notably less travel and are one of our largest marketing expenses called formation, which is our users conference we've been doing that virtually in investing in a virtual digital platform to do that on an ongoing basis.
And we don't have a target date of doing that in person yet.
But does any of you could perhaps talk about some of the savings and what we're planning in our overall forecast moving forward.
Yes, sure. So I think where we're seeing the bulk of the savings is in.
On the P&L perspective in the sales and marketing line, that's where we have the heaviest teeny.
And the events.
And those are running favorable to our original budget of course.
And the way sales and marketing came in at about 16% of revenue for the quarter, we might have been expecting it to be more of like 16, 5% of 17. So on a normalized basis. So we will probably move back towards that once we're fully <unk>.
<unk> engaged in travel and events, we're not planning for that to happen immediately so we've got a gradual.
And expectation there will be a gradual increase in <unk>.
Not much in the coming quarter, but a little bit more on the following quarter. After that and then we will we will get out of our fiscal fourth quarter will have a new budget for next year.
And we will be evaluating that as we see how things start coming back online.
We're not expecting to the rest of it certainly in the rest of this year. We don't have any big event spending we will be doing that virtually for the rest of the fiscal year. So I think the short the short answer is we'll get through the next few months then we'll be in the new budgeting cycle and we'll have some more guidance when we get towards the end of this year.
Thanks for that.
Sure.
Thank you at this time I am showing no further questions I would like to turn the call back over to Michael Jakosky CEO for closing remarks.
Okay. Thank you everyone for participating in our Q2 earnings call. We certainly appreciate your interest in Duck Creek, and let me wrap up by again highlighting that we're very pleased with our current results and our substantial growth in our subscription revenue of 51% is really reflective of growing customer interest in our Duck Creek on demand product. So we're obviously ex.
Cited about Duck Creek growth opportunities in the industry as the industry continues to transition to run core systems in the cloud I appreciate everyone. Joining today. Thank you and please be safe and healthy take care.
This concludes today's conference call. Thank you for participating you may now disconnect.
[music].