Q4 2021 Guidewire Software Inc Earnings Call

September 2, 2021

In a listen only mode a question and answer session will follow the formal presentation.

If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded I would now like to turn the conference over to your host Mr. Alex Hughes Vice President Investor Relations. Please go ahead.

Thank you operator, good afternoon, and welcome to Guidewire Software's earnings conference call for the fourth quarter fiscal year 2021, which ended on July 30, <unk>. My name is Alex Hughes, Vice President of Investor Relations with me on the call today is Mike Rosenbaum, Guidewire as Chief Executive Officer, and Jeff Cooper, Guidewire as Chief Financial Officer of <unk>.

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 the call.

Payments made on this call include forward looking ones regarding our financial results products customer demand operations 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 as of any subsequent date. Please refer to the <unk>.

Press release, and the risk factors and documents, we file with the SEC, including our most recent annual report on Form 10-K to be filed with the SEC for information on risks uncertainties and assumptions that may cause actual results to differ materially from those set forth in such statements. We also will refer to non-GAAP financial measures to provide additional information to investors our.

On a non-GAAP to GAAP measures is provided in our press release reconciliations and additional the 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 very much for joining us today I'm very excited to have the opportunity to report on the results of what was truly a remarkable year I'm proud of everyone on our guidewire team for staying focused throughout the year and remaining determined. So just steadily continue to execute on our mission to help power P&C insurance.

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We had a particularly strong finish to the fiscal year, which was the result of a lot of hard work in the quarter, but also a lot of hard work for months and years prior to this with the team's execution I continue to feel more and more confident in the path that we're on and the approach, we're taking to reinvent guidewire and our insurance suite customer base to a modern cloud platform.

Form an operating model, our cloud our cloud momentum in the quarter and fiscal year positions us well to continue to accelerate and helped drive continued innovation in the P&C insurance industry.

Q4 cloud activity was phenomenal with 17 core cloud transactions, bringing our total cloud customer count across insurance suite and insurance now to 92, we close to twice as many cloud deals in fiscal 'twenty, one than in fiscal 'twenty and close more deals in Q4 than in all of fiscal 'twenty.

This momentum gives us more confidence that we will continue to move customers to our cloud platform and continue to attract new customers to Guidewire cloud every new customer helps fuel the guidewire ecosystem that is so important to amplifying innovation and delivering value to our customers and.

In August we also took another important step in enhancing our data and analytics platform by welcoming hazard hub to the Guidewire team.

Through its API based risk modeling approach hazard hub as the best in class property risk and hazard data service to our analytics offering and by embedding its data and risk scores into customers' workflow, we will power smarter decisions and better service for end consumers.

Turning to Q4 cloud momentum was strong with sales strength on a number of fronts cloud sales comprised 89% of new sales activity in the quarter and just over 82% for the year compared to just 70% last year, which illustrates how quickly and clearly we have shifted to a cloud driven.

<unk> cloud deal volume was also strong of the 17 core cloud transactions. This quarter 16 were for insurance suite cloud and one for insurance now and the majority of these deals included add ons for data and analytics. Moreover, we saw broad based activity, including straight migration.

Migrations with significant expansions and five exciting new customers, let me touch on our new customers first.

In the Americas, we added three STI, Saskatchewan compulsory auto insurer and a property and casualty insurer and five Canadian provinces adopted insurance suite on the Guidewire cloud platform after a comprehensive process.

<unk> modern architecture deep content and technical vision were important factors as SGI looks to drive greater efficiency and speed to innovation.

National American Insurance company are Niko, a regional insurance carrier based in Oklahoma, providing commercial property and casualty coverage. Since 1987 selected the full insurance suite cloud, along with reinsurance management, and our digital and data capabilities.

Quality <unk> U S subsidiary of one of the largest carriers in Mexico selected insurance now qualify us is seeking a core platform that will scale with its growth streamline internal processes and leverage data throughout its workflow with predictive analytics.

In EMEA, a large car manufacturer selected insurance suite cloud to deliver motor insurance across multiple European countries and in APAC Hollered insurance, a rapidly growing insurer across Australia, and New Zealand markets selected claim center cloud for its comprehensive functionality and ongoing innovation we.

We are excited to partner with <unk> on this next generation claims projects.

In addition to these new customers selecting Guidewire cloud. We also signed another 12 cloud deals with existing customers as our cloud operations mature and gain traction we expect the conversion of our self managed customer base to continue to accelerate.

Saw strength across the board in the quarter with migrations occurring in both personal and commercial lines across a variety of tiers and with customers choosing to expand into new core systems not previously managed by Guidewire.

Key themes, we hear consistently from customers choosing to embrace cloud or the importance of a unified cloud platform strong product vision and road map and the ability to access innovation faster.

I won't cover every migration deal in the quarter, but a few that I think deserves specific mention.

Auto club of Southern California, a nearly $5 billion DWP carrier and the largest of the AAA Federation had previously decided to upgrade their claim Center instance version 10, but prior to starting that project changed course to ultimately decide to migrate claim center to Guidewire cloud.

<unk>, while also adding policy center and billing center in the cloud. This exciting deal represents a significant increase in our footprint at this customer.

Similarly, <unk>, who has served the commercial lines market for more than 100 years, not only elected to upgrade its claim center implementation to Guidewire cloud, but after a comprehensive competitive review decided to also buy policy center and billing center to take advantage of a single unified cloud solution and to facilitate greater <unk>.

Feet of innovation.

<unk> insurance group, a regional Midwest P&C insurer decided to migrate their insurance suite instance to Guidewire cloud after a view of their overall cost structure to support their core system framework in a self managed mode yielded significant cost savings by moving to our cloud offering and.

And finally, California casualty decided to migrate their full suite to our cloud for over 100 years Cal cash has been a provider of auto and home insurance to educators firefighters law enforcement and nurses across the country and is also one of our earliest customers having adopted claim center in 2007 and then.

Ending to policy Center and billing center in 2017, we are thrilled with the partnership here and excited to work with Cal cash on this next endeavor.

At the end of fiscal $2560.0 billion of direct written premium was under license for at least one guidewire core application.

<unk> said for a while now that with Guidewire operating as the core system of record for many of the leading insurers around the world. We have an enormous opportunity to instantiate cloud with our customer base and to leverage this success to drive new customers to our platform. It was great to see this play out in the fourth quarter.

Additionally, demand for Guidewire data and analytics solutions was healthy in the quarter.

As we grow cloud adoption, we have the opportunity to leverage Guidewire is positioned as the core system of record to embed both data and analytics throughout the core workflow to drive greater customer insights and better decisions.

Pleased to see a number of customers take this approach by including one or more of our analytics offerings in their cloud transactions.

One of the cloud deals that we closed in the quarter included analytics products and in addition, science continued to show momentum in the quarter with two notable deals.

Reinsurance solutions, a leading global reinsurance broker will collaborate with Guidewire science teams to help cyber insurers better quantify their exposures and manage their risks in the face of rising ransomware and evolving cyber attacks.

Chose science for cyber model transparency and maturity in addition to Guidewire technical expertise.

Emerging risks part of Ryan Specialty group selected science after comparing cyber risk selection and portfolio aggregation tools.

And also of note in early August we deepened our long standing relationship with S&P, enabling them to expand their use of our science cyber risk analytics to help power S&P global ratings service.

In addition to growing cloud adoption. We also continue to drive customer cloud deployments. We had 11 customers go live on 26 products across both cloud and self managed we saw four cloud go lives, bringing our total to 16, we saw two customers go live on insurance now and to customers Golar.

On insurance suite, a tier one insurer and Gore mutual the cloud deployment at Gore mutual really speaks to the power of our cloud platform. They have deployed insurance suite in the cloud to help transform our national scale purpose, driven and digitally led insurer in just a few short years already Gore mutual has seen.

To quote reduced from an average of over 30 minutes to about eight seconds and the time from App in the door to coverage issued improved from several days to about 15 minutes.

A fundamental pillar to driving cloud adoption and deployment is our growing partner ecosystem upgrading the core to the cloud represents a large and complex project for many insurers. So it's important to bring a deep and talent rich Si partner community to the table, we continue to see very healthy engagement from this community.

And both our deal flow and cloud deployments. We finished the fourth quarter with 13500 Psi consultants from over 32 partners and the number of Guidewire cloud certified consultants grew 157% year over year to 2000, and 315.11 Si partners are now involved across 29.

<unk> projects.

At the same time, our solution partners and the Guidewire marketplace continues to be important to powering P&C insurance innovation for our customers. We finished the fourth quarter with 731 apps from Guidewire in over 130 solution partners, while growing the number of solution partners by 43% in 2021.

Before handing it over to Jeff to cover our financial performance I'd like to briefly discuss why cloud matter. So much for guidewire, our customers in the P&C industry.

How does a fundamentally more efficient mechanism for delivering technology innovation to our customers every six months, we seamlessly deliver updates and new innovation to our growing cloud footprint. While at the same time solution partners can assess efficiently plug in through a common API based framework, which amplifies innovation on our platform even further.

As a cloud service provider, we also have significantly better access to use its data and the real time customer feedback necessary to to further improve adoption drive innovation and help our customers achieve the business outcomes they are targeting.

The transformation of Guidewire to a cloud service is such a monumental task that it often it sounds like it's our primary goal, but it is not our ultimate goal is to help power innovation for our customers to help them achieve their objectives and improve the state of the insurance industry.

Cloud is an essential step in this larger mission and while I'm very excited to see cloud momentum across deal volumes AOR growth in other quarterly results. It's important to realize that there is a larger goal of empowering innovation alongside our customers that we're focused on making progress against and very very proud of I'll now turn the call over to Jim.

Jeff to discuss our financial results in more detail.

Thanks, Mike we finished the year with great momentum, which is visible in our financial results. Our strong execution in fiscal 2021 sets us up well to achieve our long term financial targets.

<unk> ended the fiscal year at $582 million up 13% from a year ago.

On a constant currency basis.

<unk> increased 12%, finishing the year at $575 million and above our guidance range.

As a reminder, we measure <unk> on a constant currency basis during the fiscal year, and then revalue <unk> at year end for current FX rates.

Our over performance was driven by strong new <unk> conversion from 17 core cloud deals sold in the quarter.

We also saw healthy conversion of ramped activity in the quarter and the fiscal year.

Finally, we did better than our expectations on gross <unk> attrition in core attrition finished the year at under 3%.

Total cloud IRR, which we define as the IRR for all of our cloud products and for customers that have contracted to move to the cloud even if they are not fully transitioned yet.

Finished the year at $234 million up 51% year over year.

Cloud IRR ended the year at 40% of total IRR, which is the upper end of the 35% to 40% range that we discussed at our analyst day last year.

We expect to continue to break this out on an annual basis.

Fully ramped IRR, which is defined as the fully ramped annual price outlined in the customer contract ended the year at $694 million, representing 14% year over year growth and 12% growth on a constant currency basis.

In other words, we expect to add a $112 million of expansion <unk> as we execute to the ramping fee schedules outlined in customer contracts.

Total revenue in fiscal 2021 was $746.0 million ahead of the guidance, we discussed last quarter as a result of strength across the board.

Subscription revenue for the year was $174.0 million up 41% year over year due to ongoing productivity.

As Mike noted the vast majority of our new sales are coming from our cloud products, representing 89% and 82% of new sales activity in the fourth quarter and fiscal year, respectively.

Subscription and support revenue ended the year at $255.0 million up 24% over last year.

License revenue finished in line with our expectations with a $4 million impact from deal duration longer than our standard terms occurring in the fourth quarter. The majority of which was already included in the outlook, we provided last quarter.

Services revenue finished a bit ahead of our expectations on stronger than expected delivery in Q4.

Turning to profitability for the fiscal year, which we will discuss on a non-GAAP basis gross profit was $415.0 million.

Overall gross margin was 56% compared to 61% a year ago.

Description and support gross margin was 43%.

And services gross margin was 5% compared to 9% a year ago.

A key part of our strategy is to migrate existing customers to our cloud. These existing customers have invested significant amounts to install and configure their guidewire on premise applications and moving requires an upgrade and remediation work to align to our cloud best practices.

In order to accelerate these projects, we are investing alongside our customers by working on migration services at discounts to our standard billable rates.

While revenue recognition guidelines require us to account for the multiple performance obligations in these arrangements and allocate some of the recurring subscription subscription contract value to services revenue services margins are still impacted as we execute on the cloud migration opportunity in front of us.

Operating income was $26 million better than our guidance range due to higher than expected total revenue and lower than expected expenses due to the timing of hiring and lower travel and entertainment expenses.

Operating cash flow ended the year at $117.0 million well ahead of our expectations.

This was positively impacted by lower than expected expenses strong collections, including $12 million of early payment is not due until Q1 and approximately $5 million incremental cash flow from FX.

Free cash flow finished at $89.0 million, including $15 million in expenditures associated with our office build outs in Toronto in Dublin.

We ended the quarter with $4.0 billion in cash cash equivalents and investments.

During the quarter, we invested $39 million on the repurchase of 366000 shares.

And had $42.0 million remaining in our share repurchase authorization at the end of Q4.

Now, let me turn to our outlook for the fiscal year 2022, and the first quarter.

For the year, we expect IRR of $63.0 million to $667 million, representing 14% constant currency growth at the midpoint.

This outlook does factor in approximately $4 million to $5 million in IRR from our acquisition of hazard hub.

Going forward hazard hub will be incorporated into our analytics business and we do not expect to breakout IRR for hazard how in the future.

Total revenue for the year is expected to be between $1570 million.

We expect that subscription revenue will be approximately $250 million, representing 48% growth.

And that support revenue will decline by about $2 million year over year.

License revenue is expected to continue to decline due to the demand for new subscription sales and cloud migrations.

We have not modeled in any positive impact of new term deals or renewals with longer duration than our standard.

Services revenue is expected to be approximately $200 million.

We expect total gross margins for the year to be approximately 51%, but this gross margin percentage will ultimately depend on our final revenue mix.

Subscription margins should start to grow from approximately 23% to the low 30% range.

Overall subscription and support margins should be flat to up a point or two.

As the subscription margin improvement is offset by the mix shift between subscription and support revenue.

With respect to operating income, we expect an operating loss of between 38% and $28 million for the fiscal year.

This reflects continued investment in customer success sales and product development, which will help us widen the competitive moats as we execute against this large market opportunity.

We recognize that it is an extremely consequential decision for an insurer to entrust with third party to deliver their core system as a service.

And we expect to be the logical choice as insurers consider this path.

These investments are consistent with the expectations with our expectations and were factored into our midterm and longer term margin targets. When we updated investors at our analyst day last year.

Additionally, our operating income is impacted by the varying revenue recognition patterns reported on our income statement.

While the revenue pattern is different if we sell a multiyear term license cloud migration arrangement or a new cloud deal our customers continue to pay us in the same way, which is primarily annually upfront.

Over time, the vast majority of our IRR will come from cloud and the variation in revenue patterns will become less pronounced in operating income and cash flow will start to converge, but we're still a few years away from this.

Cash flow from operations in fiscal 2022 is expected to be between 30% and $40 million.

The year over year comparisons are challenging due to four factors.

First is the size and timing of the company's annual bonus and year end sales Commission payout, which usually occurs in Q1 for the fall for the previous fiscal year.

In fiscal 2022 this results in a $30 million higher cash payout in fiscal 'twenty one.

This is due to higher company performance in fiscal 'twenty one.

But also because the fiscal year 2020 bonus was partially paid out early in Q3 of 2020 due to an employee Covid relief initiative, which lowered the cash impact in fiscal 2021.

Second we are moving our U S employee base to an unlimited vacation policy and as a result have an $18 million one time payout of vacation accruals in fiscal 'twenty two.

Third we had $12 million of early payments from customers in fiscal 'twenty, one and finally fiscal 'twenty, one benefited from approximately $5 million due to changes in currency exchange rates.

We expanded we expect to spend approximately $30 million in capital expenditures, including $10 million in building and build out expenses as we finalize our new offices in Dublin, Ireland in Toronto, Canada.

Turning to our outlook for Q1, we expect <unk> to finish between 586% and $590 million.

We expect total revenue of between $328 million.

As a reminder, Q1 in fiscal 2021 benefited from $15 million in incremental license revenue from deal duration, including a significant contract consolidation and these items will not recur in Q1 of fiscal 2022.

We expect subscription revenue of approximately $55 million and services revenue of approximately $50 million, we expect an operating loss of between 27% and $23 million in Q1.

In summary, we are proud of what the team was able to accomplish in fiscal 2021, we remain on track to hit the financial targets discussed at Analyst day last year, and we look forward to providing more detail at our analyst day, this year, which will be on September 30.

We recently made the decision to transition this event to a 100% virtual event.

Operator, you May now open the call for questions.

Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset.

Before pressing the star keys, one moment, please while we poll for questions.

Your first question comes from the line of Matt Vanvliet with <unk>. Please proceed with your question.

Yes, thanks for taking the question guys and good job on the quarter.

As you look to continue the cloud migration momentum.

How much are you hearing from existing customers that are very fixated on reference customers going live seeing.

Your success and efficiency of those migrations.

Getting more more of those existing customers sort of deeper in the pipeline on their own cloud migration.

Yes, I'll take it first.

Thanks for the feedback.

I'd say that were seeing.

Number one the engagement from the existing customers.

Improved steadily.

I think I've talked about this a little bit on the on our last quarterly call the degree to which one of our existing customers is able to spend time with us and really evaluate our operation in the cloud platform. How it works how it will impact them the benefits. The more time, we can spend with them the better and it is a very positive sign when they.

Spend more time with us on that because it indicates.

Just a change in a sort of.

And intense.

Really to do a serious evaluation that we hope will will eventually end in a positive outcome and in migration.

Certainly.

The the whole set of implementations.

Especially at our tier one customers.

People's minds, and they consistently ask us about it.

We maintain that those programs operating.

Successfully in going live on time and successfully is critically important and so those questions definitely come up but I would say probably the most important signal I'd say is just the deeper engagement that we're seeing with our with our customer base on cloud.

Great and then as you look towards some of the international markets Great to see that you had a new cloud deal in both EMEA and APAC.

Are those regions starting to be a little more receptive to the cloud how should we think about the overall mix maybe over the next year or two of deals in the pipeline is it still pretty U S centric.

Or are you seeing a more holistic.

Demand across the globe. Thank you.

Well, yes sure.

I think that the.

Our base customer base of Guidewire certainly is when you look at it U S centric.

And then we have a particularly strong presence in Canada as well.

That that wait sort of so to speak.

It does you definitely see that in our pipeline and business activity just because so much of our incremental IRR will come from our customer base in those cloud migrations.

But we are seeing.

More and more confidence and more and more orientation I would say to cloud internationally and it was great to see those two deals we also have.

Clear pipeline.

Internationally across EMEA and across APAC. This fiscal year that we're excited about and so.

Don't think we're going to see it shifts to a 100% cloud.

Next year, but definitely that is the trend and thats true internationally.

Alright, great. Thank you.

Yes. Thank you.

Your next question comes from the line of Jackson Ader with Jpmorgan. Please proceed with your question.

Okay.

For taking my question as well.

First one is on the <unk> outlook Jeff.

Just for the hazard home, four 5 million bucks or so.

The guidance looks pretty similar to the preliminary guidance you provided on the third quarter calls.

Just given what the activity is.

And the cloud and really strong in the fourth quarter.

I guess I'm just curious.

While the increase in activity that lead to a larger increase in your guidance.

Yes, that's a good question I mean first of all.

It is similar on a growth rate basis.

But on a bigger base rate, we did do a little end up doing better than our expectations in Q4, so rolling through the bigger base on an absolute dollar basis.

As it is a bit better than what we outlined for folks next year.

Some of the performance in Q4 can create from a little bit more difficult compares on a growth basis. So so we felt good that we were able to maintain on an organic basis. The same growth rate that we outlined for investors last year and are excited about kind of how we see that playing out through the year.

Yes, that's fair.

Yes.

And then any any kind of hearing information maybe you can provide on either.

The cloud wins in FY, 'twenty, one or new customers renewal customers.

Any clear striation, you can provide would be great.

Yes, I mean, we saw a lot of.

I'd say, our progress overall cloud deal activity was pretty broad based.

We did note on the call today, we have one what we would classify as very large tier two on the precipice of being a tier one decided to migrate to the cloud but still.

We have not seen any tier ones move in a material way. This year. So a lot of that work is still out for us to capture in the in the years to come.

Okay, Alright, great. Thank you.

Your next question comes from the line of Ken Wong with Guggenheim Securities. Please proceed with your question.

Great. Thanks for taking my question, Mike if I could.

Help it notice when you talk about the 17 cloud deal that I think a lot of the commentary was you had guys that were going to go and upgrade there was a U turn you saw higher product attach I guess is it your sense that theres, probably a lot less selling in education on Guidewire as part now and now it's more just a matter of.

Kind of customers being ready and maybe maybe you guys are falling along their timelines now in terms of cloud adoption.

Or perhaps is there just something that you would highlight that that has kind of caused a bit of a reversal from what we had been seen in the past where it sounds like it was.

We have a much harder sell four for Guidewire.

Hi.

We wouldn't say that there is less selling involved and I really thank our teams here did a phenomenal job.

In the year, and especially the fourth quarter I mean every single one of these customers that makes this decision really does.

<unk> evaluation of the product and have their plan and of the project and what's involved and then that's just that is just the type of investment that we have to be willing to make.

In order to serve this industry effectively I think the thing that is improving as our operational readiness and the confidence around which we can predict how things are going to work for our customers on our cloud service and that's just confidence that comes with the experience of doing these implementations and do.

The updates and doing the upgrades and all of that sort of organizational knowledge not just even in guidewire, but also our partner ecosystem, just having great great partners in our ecosystem that have had the experience with a couple of other projects that can just provide a little bit more of that confidence.

That you need in order to convey.

Convince I guess a customer that now now is the time that it makes sense to make that decision. So.

But I still expect the selling activity or is sort of the sales expense to still be pretty significant and I think that that's just part just the what we're ready to do but I think more and more as we continue to do these releases and we continue to gain experience and we continue to have go lives that the <unk>.

<unk> will just build and build and that's what I think we are seeing.

Got it thank you for the insights there.

Useful and then Jeff just just one on margins.

As we look out to next year, you've got you've got an operating loss, there, which I think makes sense given the scale of the investment in the pipeline that you guys are closing here is it is it fair to assume that we're at a trough from a profitability perspective, as we kind of March towards that 16, 14% to 16% range in the medium term and 26% to 29%.

The later stages.

Yes, Ken I mean, I think there's a lot.

There's a lot going on in our income statement and some of the revenue timing of revenue and complexity around how that gets recognized in the income statement can cause some of those challenges that we're seeing I mean, some of the things that we focus on is the IRR growth and then if you look at how that compares to revenue growth you can see kind of some of the stuff that's more income statement driven versus.

Versus real business factors that are driving some of that with respect to operating income.

We do expect next year or two to be the bottoming out point with respect to operating margin, we're going to continue to align people more on cash flow margin and just how the cash flow dynamics work in the business or some unusual items that we walked through on the call for cash flow from operations in fiscal 'twenty two we're obviously.

Really excited.

<unk>.

Cash flow achievement, we did in fiscal 'twenty, one so youll hear us continue to focus on that metric a bit more as we go through the transition.

Got it alright.

Perfect. Thanks, guys.

Thank you.

Your next question comes from the line of <unk> <unk> with William Blair. Please proceed with your question.

Hey, guys.

Dylan on for both on I guess, it maybe wanted to double click on one of those last questions around kind of the partner ecosystem.

Guys continue to see steady momentum there with with that cloud certified number so maybe wanted to dig into more like what are the requirements necessary for partners to kind of establish this and then what are you hearing as well from both the partners and the customers just kind of drivers of demand right. So with him at the combination here for <unk>.

Just looking for more capacity towards their digital initiatives, but then also kind of partners positioning to capitalize on these broader industry trends, So love to get a sense of of how you guys are thinking about that.

Sure thing so in terms of the partner certification demand requirements as one of the things. We're trying to do is make sure that the implementation of insurance suite that ended up being deployed in production on Guidewire cloud are done in such a way that we can update them seamlessly.

Please release to release <unk> is a very configurable platform. There's a lot of degrees of freedom associated with what you can do with it and we believe very strongly that you do things right, we're going to be able to update those customers every six months sort of forever, but it's really important that the people do in those implementations they know.

We expect the system to be configured for different lines of business and different types of integrations and that they are up to date on the latest and greatest capabilities that are built into the platform. So that when they do that implementation. It's done well it's done right. Okay and you know there was a this is a major change for Guidewire and the <unk>.

Over 10000 people out there in the world that are that participate in these implementations and so the.

This certification program is designed to ensure that they are.

Trained educated and ready to do those implementations and do them really well now there are incentive to do that in.

In order to be able to be positioned.

As a partner in these deals.

They are in many cases selling right alongside us helping us convince the customers that this is the right step to take and the more certified partners. They can bring to bear on a program the more the likelihood is better.

We're going to get that business and they're going to be able to be selected as the implementation partner for our program.

Thank you.

The reason I'm, so excited about that number and that number continuing to grow.

It's really that it indicates that the the.

Consulting.

Eco system recognizes that this switch.

Is an eventual outcome that they need to be prepared for and not sort of sitting on the sidelines waiting for it to happen, they're participating with us and engaging with us in getting these people certified so that they're helping provide the thrust necessary to move the customer base over.

I honestly think it's.

All of our best interest to do that I think that the.

You know the the demand so to speak for innovation in the P&C insurance industry is only going to increase and I think that when we get our customer base and more customers added to the Guidewire cloud platform, we're going to really be able to significantly innovate in the broader P&C insurance industry and I think.

The partner ecosystem will be a big driver of that.

Hopefully that helps answer that question.

No no I appreciate the color on that one I guess, maybe one more as well so as we think about kind of the dynamic shaking out over the next 12 months you have a large portion of that installed base kind of facing end of life support.

Yes, first maybe any update relative again to the pace of migration conversations you are having here and then as a follow on to that can help us walk through the dynamics as it relates to that model impact is the migration kind of tended to have more and more of an impact too.

What's kind of the revenue recognition dynamics.

Sure I'll speak to the sort of view of the physical.

And what we're doing how we're thinking about this going forward.

Look I've said, a couple of times that.

These decisions. These projects are very very consequential for our customers and very often needs to be sequenced.

With.

In line with other business objectives.

And so in terms of end of life and the various other.

Sort of version related constraints or lever of SEC guests in the system, we want to be a first class partner to our customers primarily that's the most important thing for us is to be a partner that they can trust to provide this service to them.

No matter what.

We want to make the cloud the cloud product as good as we possibly can we want to make it easy as easy as we possibly can make it for them to move and.

And we wanted to reduce all of those risks as close to zero as we possibly can but even if we do that there's going to be a timeline that makes sense for each customer given the other business objectives. They have and we've got to be prepared for that now when you think about how does that translate into business that we're going to do in this fiscal year.

Certainly the success that we had in Q4 and last year gives us more confidence that we'll be able to sort of.

Incremental <unk> tick up the <unk>.

Pace of the cloud migration is in the cloud sales.

We feel confident with the guidance that we've given.

All trending positive for us, but at the end of the day. These still are very very consequential complicated decisions.

We're going to move we're going to get this industry and our customer base to move as fast as we possibly can but we're not in complete control of that.

And so we're going to do everything we possibly can.

That we can do and I think things are going very well, but we feel pretty good about the guidance that we've given and how that relates to the cloud demand.

Great. Thanks, guys.

Great. Thank you.

Thanks, a lot.

Your next question comes from the line of Michael <unk> with Wells Fargo. Please proceed with your question.

Hey, there. Thanks. Good afternoon, you've closed 16 insurance suite deals here or do you feel like youre getting back to more of a normalized seasonal trend.

And if so can you just talk more about how that informs the visibility you have into the <unk> and updated outlook for the upcoming fiscal year.

Yes. So we did we did 16 insurance suite deals.

Insurance cloud.

Cloud deals, which is very very positive.

Certainly one of the things we always talk about you know I was one of the things I think maybe all people banging their head up against the wall is how do we get the business to be more linear.

Obviously, we had a great great Q4.

We'd love to see the business be a little bit more linear.

I don't know whether or not you can describe what we'll see for the next year as being more normal, but certainly I think I would I would sort of pivot back to the confidence that we feel in the cloud product and our operational ability to deliver it as being something that can.

Can drive a little bit more consistent demand quarter over quarter.

We worked real hard with the teams here at Guidewire in with our customers to try to linear linear realize that demand.

But the most important the most important thing regardless of any other factor is our readiness and the maturity of the products.

The other thing I would add is as we highlighted some new customer wins and even some expansions.

Migration, some kind of new system Modernizations that are taking place. So it's exciting to start to see that.

Lay out as you all know.

There was a period of time when the cloud platforms, we're still unknown to insurers and we saw a bit of a slowdown in overall core modernization activities. So we're starting to see that return, which is a very positive sign I would say from how we've modeled it we haven't necessarily modeled it back to.

Oracle level levels pre cloud when people were looking at on Prem modernization projects, but we are starting to see that soften a bit which is good.

That's helpful. And then I guess, just going back to the comment on the subscription gross margin line I. Appreciate the mixed dynamics I think you said.

Those because you think the subscription gross margins could trend in the low <unk> over the course of the year I just wanted to revisit that is that mostly just better scale as we get through the year or is there anything else just to be mindful of that can drive just structural improvement on the gross margins there.

Yes, so on the subscription side of things we've made heavy investments in cloud operations over the last two years, you will continue to see the full year effect of that as we move into next year.

But as subscription revenue scales up and we see an acceleration in the subscription revenue line that will help us drive expansion next year, and then clearly into the future.

As we move towards our longer term targets that we thought that was set out at analyst day.

Great. Thank you.

Thanks, a lot Michael.

Your next question comes from the line of Joe <unk> with Robert W. Baird. Please proceed with your question.

Great Hi, everyone.

My question on the.

The existing customer migrations are the deal sizes getting larger Mike Examples you shared it sounded like these were all full core deals I think there's been a tendency in the past for maybe starting west and then the digital module or Greenfield so smaller in scope.

Is there been a noticeable change in this regard wet with what some of the existing customers are deciding to do.

First I guess, it's great. When we see these migrations that also include expansions and so.

Those are very very positive deals for us and the thing I would highlight there is that customers are thinking about what's their overall cloud strategy who's their overall cloud partner and what are the better and the benefits they see and guide wires that you get this full suite implementation you get a consistent approach to the <unk>.

So the whole core system across claims policy and billing and that is a very positive.

Thing for us and so when we get those deals we're really happy to see it.

I don't know whether or not I would connect the dots and say that we see a trend there but certainly.

Whenever you are going to kick off one of these kinds of projects with a customer we're looking at the whole <unk>.

Enterprise architecture their whole existing landscape and we're working with them to assess what's the best and most efficient way to sort of get them completely modernized.

So I think it's probably too soon for me to say that that indicate some sort of trend, but it's certainly a very positive signal that we saw in the quarter.

Okay. That's good color and then just on the cash flow outlook for the year.

So would you may be just been trying to normalize things and thinking about developments here it sounds like subtracting out the.

12 million and 5 million in this year's number.

Adding that back to next year's number and then the additional $18 million and one time vacation accruals.

I just want to confirm so I think operating cash maybe normalize would be closer to $70 million this year and if that all SEC.

Sounds right yes.

That kind of in line with how you would expect things to progress.

Yes, I think that.

Thats fair and Thats, the right way to think about it there's been a lots of puts and takes in the number this year.

But that's a fair way to think about it.

Okay. Thank you very much.

Thanks, Joe.

As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad as a reminder, if you'd like to ask a question. Please press star one on your telephone keypad now one moment. Please while we poll for more questions.

Your next question comes from the line of Brad Sills with Bank of America. Please proceed with your question.

Oh, great. Thanks guidance for taking my question.

I wanted to ask.

Similar question to John's question, which is when you get a customer migrating to the cloud are you finding that with some of the cohort of customers that had been on the cloud for a longer period of time that your ability to up sell them into the broader suite.

Or even just data and analytics.

As more seamless in other words those customers because they are on your servers.

You have a better ability to upsell these customers.

I want I guess there is.

Embedded in your question is maybe the.

The sense that they're already running on our cloud system and we are upselling them versus they are working with us to upgrade to the cloud at which point, we just we work with them to assess what are the other.

Core applications.

That they're currently using and what would what should they be using going forward right. So the pattern that we saw in the quarter, which is very positive is that we've got an existing customer running one of our.

Core solutions say claim center and that claim center implementation makes sense for them to move to the cloud at the same time, they say, okay, well what are we doing with our policy administration system and what are we doing with our billing system will those needs to be modernized well, okay. Let's look at the full suite from Guidewire because.

We're going to get that sort of consistent cloud platform consistent partner, we trust consistent experience across the.

Across the enterprise and the systems all designed to work together and that leads to going from sort of one pillar of the guidewire footprint to a full suite implementation in the cloud and that's a very very good outcome I think over time as we get more and more customers live on cloud as we're able to as I was sort of.

Alluding to.

In the remarks is we have more visibility into how they are using the system.

What they are adopting what the business challenges are there's going to be more opportunity for them for us to up sell them data and analytics solutions going forward I think that's the kind of thing that you should expect to play out over years that guidewire as we get the customer base moves to cloud right now a lot of this quota I guess.

So think of it as upsell is happening as part of an evaluation of our cloud migration. So that we're working with that customer to make a picture of what is their enterprise architecture look like what is their core systems look like in the cloud provided by Guidewire and.

And partnering with them to find a.

Find a collection of products across data and analytics in our core systems that makes sense for them.

Great. Thanks, so much Mike and then one for you Jeff if I may on <unk>.

The subscription margin guide for flat or up a percentage if you could remind us kind of where we are.

As you look towards that.

66% to 68%.

Term target that you outlined.

There are what are some of the drivers that could get us there in the coming years. Thanks, so much.

Yes sure.

What we said was subscription margins are going to be up in the low 30% range off of what was 23% last year, and then subscription and support would likely be kind of roughly flat to up a percentage in that dynamic.

As a result of the mix shifts.

As support which is usually around 82% margin declines as the overall mix that has an impact on the overall margin.

And then from where we are where we are is we're seeing a lot of uptick a lot of demand and transacting on demand for our cloud products. The accounting can be complicated, especially in the migration of arrangement, but we are seeing accelerating subscription revenue growth and we feel really good about the investments we've made over the.

Last two years on cloud operations. So that we can start to leverage those investments and that should drive margin expansion as we look forward.

Very much on track with what we were expecting as we set out those targets last year and we feel good about the targets we talked about at analyst day.

Great. Thanks, John.

Thanks, Brad.

Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back to Mr. Mike Rosenbaum for closing remarks.

Thanks, very much so thanks, everybody for participating on the call today. It was a really big quarter during an exciting time for guidewire in the P&C industry. We are incredibly excited about the continued demand we see for our platform and for the advancement of our cloud strategy, we remain as optimistic as ever about our long term vision and the opportunity for.

All of our stakeholders. So we look forward to talking again later this month at analyst day, which as Jeff said that'll be September 30th as a virtual event. So thanks very much and have a good evening.

This concludes today's conference you may disconnect your lines at this time. Thank you all for your participation.

Okay.

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Yeah.

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Yeah.

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Greetings and welcome to the Guidewire fourth quarter and fiscal 2021 financial results Conference call.

At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.

Police 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 the call.

<unk> made on this call include forward looking ones regarding our financial results products customer demand operations 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 as of any subsequent date. Please refer to the <unk>.

Thank you Alex good afternoon, everyone and thanks very much for joining us today I'm very excited to have the opportunity to report on the results of what was truly a remarkable year I'm proud of everyone on our guide wire team's sustained focus throughout the year and remaining determined to just steadily continue to execute on our mission to help power P&C insurance.

<unk>.

Form an operating model, our cloud our cloud momentum in the quarter and fiscal year positions us well to continue to accelerate and helped drive continued innovation in the P&C insurance industry.

Q4 cloud activity was phenomenal with 17 core cloud transactions, bringing our total cloud customer count across insurance suite and insurance now to 92, we closed twice as many cloud deals in fiscal 'twenty, one than in fiscal 'twenty and close more deals in Q4 than in all of fiscal 'twenty.

In August we also took another important step in enhancing our data and analytics platform by welcoming hazard hub to the Guidewire team.

Through its API based risk modeling approach hazard hub as the best in class property risk and hazard data service for our analytics offering and by embedding its data and risk scores into customers' workflow, we will power smarter decisions and better service for end consumers.

Business.

Cloud deal volume was also strong up 17 core cloud transactions. This quarter 16 were for insurance suite cloud and one for insurance now and the majority of these deals included add ons for data and analytics. Moreover, we saw broad based activity, including straight migrations migrations with Cigna.

Difficult expansion and five exciting new customers, let me touch on our new customers first.

Important factors as SGI looks to drive greater efficiency and speed to innovation.

<unk> U S subsidiary of one of the largest carriers in Mexico selected insurance now qualify us is seeking a core platform that will scale with its growth streamline internal processes and leverage data throughout its workflow with predictive analytics.

We are excited to partner with hollered on this next generation claims projects.

Strength across the board in the quarter with migrations occurring in both personal and commercial lines across a variety of tiers and with customers choosing to expand into new core systems not previously managed by Guidewire.

Key themes, we hear consistently from customers choosing to embrace cloud or the importance of a unified cloud platform strong product vision and roadmap and the ability to access innovation faster.

I won't cover every migration deal in the quarter, but a few that I think deserves specific mentioned.

Auto club of Southern California, nearly $5 billion DWP carrier and the largest of the AAA Federation had previously decided to upgrade their claim center instance to version 10, but prior to starting that project changed course to ultimately decide to migrate claim center to Guidewire cloud.

<unk>, while also adding policy center and billing center in the cloud. This exciting deal represents a significant increase in our footprint at this customer.

Similarly, Amira sure who has served the commercial lines market for more than 100 years, not only elected to upgrade its claim center implementations to Guidewire cloud, but after a comprehensive competitive review decided to also buy policy center and billing center to take advantage of a single unified cloud solution and to facilitate greater speed.

Need of innovation.

Pecan insurance group, our regional Midwest P&C insurer decided to migrate their insurance suite instance, the Guidewire cloud after a review of their overall cost structure to support their core system framework in a self managed mode yielded significant cost savings by moving to our cloud offering and.

Ending to policy Center and billing center in 2017, we are thrilled with the partnership here and excited to work with Cal cash on this next endeavor.

At the end of fiscal $2560.0 billion of direct written premium was under license for at least one guidewire core application.

Additionally, demand for Guidewire data and analytics solutions was healthy in the quarter.

As we grow cloud adoption, we have the opportunity to leverage <unk> position as the core system of record to embed both data and analytics throughout the core workflow to drive greater customer insights and better decisions.

Pleased to see a number of customers take this approach by including one or more of our analytics offerings in their cloud transactions.

10 of the cloud deals that we closed in the quarter included analytics products and in addition, science continued to show momentum in the quarter with two notable deals.

<unk> reinsurance solutions, a leading global reinsurance broker will collaborate with Guidewire science team to help cyber ensures better quantify their exposures and manage their risks in the face of rising ransomware and evolving cyber attacks and chose science for cyber model transparency and maturity. In addition to Guidewire is tech.

Nickel expertise.

Emerging risk part of Ryan Specialty group selected science after comparing cyber risk selection and portfolio aggregation tools.

And also of note in early August we deepened our longstanding relationship with S&P, enabling them to expand their use of our science cyber risk analytics to help power S&P global rating service.

Ive on insurance suite, a tier one insurer and Gore mutual the cloud deployment at Gore mutual really speaks to the power of our cloud platform. They have deployed insurance suite in the cloud to help transform a national scale purpose, driven and digitally led insurer in just a few short years already Gore mutual has seen.

To quote reduced from an average of over 30 minutes to about eight seconds and the time from App in the door to coverage issued improved from several days to about 15 minutes.

Good projects at the same time, our solution partners and the Guidewire marketplace continues to be important to powering P&C insurance innovation for our customers. We finished the fourth quarter with 731 apps from Guidewire in over 130 solution partners, while growing the number of solution partners by 43%.

In 2021.

While at the same time solution partners can assess efficiently plug in through a common API based framework, which amplifies innovation on our platform even further.

As a cloud service provider, we also have significantly better access to use its data and the real time customer feedback necessary to FERC to further improve adoption drive innovation and help our customers achieve the business outcomes they are targeting.

Very excited to see cloud momentum across deal volumes AOR growth. Another quarterly results. It's important to realize that there is a larger goal of empowering innovation alongside our customers that we're focused on making progress against and very very proud of I'll now turn the call over to Jeff to discuss our financial results in more detail.

Thanks, Mike.

We finished the year with great momentum, which is visible in our financial results. Our strong execution in fiscal 2021 sets us up well to achieve our long term financial targets.

<unk> ended the fiscal year at $582 million up 13% from a year ago.

On a constant currency basis, <unk> increased 12%, finishing the year at $575 million and above our guidance range.

As a reminder, we measure <unk> on a constant currency basis during the fiscal year, and then revalue <unk> at year end for current FX rates.

Our over performance was driven by strong new <unk> conversion from 17 core cloud deals sold in the quarter.

We also saw healthy conversion of ramped activity in the quarter and the fiscal year.

Finally, we did better than our expectations on gross <unk> attrition in core attrition finished the year at under 3%.

Total cloud IRR, which we define as the IRR for all of our cloud products and for customers that have contracted to move to the cloud even if they are not fully transitioned yet.

Finished the year at $234 million up 51% year over year.

Cloud IRR ended the year at 40% of total <unk>, which is the upper end of the 35% to 40% range that we discussed at our analyst day last year.

We expect to continue to break this out on an annual basis.

In other words, we expect to add $112 million of expansion <unk> as we execute to the ramping fee schedules outlined in customer contracts.

Total revenue in fiscal 2021 was $746.0 million ahead of the guidance, we discussed last quarter as a result of strength across the board.

Subscription revenue for the year was $174.0 million up 41% year over year due to ongoing productivity.

As Mike noted the vast majority of our new sales are coming from our cloud products, representing 89% and 82% of new sales activity in the fourth quarter and fiscal year, respectively.

Subscription and support revenue ended the year at $255.0 million up 24% over last year.

Services revenue finished a bit ahead of our expectations on stronger than expected delivery in Q4.

Turning to profitability for the fiscal year, which we will discuss on a non-GAAP basis gross profit was $415.0 million overall.

Overall gross margin was 56% compared to 61% a year ago.

Subscription and support gross margin was 43%.

In services gross margin was 5% compared to 9% a year ago.