Q3 2021 Guidewire Software Inc Earnings Call
Should require operator assistance during the conference. Please press Star zero on your telephone keypad. Please note. This conference is being recorded I will now turn the conference over to your host Alex Hughes you may begin.
Thank you operator, good afternoon, and welcome to Guidewire Software's earnings conference call for the third quarter of fiscal year 2021, which ended on April 30th My name is Alex Hughes, Vice President of Investor Relations and with me on to the call today is Mike Rosenbaum, Guidewire as Chief Executive Officer, and Jeff Cooper, Guidewire as Chief Financial Officer, a complete disclosure of our results can be found.
In our press release issued today as well as in 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 recorded and a replay will be available. Following the conclusion of this call statements made on this call include forward looking statements regarding our financial results products customer demand operations the impact of COVID-19 on our business and other matters. These statements are subject to risks uncertainties and assumptions and are based on management's current expectations as of today.
And should not be relied upon as representing our views at any subsequent date. Please refer to the press release and risk factors in documents, we file with the SEC, including our most recent annual report on form 10-K, and our quarterly report on form 10-Q to be filed with the SEC from.
For information on risks uncertainties, and the assumptions that may cause actual results to differ materially from those set forth in such statements. We also will refer to certain non-GAAP financial measures to provide additional information to investors a reconciliation of non-GAAP to GAAP measures is provided in our press release.
Reconciliations and additional data are also posted in the supplement on our IR website and with that I'll now turn the call over to Mike.
Thank you Alex good afternoon, everyone and thanks for joining us today I'm pleased to say that we had a great third quarter with both <unk> and subscription revenue coming in ahead of guidance. We continue to build on our cloud momentum with key cloud wins migrations notable cloud deployments and the third release of our cloud platform Cortina.
<unk> is the latest in on twice yearly release cycle for the Guidewire cloud platform and includes numerous advances in innovations that bolster our position as the leading cloud solution for P&C insurers on today's call I'll provide more color on each of these areas and talk about how and why our performance in the quarter gives us increasing confidence in.
Our cloud transformation.
I'll turn it over to Jeff to discuss our financial results and outlook.
Starting with sales activity, we closed 8 cloud deals in Q3, 5 for insurance suite cloud and 3 for insurance now we continue to see very healthy year over year growth in deal count and year to date, we've had 11 insurance suite cloud deals up nearly 2 ex compare it to the same period last year.
Sales activity in the quarter showed strength across Americas, and Asia Pacific regions and included the following highlights.
F C C I insurance group, a middle market commercial property and casualty insurer headquartered in Sarasota, Florida, and writing in 20 States plus Washington D. C decided to upgrade claim center to the Guidewire cloud platform and replace their existing billing system with Billings Center cloud this will allow F CCI to simplify it.
And benefit from the continuous upgrades and innovation cycle provided by Guidewire cloud.
An existing claim center and billing center customers specializing in commercial trucking and auto insurance chose policy center on Guidewire cloud and a first step towards adopting guidewire cloud more broadly key factors that impacted their decision where our need to increase their speed to market with new insurance products seamless integration with claim center and <unk>.
<unk> Center and lower overall total cost of ownership.
RLI insurance company, a tier 2 specialty insurer headquartered in Italy, Illinois was in the Middle of a claim center version 10 upgrade when they decided to accelerate straight to Guidewire cloud. This will allow them to stay current with the claim center roadmap to improve automation and dynamic claims processing, while aligning with their cloud.
Our strategy to improve speed to market. This is a great example of how our effort to streamline cloud upgrades accelerates customer adoption.
Oh, we Nisei Dawah insurance, New Zealand is subsidiary of M. S. N. A D in Japan that provides motor insurance through the Toyota dealer network in New Zealand selected insurance suite cloud after an extensive competitive review key differentiators included our product breadth, our proven ability to scale and our <unk>.
Our innovation Road map. This is the first great win at a O E, which will allow us to demonstrate our cloud platform to the larger M. S. N a D group.
First Great Commission or EQ C. A new Zealand crown entity that conducts natural disaster research education and provides insurance to residential property owners elected to migrate claim center cloud from V..8 for our clouds compelling financial case improved configuration tools and strong innovation roadmap. This is a guidewire.
Led migration that utilized our cloud direct framework.
We also continue to gain momentum with insurance now, which is our all in 1 car offering targeted at smaller insurers in North America, and where are we tend to see the broadest competition and M. G. A headquartered in Nashville selected insurance now for its product versatility and for the maturity of Guidewire. This will be a cognizant led implementation.
Which demonstrates early momentum with partner led implementations of insurance now.
After an extensive review we also saw insurance now selected by Lititz mutual insurance company, a provider of homeowners and business insurance through a network of independent agents.
Italy, a longtime tier 1 customer chose to invest in another instance of insurance now to support an additional business unit for its versatility rich feature set and ability to scale. This customer leverages, both insurance suite and insurance now as they have many different business units, who each have different core solution needs and finally.
And a great example of how insurance now can scale as our customers grow we significantly expanded our partnership with Andover companies a tier 3 insurer, who has been in insurance now customer since 2017.
We also continued to see healthy activity and strong demand for data and analytics with 6 deals in the quarter. Our science business continues to grow as insurers are seeing growing demand from policyholders looking to safeguard against the threat of increasing frequency and severity of cyber risk around the globe notable.
Wins in the quarter for Science include Donegal Insurance Group Ascot U S services and each center each center or a global leader in managed detection and response represents an exciting new use case for science outside of insurance.
In addition, we also had a great digital win in the quarter at automobile club of Southern California, The Triple a affiliate carrier an existing insurance suite customer wanted to improve their digital presence and our new tariff framework enabled their team to create compelling digital journeys faster and cheaper than with her.
Existing alternative while this was not a cloud deployment I want to point out that the architecture of the digital solution and how it aligns to our cloud platform was a key factor in the decision and points to an intention to eventually move to a cloud platform.
Turning to customer success 12 customers went live on implementations for 30 Guidewire products globally, and we were particularly pleased to see 2 initial go lives on the Guidewire cloud platform Aviva, Italy, a leading tier 1 insurer successfully deployed insurance suite on Guidewire cloud platform in less than 9 months and experienced immediate cost.
Reduction in application maintenance operations.
The Hartford, a leader in property and casualty insurance was able to deploy insurance suite cloud for the putty insurance brand and achieve full end to end functionality in less than 6 months Party provides a direct to consumer quote and buy experience for contractors and handymen, allowing the purchase of usage based insurance for as little as a few up.
Hours of coverage.
In the quarter. We also saw insurance, Australia group Australia's largest insurer go live on policy Center Billings Center and digital this was a large transformational project for years in the making and included partners Pwc Tenzing in cognizant for large transformations like this an insurer.
Often focus on modernizing their core systems first before moving to the cloud. We're excited about this golar go lives and look forward to continuing to support IAG on its journey.
With that let me turn to discussing Cortina or most recent guidewire cloud release, which I'm very excited about and we are all very proud of Cortina represents a significant step forward in advancing our cloud strategy and is a major expansion of the innovation efficiency and ease of integration for customers. It demonstrates the advantage of combining guide.
<unk> depth and breadth with the speed ease and efficiency of the cloud and the large amplifying ecosystem of solution partners, who can more easily plug in through open Apis and standardization I'm, especially happy about Cortina because the key enhancements contained in it exemplify how the platform has evolved and will.
Seniors to evolve how the pieces worked together and build on each other and how now after 3 releases more and more apparent how powerful this innovation machine will become for our customers Cortina.
Cortina included 3 important examples of innovation that I want to highlight.
First we introduced a new integration gateway as a native part of Guidewire as platform. The integration Gateway orchestrates API calls to and from insurance suite and third party applications and greatly simplifies the approach customers take to integrating guidewire to other systems, the simplifies process automation and enables insurers to.
Their own differentiating workflows based on an ecosystem of connected apps and services. It is a great example of the type of thing that is repeated over and over and over again with every single implementation of guidewire around the world by centralizing and standardizing the approach to integration with insurance. We can make this important part of every implementation faster and cheaper and more reliable.
<unk>.
Second is data studio, our new data management tool built on top of our Guidewire data platform that enables customers to access create and publish business ready datasets whenever they're needed now every single Guidewire cloud platform customer automatically has out of the box access to a data lake populated with the event driven day.
Streamed from insurance suite and paired with data studio. This enables customers to quickly and easily define and publish these datasets to be used for any reporting and analytics requirements. They have again this foundational platform capability reduces the costs associated with initial implementations and makes ongoing innovation on the.
Form much faster and more effective.
Finally.
We have now made it possible to run insurance now on the Guidewire cloud platform, which will extend many of the Guidewire cloud platform benefits like scalability monitoring and easier integration to our insurance now customers and this will also drive greater efficiency for Guidewire is a critical first step in extending the innovation and benefits from insurance.
And Guidewire cloud to our insurance now customers.
Switching gears to our SRA ecosystem and marketplace, we continue to see tremendous enthusiasm and excitement across guidewire as global partner community. We ended the quarter with more than 1600 consultants from 31 partner companies, who have now earned the advance certifications required for Guidewire insurance suite cloud implementations and this is up 36%.
Sent from the end of last quarter and continues to demonstrate the strong demand for partner implementation services and Guidewire cloud. Additionally, cognizant and Deloitte qualified for the cloud specialization within our partner connect program, joining Pwc E Y and cap Gemini as key systems integrators, who have earned this designation.
This growth in certified consultants and partner specialization is proof of the opportunity our Si partners see in the future of Guidewire cloud.
We also saw continued momentum with our marketplace partners. There are now over 700 applications from Guidewire and 120 partners and we added a record number of partners and App and partner applications in the quarter.
As we continue to grow this marketplace, we deliver more and more value for customers by enabling and share tax to innovate on top of and in conjunction with our platform as I mentioned, just a minute ago Cortina delivers a very significant new integration capability that I expect will unlock innovation and accelerate the development of simple repeatable plug.
And play integrations on our marketplace.
Finally, Cortina also includes Guidewire usage based insurance, which is a package set of products and services built on the Guidewire platform and integrated with key capabilities from our partner ecosystem, such as true motion and Cambridge mobile telematics. It's the industry's first end to end usage based insurer.
<unk> solution supporting the entire lifecycle from quote to claim in summary, we continue to execute well across the key elements of our strategy, including cloud deals go lives in our partner ecosystem and our Guidewire cloud roadmap customer interest and engagement continues to grow and activity levels are high as we close out our fiscal year, we feel.
Good about our cloud pipeline and long term position in the market and I continue to be very confident in the connection between our successful short term execution and our long term outcome, we're driving towards in 2022 and beyond I'll now turn the call over to Jeff to discuss the financial results in more detail.
Thanks, Mike.
We were very pleased with our results in the quarter exceeding our outlook across the board.
<unk> ended at $538 million up 11% year over year.
We saw continued insurance suite cloud momentum combined with strong contributions from analytics and insurance now.
Total revenue was $164 million ahead of our outlook, primarily due to strong subscription revenue.
Subscription revenue was $44.6 million up 48% year over year.
Subscription revenue benefited from higher than expected variable revenue from science and insurance now customers.
And strong third quarter revenue conversion from cloud deals sold in Q2 due to faster software provisioning.
As a reminder, we start recognizing subscription revenue for our cloud arrangements upon provisioning of the software.
Other components of total revenue finished largely in line with our outlook.
From license revenue was $50.9 million, which is $12 million lower than Q3 last year due to $12.8 million of deal duration impacts last year that did not recur this year and more generally due to the fact that almost 90% of our bookings in Q3 came from our cloud products.
Turning to profitability for the quarter, which we will discuss on a non-GAAP basis gross profit was $81.6 million.
Overall gross margin was 50% compared to 56% a year ago.
Subscription and support gross margin was 42% and benefited from revenue outperformance that I just discussed.
Services gross margin was 10% compared to 12 per cent a year ago.
Operating loss was $16.3 million better than our guidance range due to higher than expected total revenue and lower than expected expenses due to the timing of hiring.
We ended the quarter with $1.3 billion in cash cash equivalents and investments.
During the quarter, we invested $80 million on the repurchase of 765000 shares with $77.4 million remaining in our share repurchase authorization.
Turning to our outlook I will discuss the full year outlook and then I will discuss some of the preliminary some preliminary expectations for fiscal 2022.
For the full year, we now expect <unk> to be between 562 and $569 million.
Our fourth quarter is always a very active period for Guidewire and this year is no different.
We have a large number of cloud evaluations ongoing at the moment.
This includes a healthy mix of cloud migrations existing customers looking to bring new systems to the cloud and new customer engagements.
Sales activities with existing customers contemplating a migration are focused on the timing of an eventual upgrade.
However, the timing of the final resolution of these engagements is always hard to predict and our outlook reflects our best view into where we believe we will finish the year.
As we look ahead to next fiscal year, we continue to feel confident in demand as customer upgrade schedules firm up.
As a reminder, we measure are or is it on a constant currency basis and re value at the end of each fiscal year.
If FX rates remain unchanged from the end of Q3, we would expect some benefit to our numbers, but this benefit is not reflected in our outlook.
We are increasing our total outlook, we are increasing our outlook for total revenue, which we now expect to be between 732 and $738 million.
This reflects increased strength in subscription revenue and services revenue.
We are increasing our guidance for subscription revenue to approximately $167 million.
There is no change in our term license revenue expectations and there is just over $3 million and longer than normal deal duration embedded into our term license outlook in Q4.
We are also increasing our services revenue outlook to $185 million as a result of delivery schedules firming up in Q4.
We still expect total gross margins for the year to be approximately 55%.
With subscription and support margins at around 43%.
Services gross margins for the fiscal year are still expected to finish on the low single digits.
We are raising our outlook for operating income to between $14 million and $20 million due to an increase in the midpoint of our total revenue outlook and due to expense favorability from the timing of hiring.
Our outlook for cash flow from operations remains unchanged for the year.
Finally, I wanted to provide some high level commentary on our expectations for fiscal 2022.
As we look ahead to next year, we are confident our growth and subscription revenue growth will both accelerate.
In addition subscription gross margins will also start to demonstrate expansion.
These are foundational building blocks of our long term model that we discussed at analyst day last October.
We expect our our growth of 12% to 14% from the midpoint of our of our fiscal 'twenty 'twenty, 1 or our outlook in fiscal 2020.2.
We expect subscription revenue growth of 42% to 48% from our fiscal 'twenty 'twenty, 1 expectation expectations.
License revenue is expected to decline due to cloud cloud migration activity and less new term license sales as most of our bookings now come from cloud.
Services revenue is expected to grow in the low single digits.
As a result of all of these factors, we expect total revenue growth in fiscal 2022 of between 3 and 5%.
As noted in the past, we expect subscription gross margins for fiscal 2022 to be higher than fiscal 2020..1 as we gained leverage from accelerating subscription revenue and begin achieving efficiencies.
Overall subscription and support gross margins are expected to be relatively flat as the overall mix of subscription and support revenue shifts towards subscription revenue and away from higher margin support revenue.
This preliminary view is consistent with the long term outlook, we discussed at analyst day on October and.
And we hope that you find a constructive as you begin to think about your fiscal 'twenty 'twenty 2 models.
Operator.
Can now open the call for questions.
Thank you at this time, we will be conducting a question and answer session. If you'd like to ask a question. Please press star 1 on your telephone keypad.
Formation call indicate your line is from our question queue. You May Press Star 2 if you would like to remove your question from Mchugh from participants using speaker equipment or may be necessary to pick up your handset before pressing the star.
Our first question is from Chris Merwin with Goldman Sachs. Please proceed with your question.
Okay. Thanks, very much for taking my question.
Just wanted to ask you about the cloud deals in the quarter I think there were 8 of them. Obviously, a very big number can you talk a bit about how many of those were guidewire cloud platform deals and then just at a higher level. How do you think about trying to push more customers do guidewire cloud platform deals as opposed to lifting and shifting St existing.
Deployment of Guidewire to the cloud and it's not on cloud cloud platform. So just trying to think I'm trying to understand how you are.
<unk> customers in that direction to the extent that you're able to.
Yeah, Chris Thanks for the question Yeah, Let me, let me be clear about this so going forward all of the insurance suite cloud deals will be on Guidewire cloud platform.
We worked with.
Some of the early.
Guidewire cloud customers on migration to Guidewire cloud, but going forward everybody that's buying cloud specifically insurance suite will be gone direct to Guidewire cloud platform on the insurance now side I think net will it'll take us a bit of time as I called out we had we had this 1 important milestone this quarter.
Getting 1 of the insurance now customers on to that Guidewire cloud platform infrastructure, and that's an important milestone for us.
But we'll see how we progress the rest of the insurance now customer base and net new customers for insurance now, but the way to think about it is that.
Going forward every insurance suite cloud customer we go on to Guidewire cloud platform, so that makes sense.
Yeah, that's perfect. Thanks, Mike and I just had a follow up for Jeff on the initial look into next year from the 12% to 14% <unk> growth can you talk a bit about what youre seeing in the pipeline today that gives you confidence on that acceleration and how much of that acceleration is being driven by your expectation for more deals or larger deals versus the impact.
Ramp pricing starting to come through and getting captured in and the standard error definition.
Yeah. So on so a lot of that acceleration is the model is starting to take effect and we're starting to see the impacts of the model that we put in place a number of years ago and so starting to see the impacts of these ramped deals that flow into the number on a more meaningful way and as we layer on cloud customer cohorts that becomes the new.
More powerful artifact of our model.
We're also you know this is we're also seeing good buying signs from existing customers that are contemplating an eventual move I noted on the call that you're.
Predicting the timing of.
Getting that to final resolution can be difficult, but all the patterns, we're seeing with some exciting existing customers seriously contemplating that move.
It flows into how we think about our expectations for next year and then in general as well, we're starting to see for a while it's been.
A little bit of a soft market for insurers wanting to modernize new systems as they wait for the maturity of the cloud platforms to reach a certain level and we're starting to see some good momentum on that part of the market as well as well, which is which is exciting for us.
Okay. Thanks very much.
Thank you. Our next question comes from Sterling Auty with J P. Morgan. Please proceed with your question.
Hi, This is maria on the fish.
And just sticking with the crown towers on a corner.
Those came from existing customers.
Hey, Caroline Dallas.
Okay.
Yes. Thanks for the question, let me, let me make sure I get this correct for you.
There were no tier ones in that group.
And.
Apologize I'm looking at the numbers here to get you the percentage my rough is.
You know 50%.
Roughly and the team are all added up here for you in a second.
I think it's in line with what we typically see in the pipeline.
When upgrades of existing customers and net new deals that we're able to close but in the quarter. We didn't have a tier 1 we did have the tier 2 as I called out ROI insurance company.
Okay, great. Thank you.
Thank you. Our next question comes from Ken Wong with Guggenheim Securities. Please proceed with your question.
Great.
This first question just building on what Chris was asking Jeff on the 12% to 14% Guide next year I guess, how should we think about the trajectory towards the 17% to 19% CAGR. So it does feel like.
Last year on this year is going to be the trough up share.
Should it be fairly linear.
In terms of getting to that longer term target.
Yeah, Ken I think I think it's pretty consistent with how we talked about it at analyst day.
Pleased to see some acceleration as we move into next year.
That's consistent with how we set the expectation on analyst day that it would probably take a couple of years for us to get back into that mid teens level and then.
Hopefully, we can continue to see acceleration beyond that but but that's how I would think about it you know we're not we've thought about this as a 2 year journey getting back into kind of the mid teens and that's still very much how we're thinking about it.
Got it got it great. Thanks for the clarity and then Mike. This is sort of a broader industry question I think in the past week, we saw eliminated get some negative flow back for AI powered claims commentary that they made I think 1 of the more compelling value add automation that we've seen from Guidewire cloud as auto pilot and obviously you guys have talked about the value.
Data insights that's powered by the cloud any of any initial thoughts or read throughs for guidewire. Another P&C platform providers with our with this whole.
With AI and potential concerns there.
I appreciate the question I think it's a very very good 1 I think.
The way, we think about this is that.
Trust is a very very important word as it relates to our cloud platform provider like Guidewire or an insurance company and establishing trust with your with your customers about how you do things and how the systems work is critically important too.
Any company, maybe not just in our industries, but in the world.
And you know the degree of.
Sort of social commentary and discussion about the way to the way different companies operate is just becoming more and more important every day and I think.
What the way I the way we look at it at Guidewire is that machine learning techniques are gonna enable.
Insurance companies to become significantly more efficient, they're gonna enable companies to price risks more effectively and all of that benefit eventually flows back to consumers and businesses are better run insurance industry that I work very hard every single day to.
To make possible. The net result of that is a benefit to consumers and companies, but it's important that everybody understands how these systems work how they are being used and you know in net we're very careful and open about the approaches that we're taking on auto pilot is a small first step in that.
Direction I hope that we're able to achieve very very significant results in our customer base with it but it will always be done in an open way in.
And sort of partnership with our customers and in partnership with our customers' customers. So that people can understand how the systems work and build the trust necessary to enable us to achieve that output. So I really do appreciate the question and it's something we do think about quite a lot.
Fantastic insight thanks, a lot Mike.
Thank you. Our next question comes from Matt Vanvliet with BPI G. Please proceed with your question.
Yes, Thanks, guys for taking my question I guess, Mike you highlighted marketplace is a big opportunity and something that you know a lot of the developments on Cortina are really enabling maybe.
Maybe just help us think about over the longer term, how how do you monetize that most effectively and how much can that sort of contribute to the.
The actual reported results in financial model versus.
Just being another key element in feature for you're.
Your underlying customers to enable their kind of future proofing of their business.
I would say yeah. Thanks for the question I would say primarily I'm thinking about this much much more as a differentiating feature of the platform of the products something that augments the value of what Guidewire is able to deliver.
Certainly there are there's potential to monetize marketplaces in many of the leading <unk>.
Platform providers have been very successful in endeavors, such as that.
But right now and we are much much more focused on.
Growing that ecosystem enhancing the capabilities of the platform such that that ecosystem can flourish.
You know because I honestly, just think we're getting started there.
And for 1 really important reason right is that Guidewire cloud represents a stable and consistent surface area 2 partners in a way that the current guidewire customer base does not because the current guidewire customer base is spread across a variety of different version.
<unk> and started behind firewall implemented on Prem are implemented in public clouds, but on you know with each with each customer, but in a guidewire cloud environment with the integration framework that we described as part of Cortina you'd get a stable surface area and I, just think that's going to cause the marketplace to flourish.
It's going to it's going to reduce the expanse of.
Building these solutions, it's going to reduce the expense of implementing new solutions and I really want to see that flourish.
And that's how I'm thinking about it as a differentiating feature of the platform certainly theres monetization potential, but I don't want to start predicting that prematurely because I think at this point in our evolution, it's much more important for us to instantiate that marketplace.
And really invest in growing it so that everybody can benefit from it from its existence is that you know.
That makes sense.
Yeah, that's great and just maybe just on the initial thoughts, especially around gross margin for next year.
What are.
What could be the headwinds to seeing overall.
Yes, gross margin expansion across the subs line.
If you have another very strong.
<unk> 2 of a booking new cloud deals because that.
Does that compressed the near term gross margin potentially as they ramp up.
Or are we through most of that.
Kind of layering in of new deals, causing compression.
And sort of new business on top of it is just leverage from here.
Yeah. So we've completed a lot of the hiring and the building out on the cloud operations team that's been a big emphasis for us for a couple of years.
Been a lot of hiring this year. So the full year effect next year will still have an impact on margins, but you know as.
As we noted in the prepared remarks, we do expect to see margin expansion on the subscription line next year and in a way that it is fairly material now when you look at subscription and support.
Does support.
<unk> is relatively high margin today and as the mix shift increases on the subscription side versus vis vis the support side. The overall subscription and support margins will remain relatively constant as the outlook that we provided on the call, but but we are expecting to see significant expansion on the subscription.
Arjun line.
Okay, great. Thank you for taking my questions.
Thank you.
Thank you. Our next question comes from <unk> Tandon with Needham. Please proceed with your question.
Hey, Good afternoon, guys. This is actually a cow Peterson on for Myles I wanted to touch a little bit on the initial 2022 thoughts for license sales.
You guys are there any assumptions for existing licensed customers transitioning to the cloud or for their longer term impacts from like longer term deals that were signed in FY 'twenty, 1 that won't recur I just wanted to see how we should.
Think about the puts and takes of license revenue next year.
Yeah, Yeah. Thank you and that's part of the reason why you wanted to get some of that outlook out. There is I know this can be hard to model on the license revenue side. You mentioned 2 of the big factors that are that are impacting license revenue next year..1 is as we are seeing healthy migration activity.
When a customer in Axa migration deal with Guidewire, there will be a license event in the year that that deal is signed but then going forward. There there won't be any future license revenue associated with that customer as we transition them to subscription so.
There is cannibalization of our license revenue that will take place from our subscription revenue line. So that is happening and that's showing up in the model and then you know as term license bookings become a smaller and smaller piece of the overall new bookings.
Because term licenses are typically 2 year duration duration.
The year after there's no recurring event on the term license side and so we're seeing that impact from auto but those are the 2 things that you highlighted and those are the 2 primary factors that are causing year over year declines for license revenue.
Okay, Great. That's helpful. And then I guess switching over to kind of the services. My name I know, it's it's been declining for a couple of years and you guys are saying kind of low single digit growth next year do you guys think you've kind of right size, where you want your services business could be moving forward.
Or maybe it's like a low single digit growing business and then a lot of the rest of the growth is kind.
Kind of.
Done through like some of your Si partners.
Just wanted to.
To get a feel for what the right mix services is for you guys.
Yes.
We've been pushing a lot of that business to our partners, which is absolutely part of our long term strategy.
We're very excited about the momentum we see with all of our partners.
That gives us more scale that we know we're going to need as we start to migrate this industry in a meaningful way.
So we do think we've kind of got that organization at the right level, where we can grow it in a in a relatively muted fashion, but continue to grow that a bit and then at this point in time, we are keeping our services margins a little bit lower than what we've seen obviously lower than what we've seen historically is.
As we're investing alongside of our customers to help with some of these migrations and overtime, we expect that to move up a little bit, but probably won't see that next year.
Great.
Good color thanks, guys.
Thank you. Our next question comes from Michael <unk> with Wells Fargo Securities. Please proceed with your question.
Hey, there thanks good afternoon.
I appreciate the initial outlook for fiscal 'twenty 2.
Always helpful. Jeff can you, maybe just remind us how much visibility you have into next year at this point in time the Aero Guide.
Throughout the course of this year has held fairly steady throughout the course of the year, which is actually pretty remarkable given the moving pieces.
You're dealing with so maybe just any commentary just around visibility as a starting point here is helpful.
Yes, I mean I think.
Or are there is there are 3 factors that drive how we think about IRR there.
As new deals that we sell on a particular period and how they contribute.
<unk> there is <unk> that comes from previously sold ramped arrangements that flow into the number as long as we execute.
And then there is our expectations for our attrition, which may be tied to a variety of other events that could that can cause some IRR attrition as we look forward to next year. The number that is firming up and just continuing to provide more surety into how we think about the guide as well.
Have more visibility into what's coming from the base right. So what's already embedded into ramp degree agreements and as we layer on those cohorts of agreements that helps with our visibility.
That being said, we obviously need to go out and sell new business and continue to win new customers and migrate our existing base. So.
Those 2 factors are important and then just a quick comment on air or attrition.
Last couple of years, we've seen a little bit of elevated air our attrition as we look forward to next year, we are expecting to see some improvement on that line that is factoring into our guide.
Okay. That's all helpful last quarter, you also mentioned some insurers.
Or maybe not all the way ready for cloud and highlighted if yourself managed deals this quarter. The tone suggests things are maybe dropping so are you still seeing that that's all managed dynamic as well or did something there also maybe change as we get closer to the end of the fiscal year.
Yeah.
We saw a difference between the results in Q2 and Q3, but I think that you know that.
Has to do some I think always with just a couple of deals can change those percentages pretty significantly.
In general certainly.
The majority of the bookings activity as cloud and that is what we're leading with.
But we do see it from time to time in specific geos, sometimes there's a.
You know a circumstance like we highlighted last quarter, where it makes more sense to start on Prem.
But light, but I want to reiterate just like we said last quarter on the call every single time, 1 of those situations occurs.
We're very very clear about the and the ultimate outcome of the implementation.
We'll be Guidewire cloud and the architecture of the service and the way we're approaching it supports that and I think is a bit to our benefit for all for a lot of customers, but the vast majority of bookings activity is cloud.
So.
On a quarter or that that percentage may go up and down but the trend is certainly much more towards cloud.
Got it thank you.
Thank you. Our next question comes from Bob on theory with William Blair. Please proceed with your question.
Hey, guys. This is Dylan on for Bose on Tonight. So I appreciate you taking our questions here maybe.
Maybe first for Mike starting out so we had the connections conference.
M.
On a week or so ago and it really seemed like there was much more on kind of the cloud emphasis on readiness here.
Here, you've talked historically about having 3 releases under your belt.
Where you'll feel really comfortable with the kind of underlying infrastructure there were new.
Now at that point I guess can you just kind of talk about some of the key takeaways and learnings over the past 18 months here.
How are you gonna viewing carriers.
Giving kind of customers' confidence at the time is now.
Yeah I appreciate the question and I appreciate that you watch that event.
It is when we started the journey with Guidewire cloud, we really felt like 3 releases was what we were going to need in order to be able to really feel confident that we that we that.
We had it in that we would have enough experience with the existing customers to be able to know and hone our direction and the emphasis on where we've been putting our effort in putting our innovation.
Also like very big progress on integration and the data platform that I highlighted which traditionally are just very important you know sort of <unk>.
Steps and any implementation, but I think the most important thing is a bit it's something that I've learned in almost 2 years here at Guidewire, which is that you have to be thinking about the future right because for from an from a carrier perspective, making a decision from an insurance company perspective, making a decision.
Isn't about this these projects can take 9 to 12, maybe even 15.18 months to execute and so the the mindset that I'm trying to extend she ate with our customer base is that you don't just need to be thinking about where guidewire cloud is right now, but you also need to be thinking about where we're gonna be.
And 18 months, because that is going to be we're going to be evolving.
As the project evolves and as the project go low goes live and so the confidence that we're building internally about our ability to execute and support these complex.
Implementations are.
Is really now there and we really need to earn that trust and project that confidence in order to get the customers to feel comfortable making that decision and so you know.
That was the that was why we were so excited about Cortina is that you really see it all coming together and at the same time, you can say Oh wait a minute what is it going to look like in 18 months and that's the picture that we need to be painting with our customers because that's the platform that they're going to eventually be going live on even if they make the decision right now.
So hopefully that's helpful.
It definitely was an exciting release for us and it was an exciting connections event.
Yes.
We share the color that's helpful and I guess, maybe just kind of piggybacking off of that as well.
You kind of emphasized the cloud readiness and these releases lining up with the legacy version end of life I think it's almost kind of half of your base.
Here facing end of life in the next year, you've got your cloud direct program I think you highlighted.
Customers transitioning direct from version 8 to the cloud.
In the quarter here, but would love to kind of get a sense on how you guys are viewing this dynamic.
And how these conversations are trending in that how thats, giving you maybe confidence in not only maybe in the back half of this year, but that initial kind of fiscal 'twenty 2 and guide that you guys have laid out there. Thank you.
Sure. Thanks for the question. Yeah can you you can probably imagine that sort of behind the scenes that guidewire. We're working with every single 1 of these customers about their plans for their upgrades and the versions and supported versions and the circumstances around which they're operating and working with them.
To make them make the best possible choice for their company around timing and that eventual upgrade I mean theres no. That's that's 1 of the nice things about the circumstance that we're operating in is that there's this sort of built in upgrade cycle based on the versions that all of these customers are on in all.
All of these efforts that we've made around.
Proving out and simplifying that upgrade path cloud direct like we called out with 1 of the deals in the quarter has been a real benefit for us and just being able to execute these getting more and more experience with the project all of that serves to build our build our customers' confidence and trust in us.
And the sort of I guess, the logical and eventual decision.
To move.
I just find it to be it's very unique in my personal career, how often I'm, having a conversation with a customer that where where you know at some point in the conversation we sit they say to me. It's really just a matter of when we will do this not if we will do this.
And that that feeling across you know 300, some customers in over 400 instances of Guidewire factors into the very complex project plan that enables us to make a projection about the.
The components of those deals and how that will roll into <unk> and what that will mean for the.
The sort of finances of guidewire, but underlying all of that.
I really think it's been it's been very very helpful that underlying all of that has been this attitude that we're going to build a cloud platform that works for our customers and that in that understanding what they need understanding what is going to build their trust and confidence in us and proving that out and executing on that is sort of the.
The basis for us being able to confident have the confidence to make the projection for next year at all just at all it just feels like we set out the plan we're executing the plan it feels it feels good.
That being said these are very very complicated projects and there's a lot of moving parts in there sometimes slow moving and so this transformation is going to carry out over years, but my take is especially after that cortina release.
It is happening according to plan.
And we feel good about it so hopefully that's a long answer hopefully helps you give you some colors to what backs that up.
Okay very helpful. Thank you guys. Appreciate it I appreciate you taking our questions.
Thank you. Our next question comes from Joe Goodwin with JMP Securities. Please proceed with your question.
Great. Thank you so much guys for taking my question.
Just wanted to kind of double click on the day to studio and where what's the early feedback has been there and then maybe you can just speak to kind.
Kind of how you view the importance of data and kind of.
The maturity of that ecosystem over time for Guidewire and kind of just the larger the industry largely thank you.
Yeah sure. Thanks for the question so.
Initial feedback has been wildly positive. It's 1 of those product features that we've been able to work with a couple of customers behind the scenes on.
A couple of our cloud customers have been able to have access to it and it's been received very very positively.
It's 1 of those circumstances, where the product and engineering teams are sort of excited to be to be coming to work every day because of the feedback they're getting from our customer and for me. It highlighted just how different the approach will eventually be with with much much more of the Guidewire product suite, where we're gonna be able to work.
With cloud customers on early versions of these new products new capabilities almost in real time in a way that we werent really able to do in the past and that's been very validating.
For me and you know with respect to the importance of data and analytics I think insurance companies are are and always have been and always will be very data driven.
It's a data driven industry, it's an analysis driven industry and.
It's critical not just to just support the regulations associated with the operations, but to be able to make the right decisions every single day about.
The risks you underwrite.
Way you approach claims, it's all data driven and so.
The more fluid, we can make access and that approach the better.
I'm on.
Thanks for the question.
Thank you. Our next question comes from Parker Lane with Stifel. Please proceed with your question.
Oh, yeah. Thank you it's Parker on for Tom Roderick.
Mike I think it was about 8 months ago. When you gave us the figure that 75 per cent of the bases on insurance suite, 8 or 9 and I'm. Just wondering if you can give us an update on that and maybe talk to.
The relevance of cloud direct as customers start to contemplate whether or not to upgrade to iOS 10 or move over to cloud is that something that youre seeing really resonate right now or do you think theres still some room to go for customers to really see the value there.
Well I think the answer to question is both.
It does really resonate, but there is still work to do.
Like it keeps this is this is a very very complicated decision for our customers and as I've said on other calls and in other venues very often that decision is it ends up being related to the.
The overall <unk>.
Inscape at an insurance company, rather than just specifically guidewire.
There it gets sort of logically lumped into an overall cloud strategy and the other.
On a sort of workloads or applications that accompanies integrating guidewire too. So it ends up being a very very big decision certainly cloud direct.
Our momentum on cloud.
The functionality that the beneficial functionality that's included in cloud it sort of helps that equation.
A lot in it and it's like I said resonating with customers and that's why you hear from customers this sort of a when not if kind.
Kind of conversation.
But it does sometimes make logical sense for our company to follow through on.
You know on their existing on prem or sort of self managed cloud implementation. It was 1 of the reasons why.
I wanted to call out this incredible go lives that we saw this quarter at insurance Australia Group. You know this is a 4 year project a 4 year modernization project.
That's it.
It's a phenomenal partnership that we have there in a major major implementation that we have there and it's very exciting for them to be able to achieve that milestone we're excited to be able to serve them effectively.
As a as a platform provider.
But if you think about executing a project like that that's over 4 years and right in the middle of that project Guidewire introduces cloud. It just makes sense to sort of follow through get that executed and then once its live and done and the risk of the execution. There is gone then you say to yourself, Okay. What do I do next in some form of that.
<unk> is taking place at every single 1 of our customers and we kind of have to work ourselves into that.
<unk> plan into that enterprise architecture and into a situation with them that makes sense.
And so cloud direct helps.
The you know the the you know the current.
Upgrade cycle associated with whatever version there on that helps.
But it but it's a it's not necessarily a theres no magic silver bullet there, it's just a big hard complicated project that.
We're frankly lucky to have an opportunity to participate in.
Yeah makes sense and then maybe a point of clarity on the new usage based insurance solution as we think about the target buyer. There is it typically a customer that would have adopted insurance now for a new line of business is it going to be more a situation, where a customer maybe had guidewire already deployed and they choose to move over to.
Usage based insurance could you just give a little bit better sense of who the target customers there.
The target customer is an insurance suite customer.
In general and ideally in insurance, we customer running Guidewire cloud and I think that the mindset that caused us to make this investment.
Was simply that we I think we saw this moving away from some sort of test and learn or experimental line that each 1 of our customers might be thinking about and something that was becoming much much more mainstream and what we wanted to do show everybody in.
And kind of put together that complete solution that said here's the template for how everyone could implement a usage based insurance line on insurance, Sweden Guidewire cloud.
Sort of just say like this is going to become a percentage of every ones.
Auto insurance approached auto insurance and Theres going to be some percentage of that that book of business that runs this way and we want to facilitate that and it's been it's been really interesting right because you're able to leverage the new functionality on Guidewire cloud, we're able to leverage the marketplace solution.
Our available there and put that together and provide this template.
That has been.
We received a lot of positive interest.
And understanding how that might be deployed.
Got it thanks for that clarity index for taking the question.
Thank you. Thank you. Our next question comes from Joe <unk> with Robert W. Baird <unk> Company. Please proceed with your question.
Great everyone I wanted to go back Mike You you mentioned a few questions I got to just stay on Bill 10 upgrades and having visibility on on migrations and Jeff on your.
Discussion on AOR for next year, you mentioned buying science from existing customers. So can you just elaborate on that.
Some of you know what these buying science.
Or that you're seeing and then yeah.
Just thinking about the catalyst from migration and I know, we've been talking about a lot so far on the call, but when you think about the dynamics on the installed base.
It's that I S H cohort that seems to have pretty compelling.
That's about to take place on in 2022, just yeah. There's some of the end of life support on on the underlying technology there. So.
Is that maybe an example of kind of an event, where you think over the next 12 months a high probability and a large share of a certain segment of your installed base is going to be making a decision 1 way or the other.
I think I would I would characterize it as much more.
A large percentage of our customer base.
Has to have the conversation and it has to make the plan, whether or not that and that results in a decision to move to guidewire cloud or it ends and resulted in a decision to wait.
Another period of time and.
Deal with the risks associated with the versions in the supported sort of circumstances of the environment for a period of time is TBD.
But certainly that cycle creates the opportunity for us to have the discussion.
To work out the plan.
Which rolls up to the.
The the sort of economics that we described before that result in our ability to project.
There's not.
Like I said that ends up being still a very very complicated decision for each 1 of our customers and not as simple as just simply what's even what's the what's in the best what's the best outcome, just specifically for Guidewire you know even if the outcome is just what specifically burst in the guidewire.
There is a conversation about what's the overall cloud strategy and what's the rest of that enterprise architecture look like and so.
It doesn't it doesn't really create this magic silver bullet. It just creates a built in mechanism for us to go have strategic conversations with every single 1 of our customers about what their plans are and how do we facilitate and like I said built on a build earn the trust and confidence that it makes sense for for them to me.
The decision to go to cloud, but ultimately those decisions will get made based on the timing of those decisions will get made based on what's in the best interest of each of those customers.
Yes, the only thing I would add is as.
As you know a fairly significant amount of that opportunity sits with the tier 1 and tier 2 insurers for guidewire.
1 of the ways that I think about buying signs as the amount of time that those that part of the market is investing in understanding our platform understanding the maturity of the platform the scalability of the platform and we're starting to see.
Those sorts of activities investing more time.
That I think is a positive early signal for buying.
Great. That's really helpful and then just on.
Yeah. Good comments just on some on the P&L items for next year I guess, how do you think about the cash conversion on some of those because it's a bit tricky.
It seems like some of your revenue streams like subscriptions improve but then license sales coming down so that has a margin implication I'm just wondering maybe on the rest of the P&L and then and on cash flow for next year.
Yeah. That's a good comment I mean, a lot on the license declines that you're seeing is a fair amount of that is related to multi year activity.
Where we continue to invoice that customer and so the cash generation will change or get better, especially on the migration context.
We'll change or get better, but the revenue is impacted so so as you kind of as we look to next year and we didn't provide any commentary on cash flow from operations next year, but we have noted in the past that in this transition aerie period, youre going to see some divergence between operating income margin and cash flow margin.
They're operating income margin.
As you know more negatively impacted by the transition and then cash flow margin and we'll certainly give more insights around that on the Q4 call.
Okay great helpful. Thank you.
Thank you. Our final question comes from Peter Heckmann with D. A Davidson. Please proceed with your question.
Thanks for taking my question most of my questions have been answered, but I wanted to talk a little bit on a geographic standpoint, and how you see demand do you see it.
Any green shoots in Europe, particularly the U K at this point.
Particularly the UK interesting so we definitely are.
Having continue to have success worldwide.
As it relates specifically to cloud.
Europe, we have a couple of great customers and a couple of great projects.
You know nothing specific to call out in the U K.
My head.
But.
1 of the things that's I think very very positive about our approach is that the architecture supports worldwide implementation and so we're having conversations.
Literally all over the World you know you were having conversations in Japan, Australia, and New Zealand as we talked about on this call.
Italy.
France.
You know, even though theres some customers in the Nordics that we're having conversations with them. So I really think that there is a.
So just on a broad worldwide demand that maps pretty well too.
To our installed base.
<unk>.
So hopefully that makes sense.
That does.
Real quickly.
Has there been any change in your thoughts about cash.
Capital allocation towards M&A, it's been a new 3 or 4 years since your last deal and.
I know valuations are high but then how do you think about.
Putting some of that capital to work on acquisitions and and and weather.
How do you think about it weighted consolidating deals versus deals that add some complementary technologies or <unk>.
Our capabilities.
Well I, certainly think that as our confidence in our.
Our ability to execute and be successful on the plan that we've laid out fields.
I think from me it becomes.
More.
It becomes more possible maybe is the right word that we would look to.
Inorganic growth opportunities that complement our ability our ability to deliver value to that P&C.
Customer base.
We're always looking at the market and as you said you know.
It's an interesting time with respect to.
Valuations, but we are always looking and I think from me. The calculation is about how confident are we in our ability to execute on the baseline opportunity that exists at guidewire, specifically to execute on our cloud transformation convert our customer base successfully and deliver significant.
<unk> more value to them, then use that as a mechanism to differentiate ourselves and sell more net new P&C core systems, and then use that system that we are now very confident that will exist use that system to add.
Additional functionality, whether or not that's core systems or analytics systems or data systems to that core.
So that core sort of enterprise architecture for our P&C insurance company I think that that possibility makes more sense.
And I think this quarter execution in Q4 execution, you know as we look into next fiscal year, our confidence my confidence in our ability to execute is improving.
And so I feel pretty good about that and I think that tends towards us being.
I certainly wouldn't use the word aggressive, but I would say.
On the mindset that we have about the opportunity to identify value add.
Sort of companies that we could add to that mix improves.
Got it thank you.
Yeah. Thanks for the question.
Thank you.
Ladies and gentlemen, we have reached the end of our question and answer session. I will now turn the call over to Mike Rosenbaum for closing remarks.
Hey, Thanks, everybody I just wanted to once again say.
Thanks for joining the call. It was a great quarter, we look forward to seeing you at the end of Q4, so thanks very much and good night.
This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation and have a great evening.
Uh huh.