Q1 2022 Guidewire Software Inc Earnings Call

December 2, 2021

Greetings and welcome to the Guidewire first quarter 2022 financial results Conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. 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 it is now my pleasure to introduce your host Alex Hughes Vice President of Investor Relations. Thank you Alex you may begin.

Thank you operator, good afternoon, and welcome to Guidewire earnings Conference call for the first quarter of fiscal year 2022, which ended on October 31st My name is Alex Hughes I Am Vice President of Investor Relations and with me on the call 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 the call.

Statements made on this call include forward looking ones regarding our financial results products customer demand operations and the impact of COVID-19 on our business and other matters. These statements are subject to risks uncertainties and assumptions 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 pressure.

And the risk factors included within the documents, we file with the SEC, including our most recent annual report on Form 10-K as 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 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 start from.

I'll now turn the call over to Mike.

Thank you Alex good afternoon, everyone and thanks very much for joining us today.

On the heels of a strong finish to last fiscal year, we had a record Q1 sales activity with and continued to build momentum for Guidewire cloud cloud bookings were over 90% of deal activity for the first time ever and helps drive Q1, <unk> above the high end of our guidance range. It was a great start to our fiscal year.

Points to continued strength in our cloud business and strategy.

In the quarter, we signed five more insurance suite cloud deals on top of 17 last quarter and saw another six successful cloud customer deployments.

This is a great illustration of success leading to success.

As we close more deals and demonstrate more go lives, we will see increasing confidence and demand from our customer base with a growing number of commitments and successful deployments more insurers will decide that it's time to move to the cloud is now.

Interest in Guidewire and the overall insured tech market was on full display at our recent connections customer conference, which was held as a hybrid event in Las Vegas last month we.

We had over 300 people in physical attendance, which I think is phenomenal considering the current environment and international travel restrictions, we saw broad participation from across our customer base and partner community and it was great to see a heightened focus on cloud and insurance innovation from every one in our ecosystem.

Connections with a great platform to show the Guidewire community exciting new developments and innovations and Dobson, our fourth release of the Guidewire cloud platform I'll talk more about dobson in a minute, but I think it is getting clearer and clearer to our customers, but the six month release cycle of Guidewire cloud platform offers a suite.

Pierre you track to the faster and continuous innovation needed to advance their objectives.

As I mentioned cloud deal activity in the quarter was phenomenal with five new insurance week cloud upgrades in the first quarter spanning both Americas and EMEA.

In the Americas I was pleased to see a deal with a tier one insurer and activity across both commercial and personal lines a tier one insurer elected to upgrade claim center to the cloud as part of its strategic vision to provide industry, leading claims services, while balancing superior satisfaction indemnity.

The accuracy and cost of service management.

Franklin mutual based in New Jersey, and gaining back to 18 79 elected to migrate to the Guidewire cloud platform to take advantage of our auto pilot roadmap data strategy and the combination of our deep R&D and innovation cadence delivered to the cloud through our fast six month release cycle Franklin.

Mutual came to Guidewire through our acquisition of I S. T. S decided to migrate to insurance suite B 10 from insurance now in 2018, and we are now excited to take them to our cloud as they look to further expand.

A tier two insurer based in Canada chose to migrate claim center in order to simplify its technical ecosystem and to accelerate speed to market. This builds on their adoption earlier in the year of policy Center and billing center for the Guidewire cloud.

In EMEA it was great to see two exciting cloud deals trig, the largest non life insurance company in Scandinavia with significant market share across Denmark, Sweden, and Norway adopted claim center on Guidewire cloud for its platform sophistication auto pilot and analytics technologies.

N V assurances founded in 19 O seven and now one of Belgium's largest insurers elected to migrate insurance suite to the cloud because of our platform strong fit with its strategic imperatives.

We also saw continued success in analytics in the first quarter S&P as I briefly mentioned last earnings call expanded their relationship with us in a very significant and strategic way.

We will work with S&P to use science to develop the first cyber risk impact quantification of credit and financial Health. This is an outstanding validation of what we already know that cyber risk is an important consideration when evaluating credit risks and it's exciting to partner with S&P on this initiative. Additionally, mark.

Cal Corporation, a global insurance and reinsurance carrier based in Virginia selected science.

In addition to deal activity, we continued to drive strong cloud deployments with six more cloud go lives in the quarter.

These deployments are critical element of our cloud strategy, because they enable us to show the industry that customers just like them are successfully executing cloud strategies on the Guidewire cloud platform. Our large tier one insurer went live with claim center on Guidewire cloud and began its business rollout this speaks to our ability to.

To support an important tier one customer in the cloud and we look forward to continuing our work together Omega the oldest mutual insurer of automobiles in the United States achieved the second of its three major cloud milestones with the launch of policy Center on Guidewire Cloud. This joins billing center and will next be joined by claim center and speaks to our.

<unk> to successfully transition a large long standing and highly configured customer to Guidewire cloud.

We also saw a private mutual insurer with over 120 years of experience serving individuals families and businesses in multiple states throughout the United States deploy policy Center billing center producer engage and cloud data access in Guidewire cloud. This sets the foundation for multistate expansion and additional lines of business.

On Guidewire cloud in.

In addition, a fast moving commercial insurer targeting evolving mobility markets successfully launched claim center on Guidewire cloud in less than 10 weeks, which speaks to the fast time to market advantage. The guidewire cloud brings to Greenfield initiatives. This follows the policy Center and billing Center go lives a year ago, meaning they're now in production with all three core.

Insurance suite cloud products at the same time, we also deployed insurance now a true more insurers bowhead specialty and innovated holdings.

Customers adopting and deploying Guidewire cloud are doing so in large part to take advantage of the superior speed and innovation. It delivers every release the released adoption last month demonstrates these advantages and delivers exciting new enhancements that accelerate innovation integration design and insights innovations.

Innovations made faster by enabling customers to launch and deliver products more quickly with Guidewire go innovations also amplified and accelerated by making it easier for developers to integrate external applications with their core systems through our cloud integration framework.

Its also now much faster and easier to design front end digital experiences with <unk>, which delivers an expanding library of pre configured building blocks reusable components and metadata driven UI configurations for our customers' digital experiences.

At connections. We also launched Guidewire live a suite of analytics applications designed to allow insurers to be brilliant in every stage of the insurance lifecycle.

This all makes me very proud of our team and excited for our future I'm equally excited about the excellent progress we continue to make with our expanding partner community, which is a critical component to our strategy and an important element of our success. Our Si partners remain a force multiplier for us since they play a critical role in helping customers plan and.

Execute their deployment on Guidewire cloud, we continue to see strong growth in this area. We now have 15800 Guidewire consultants from 30 to Si partners up 38% year over year, and we now have 14 Si partners involved across 35 cloud projects.

With Guidewire cloud momentum, increasing we are seeing this community moved quickly to become Guidewire cloud certified Guidewire cloud certified consultants grew 287% year over year to over 2800.

At the same time, our solution partners in the Guidewire marketplace continue to be important drivers powering P&C insurance innovation for our customers. We continue to see strong growth in our marketplace and I'm, even more excited about the long term potential here as cloud deployments make it easier and easier to integrate and deploy on guidewire.

This ecosystem will unlock tremendous value on top of and alongside Guidewire and developments such as our new cloud integration framework and you throw our important components facilitating this with.

We finished the first quarter with over 140 solution partners up 50% year over year, we understand the strategic importance of the insured tech ecosystem through our customers looking to build competitive advantage. So we're investing in this area further to identify and incubate. The next generation in short to excess potential solution partners through our.

New insure Tech Vanguard program.

We're also investing directly in leading ensure tech solutions and last month, we invested in two exciting innovators frisk and AI powered end to end fraud prevention and detection solution for global P&C insurers and shift a provider of AI, driven automation and optimization solutions for global for the global insurance indie.

St.

In summary, we had a fantastic first quarter on the heels of a strong finish to last year.

I feel good about how the fiscal year is shaping up with our strategy and execution coming along nicely.

We are optimizing and investing for product velocity and more importantly customer success in the cloud. These projects are very challenging and complicated and we will continue to invest to help ensure successful outcomes, it's hard but rewarding work that we're proud to tackle as we work arm in arm with our customers and partner.

To transform with that I'll turn it over to Jeff to talk about our financial results and our full year outlook.

Thanks, Mike.

Let me jump right into our Q1 results, our strongest first quarter ever from a bookings perspective, which fueled our outperformance and over 90% of our bookings activity came from our cloud products.

<unk> ended the quarter at $594 million ahead of our expectations and up 16% year over year.

We're thrilled with the activity, we experienced which continues to be highlighted by insurance suite cloud momentum.

Our ongoing cloud strength is also visible in our subscription revenue, which was $57 1 million up 53% year over year.

Subscription and support revenue was $79 million up 36% year over year.

License revenue was $40 2 million down 25 million or 38% when compared to Q1 last year.

While we expect term license decline as we successfully upgrade on Prem on premise customers to our cloud. The decline in Q1 was also due to $15 million of incremental revenue from term license deals that deviated from our standard contract terms in Q1 last year.

We discussed this at length last year and much of this incremental revenue was due to a multiyear contract consolidation at one of our largest customers.

As a reminder term license revenue is recognized upfront for multi year contracts.

Services revenue was $46 8 million.

This was lower than our expectations due to three complex customer engagements two of which are cloud migrations, where revenue recognition is tied to project percent complete assumptions rather than our typical time of materials arrangements give.

Given project complexities, we adjusted our percent complete assessment, which impacts the timing of revenue recognition.

Even with this adjustment total revenue in the quarter was $165 9 million at the high end of our guidance as strength in subscription revenue largely offset lower than expected services revenue.

Turning to profitability, which we will discuss on a non-GAAP basis gross profit was $73 9 million.

Overall gross margin was 45% down from 54% last year.

Subscription and support gross margin was 43% down from 48% a year ago.

This decline was due to large investments we have made to support our current and future cloud customers.

Additionally, accelerating cloud activity in Q1 led to higher than expected cloud infrastructure costs.

Services gross margin was 4% up from 2% a year ago.

Operating loss was $28 7 million.

This was below our guidance range due to a few factors.

Moving into fiscal 2022, we updated our employee attrition assumptions.

During the pandemic, our overall employee attrition was at historically low levels and looking ahead, we modeled in higher.

<unk> turnover to reflect what is commonly being referred to as the great resignation.

Thankfully, we have not seen a spike in attrition at this point and we are Recalibrating our models.

Over the long term retaining our existing outstanding employees as a much better outcome for guidewire, but this does have an impact on our assumptions for the year.

Second as I previously mentioned cloud infrastructure costs in Q1 were a bit higher than expectations.

This impacted both our cost of subscription and support revenue, but also operating expenses as our engineering teams are utilizing public cloud services more in product development and our pre sales teams are building out demos and poc's utilizing public cloud services.

<unk>.

Finally, we did see a bit higher commission expense as well in Q1, as we had strong bookings activity in much of this activity occurred early in the quarter.

We ended the quarter with $1 $1 billion in cash cash equivalents and investments.

The combination of bonus payout vacate vacation accrual payouts as we move to unlimited vacation policy in the U S. Our acquisition of hazard hub and our investments in <unk> and shift all had an impact on cash balances.

Additionally, we invested $26 million on the repurchase of 226000 shares in the quarter.

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

For the year, we are increasing our <unk> guidance to $569 million to $566 million, representing 14% constant currency growth at the midpoint.

There is no change in our total revenue expectations.

We now expect our subscription revenue to be a couple million dollars higher than our prior expectation expectations and services revenue to be a couple million dollars lower than our prior expectations.

We now expect total gross margin for the year to be closer to 50, 50%.

But this gross margin percentage will ultimately depend on our final revenue mix.

Overall subscription and support gross margins for the year should be flat to up a point as the subscription margin improvement to approximately 30% is offset by the mix shift between subscription and support revenue.

We expect services margins to be in the low single digits.

With respect to operating income.

Expect an operating loss of between 58% and $48 million for the fiscal year.

This adjustment to our operating losses due to the Recalibration of our employee attrition assumption built into our forecast model and due to higher public cloud infrastructure costs.

On the cloud infrastructure side, we have been optimizing for speed and customer success as we build and deliver cloud first products, which include new capabilities, such as cloud data access and data studio.

We are building out more controls and constantly optimizing our architecture to ensure efficient management of our public cloud spend.

We still feel confident that improved controls and cloud maturity will support our long term margin expectations, but higher than expected Q1 costs combined with accelerating demand and adoption of our cloud products resulted in a revision of our expectations for fiscal 2022.

Cash flow is expected to be impacted by these factors as well as such we now expect cash flow from operations in fiscal 2020 to be between 10 and $20 billion.

Turning to our outlook for Q2, we expect <unk> to finish between 613, and 616 million, which represents 18% growth at the midpoint or just under 17% on a constant currency basis.

We are managing to much better linearity in bookings activity this year, which is really positive.

In Q2 benefits from the realization of ramp sold in prior periods.

We expect total revenue of between 195 and $199 million, we expect subscription revenue of approximately <unk> $65 million and services revenue of approximately $49 million, we expect an operating loss of between 15 and $11 million in Q2.

In summary, we are thrilled to see strong momentum in Q4 continue into Q1.

<unk> and subscription revenue continues to track nicely to our near term and longer term targets.

This validates our investment thesis as we bring insurer core systems to the cloud.

While we are now seeing a bit higher expense in fiscal 2022, we do not think these increased costs pose a challenge to our longer term margin expectations.

Operator, you can now open the call to questions.

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

And with Barclays.

Please while we poll for questions.

Thank you. Our first question is from Jackson Adair with Jpmorgan. Please proceed with your question.

Great. Thanks for taking my questions.

I guess the.

First one is.

Maybe on the expenses, Jeff So I.

I guess can we just dig into it a little bit more I would've thought that.

Better build for IRR and.

And more cloud deals would ultimately help the operating expense or I'm, sorry, the operating income line.

So just curious what happened there and then also on the <unk> build.

Is any kind of strength in the first or second quarter coming from pulling forward, the third and fourth quarter pipeline. Thanks.

Yes.

So first of all I just wanted to clarify I think I misspoke on the call I mentioned our.

Our our guidance of $5 59 to 569 that should have been $6 59 to 669. So I just wanted to clarify the record there and then Jackson on the expense side.

I think one of the things as we're working through this transition to the cloud there are a couple of things going on.

These are obviously very complex engagements that we're working on hand in hand with our customers.

And some of these projects.

Have are taking a little bit more effort to get to work get them to where we need them to get you in and we're certainly committed to customer success. We know we're at a critical part of this overall journey towards this industry adopting cloud systems. In these early cohorts of customers are absolutely critical so where we are investing a bit on the on the services side.

To ensure that these projects are successful.

And that's part of what's going on in the overall expense Arena I do think that some of this was a bit of a modeling artifacts as we were exiting the pandemic.

Operating at historically low levels of attrition on the employee side recognizing.

Recognizing that everybody has been talking about the great resignation, we did embed a little bit more attrition into our forecast model and we gave a license to the business to continue to hire aggressively because we are concerned we want. It. This is a real critical time for us and we want to make sure that these projects.

PD velocity that we have going on right now continues and so we wanted to be prepared for an acceleration of employee attrition and we haven't seen that yet so that that played into the numbers a bit on the cost side.

And then finally.

We did see a bit of a spike in usage with respect to some of our public cloud spend.

We have teams digging into that to make sure that we're optimizing our spend and being thoughtful about how we architect certain things. There were certainly some decisions that were made on the architecture side that we're more focused on.

Making sure we can move fast cadence and with products that will meet the needs of our customers and then as as we evolve those products, we will make them more efficient over time, but that caught us a bit off guard in the quarter.

You see that reflected in the guide and then finally on.

On pulling forward deals we are seeing better linearity this year than prior years and that's a positive thing. If you think the last couple of years has been extremely back end weighted and there's been actions that we've taken as a company, but it's something we really want to start to see better linearity. So I wouldn't say, we're we're pulled.

<unk> forward any deals into Q2.

We're just seeing what should be more consistent linearity moving forward in the last couple of years, where we're much more extreme on the back end weighted side and that does make for some easier compares and there is the easier.

Easier compare in Q2.

Okay, Great and then a quick follow up you mentioned employee attrition, which which reminds me too Frank.

Sales officer departure.

<unk>.

I guess early last month any update on that search.

And yes just.

Any additional color you can give on Frank's departure would be great. Thank you.

Yeah, Let me, let me take it I.

I guess first thing I'd say is I've been.

Now just elated with how the teams responded and how Priscilla has stepped in.

Lead the organization and continued driving.

Success, we missed Frank.

But the companies moving forward and we're just really really excited about you can see it in the results of the quarter.

How were executing and the view that we have into Q2 in the pipeline and the perspective on the year.

We are engaged with with folks about talking about that role.

I don't feel.

I personally don't feel like this is something that I need to rush, just because I feel like we've got a very very good team and I feel great about the leadership that Brazil is providing right now and I think thats. What you that's reflected in the confidence that we have about the sort of top line outlook.

Outlook for the company right now.

Okay, Alright, thank you guys.

Yes. Thank you.

Thank you. Our next question comes from Pavan <unk> with William Blair. Please proceed with your question.

Hey, guys. This is dylan on for <unk>. Thanks for taking the questions I guess, maybe it would be first.

The the potential benefit of being able to kind of host the connections conference in person right. So given these systems are so mission critical can you talk about maybe how that's helped benefit pipeline activity interaction being able to showcase the value here, especially since kind of the rollout of G. C. P.

<unk> excuse me.

Fully kind of happened.

Virtual environment, so maybe any any color commentary.

To support kind of that reference selling motion.

The event in person.

Sure Great question.

I am just right now so happy that we decided to proceed with doing the event in person and other feedback that we've got across the board from customers.

We are able to attend partners on the on the.

On both sides of the aisle so to speak you know the systems integrators as well as.

The salute the applications that are on our marketplace and the feedback was just incredibly positive just to have the opportunity to get together and talk to customers about projects and about initiatives and about the progress that we've been able to make over the last 18 months or so about the cloud products.

It was altogether a positive event.

You do an event like that and it certainly has a positive influence.

On.

The deals that we can touch and influence.

The pipeline that we can connect with at the events.

It also provides.

Super Super, forcing function for us to be able to put together.

<unk> sort of presentations that are gonna enable the you know the teams to be able to execute on programs more effectively so across the board very very positive.

Think that the.

The biggest one if I could give you one takeaway that I had from the event was just simply consistent feedback from customers about how the Guidewire cloud product story is really coming through consistently across teams and the consistent ability to deliver there really.

Pieces and to deliver the new functionality in the release and follow through on the.

On the on the roadmap.

With the major takeaway that I had from the event.

But overall very positive I mean on the downside, it's still frustrating that we're living in a in a in a word.

World that is constantly dealing with this with COVID-19 and the international audience with someone who's got a lot we're pretty limited in terms of their ability to attend the event. So it's also very positive they were able to run the thing is the hybrid event in broadcast it make it available to people to watch a synchronously and I think that'll be a positive pattern for us going forward.

So hopefully that gives you a little bit more color.

The outcome of the of the event.

Yes, that's really helpful. Thank you and then I guess, maybe one other one too so you've announced some recent marketplace partnerships here around kind of digital claims payments.

I would like to kind of maybe get a sense of how youre thinking about the broader opportunity around digital payments kind of where maybe this fits with adoption.

Then kind of insurance carriers and their end customers today and how that's also kind of ties into the broader claims automation initiative that we're seeing with carriers.

Yeah sure let me touch on the second half of that first so you've heard me talk about autopilot a couple of times in terms of the color behind some of the implementations in the transactions that we've done.

We think in our L. A significant number of our customers you know think that Theres, a very very significant.

I would call efficiency opportunity that exists in claims automation and there's a lot of excitement about the autopilot roadmap and that's a big part of a lot of the.

The cloud upgrade and new sales activity around claim center.

Specifically, we are excited to talk about trig.

As one of the deals that we closed in the quarter. They just have a phenomenally aggressive and innovative new about how automated the interaction model at a b with claimants and with customers and we're excited to partner with them.

As they sort of push us and push the industry forward. So that's really exciting with respect to payments my perspective is that.

Again, it's an opportunity for you to not only improve the efficiency of an insurance organization, but also improve the convenience and the customer satisfaction associated with.

Making a claim or making a payment in our view.

I'd point you back to the.

The work we've done around our integration gateway in the cloud API in the marketplace and just making it easier for these partners.

It just reduces the barrier to try and implement these types of solutions.

Because they're they're just almost obviously.

Smart thing to do for most insurance companies and so if we can make that easier and easier and easier it is going to drive innovation.

Innovation in the industry is going to drive demand for cloud for our cloud platform. So.

There's a.

Couple marketplace solutions that.

We are excited to work with in this area and.

Unexpected like a lot of other areas in the marketplace to just help us grow.

Very helpful. Thank you guys for taking the question and a really nice job on the quarter.

Thanks very much.

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

Yes, thanks for taking the question guys.

Maybe following up a little bit Jeff.

Jeff on the comments you made to one of the questions earlier about continuing to be very focused on.

The execution of deployments and having a very customer centric approach how is that pressuring the capacity of the services staff.

That you have now do you need to add head count there or should we think about the rapid growth in Guidewire cloud certified systems integrator partners that you can now start off loading more and more of those deals, especially.

As you've built up some sort of muscle memory, I think the best way to rollout the Guidewire cloud deals.

And let me take that I think that's exact your question sort of describes exactly how we're looking at it.

It's definitely something we watch very closely because.

The work required the people necessary to do these to execute on these programs is something we pay very close attention to and it's.

As we sell more and get into more of these programs.

Potential limiter on our ability to grow and so getting the partners involved.

Either directly or indirectly having the people trained up with the experience necessary to be able to successfully implement and upgrade the systems to the cloud is critically important and something we're very very focused on.

It's not something that I would call out now as.

A limiter, but it's something that we're closely following in managing closely and.

Working as hard as we can to keep up with the demand and ensure that the projects are delivered successfully like I said in the prepared remarks.

Very very complicated programs that we worked through with the with our customers.

And it's not just the core system upgrade, but it's the downstream systems that they need to be integrated to the data and analytics services that they power and the digital interfaces that go alongside them and each time, we do one of these upgrades each time, we successfully get one of these customers live we're learning a little bit.

It gives us an ability to be a little bit more efficient on the next one and also transit transitioning that information that learning out to the broader ecosystem and working hard to increase the capacity for us to meet this demand. So it's a great question I think your the way you posed it lines up very well to the way we are.

Managing it.

Great and then I guess as you continue to have the discussions with a number of especially your largest tier one.

Customers about their path to the cloud what it might take and when it might happen.

Are you still getting any pushback of Oh, I don't see any reference customers that sort of look like us or operate and the markets we operate in.

Where do you feel like you are kind of over the hump now where you've you've gotten enough of a sample across your entire customer base.

That's no longer a limiter and instead you really are on the the win not if for virtually every customer in your portfolio.

I would say it.

It tends towards the win not if okay, but that still doesn't mean that they're not asking us for more proof points and more experience and more examples that's still definitely part of the evaluation process and the more successful.

Implementations and go lives that we have the more experience that we have the more releases under our belt on the Guidewire cloud platform the more.

Functionally ready we are to support them.

So that experience just continues to build and.

Kind of Whittle away at the questions and the concerns but for sure the tone of the interaction with our top customers is has shifted as I've said before to a more of a question of when they plan to do it and when they feel like they are ready and we are ready.

As opposed to the way a more sort of existential question about if it's the right approach.

I am completely confident now that we are on the right technical approach for our customer base.

But like we constantly say these decisions and implementations are so complicated that it may take multiple years for that.

Sort of a decision to proceed makes logical sense.

It's for them and so.

The trend is very positive.

But it.

Theres nothing magical about any particular moment.

Positively working through.

These these implementations and the experience we gained from them and continuing to execute on the roadmap and continuing to improve our improve our readiness.

So hopefully that helps answer the question.

That's great. Thank you.

Thank you.

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

Great. Thanks for taking my question Mike.

Mike I wanted to maybe build on that tier one theme. It sounds like you guys had pretty good traction this quarter I think a peer of yours indicated some maybe some uncertainty with with tier one deal activity just wanted to check to see if anything you're seeing as far as sales cycles, a change or just customer interest from some of your largest largest.

Customers.

I wouldn't say anything's changed quarter to quarter, we continue to see interest filled.

Great the innovation agenda, the automation agenda, the efficiency agenda at customers continues to build.

I would say.

Over the course of the last six months or so and I think we've touched on this a bit in Q4 as well.

The COVID-19 concerns about the economy et cetera seem to be past the.

The working model associated with work from home or hybrid project work has passed and so people feel comfortable about.

Taken on these programs now.

We see that across the board, so I wouldn't call out anything with respect to tier ones.

Like I said, we had some we had.

Some good activity in the quarter.

And we continue to make positive progress.

Especially in our customer base about building that confidence.

Got it perfect and Jeff just one for you on the on the <unk> increase.

Increased.

It looks like Q1 Q2, you guys are getting better than what we're used to seeing from a sequential increase.

And you mentioned some of the ramp deals starting to flow through.

Should we think about the contribution from from ramp deals versus maybe net new <unk> as far as yes.

Keeping those numbers elevated.

Yeah, I mean, we've talked about this a bit in the past, we don't we don't get too explicit on breaking that out but I.

I will note that Q2 in particular has a fair amount of activity coming in from prior deer sold which is which is great to see.

But that is a bit of a tailwind that we're seeing in Q2 and as we think about the full year. The context, we provided in the past is that expect a little bit more from the backlog are coming in from ramp deals. This year. When you compare that to what we need to go out and get that do.

Okay, great. Thank you very much.

Thank you. Our next question comes from Peter Heckmann with D. A Davidson. Please proceed with your question.

Good afternoon. Thanks for taking the question you know after reviewing the Gartner reports for both North America and Europe.

It seems as if a number of marginal players continue to get squeezed out is as more and more.

Carriers decide to upgrade their technology with one of a handful of leaders.

Do you feel that's the case and do you see there is an opportunity for either yourself or someone else to consolidate some of those smaller players.

Over time.

Okay interesting question.

I would say.

Yeah, certainly I think the investment necessary to instantiate, a cloud platform to serve core systems and property casualty insurance requires a pretty significant investment and so.

The idea that.

There wont be 25 vendors cecily competing in this space over the course of the next 10 years.

Is it good.

Conclusion.

And you know certainly unbiased being the leader but.

But we see that and I see that just based on my experience in the the view into what it takes to really do this well and the long term investment necessary in the specificity necessary to win in this market and serve this customer base and needs these needs specifically.

Size is going to play a big positive factor in the success of those kind of companies.

Whether or not it creates an opportunity.

To consolidate I would say I'm not sure I think when you do think these systems are implemented for a long time and the expectations customers have about the duration of that investment.

Is pretty significant and so.

It's not the same as other SaaS industries, where the implementation might be turned over once every year or once every two years when the implementations only turned over in the best case. Once every 10, then you've got to be careful I think about the assumptions associated with consolidation.

But I feel great about our position and the investments that we've made over the past 20 years and over the past three to take that expertise and turn it into a winning cloud platform.

Uh huh.

Hopefully that gives you a little bit of color in terms of how I see it.

Yeah no. Thank you for the thoughtful answer and just as a follow up Jeff did you say about $49 million of services revenue.

In the second quarter and if so could you just review that issue around the timing materials versus versus.

The other accounting method that you mentioned.

Yeah, Yeah, Yeah. So we said $49 million in Q2, that's approximately $49 million is our expectation at this point in time and essentially we typically do services arrangements on a time and materials basis.

Some of our customers have invested significant amounts to put in place the on Prem system, and we are now asking and working with those customers to ship them over to the cloud and we have done some of these projects on a more fixed bid.

Type of arrangement and the accounting around a fixed bid arrangement is is you have to constantly assess.

How complete how much work have you done and what percent of the overall project is that and we had that in Q1. There was some reassessment of the effort required in order to complete projects and so that had an impact and you saw that how we ended <unk>.

Executing the year on the services revenue line, but it should be the expectations, we set last quarter.

That makes perfect sense. Thanks.

Thank you. Our next question comes from Joe <unk> with Baird. Please proceed with your question.

Great Hi, everyone.

Yeah I wanted to go back claims automation that was obviously, a big focus at connections a year ago and within the band Prelease.

Now claims is where you were having a lot of deal momentum is it fair to make the association between the two and think about kind of the 12 month timeframe between the biannual reliefs and starting to get some pipeline conversion with I guess the obvious implication is you're now on four releases and overtime. It is only going out.

Increase more so that those kind of broadens the potential opportunity if those kind of connection and 12 month time frame makes sense.

Yeah sure I think it's a great insight.

You know Theres a lot of as I mentioned, there's a lot of very very positive feedback and interest from our customer base around.

The auto pilot products and you know.

It just it takes a bit of time for us to launch something explain it to everybody what our vision is.

We're getting used to launching things based on the idea of what we call early access that enables us to work with a couple customers directly and limit that interaction. So that we can learn from the implementation feedback.

And then factor that into the next couple of versions of the product having that cadence.

Silicates us building better software and so yeah I think it is absolutely.

<unk> to say that hey, it was about a year ago, we launched it and then we went through a cycle in bound some interest and now it's driving some deals in a more active way I think the other way to think about this more broadly is that.

We are more clearly now release after release after release differentiating the service and the value we can provide to customers through the cloud beyond just the where it runs and who runs it and how its upgrade but actually what it does and how quickly you can build new.

Products using it with advanced product designer or roll out a new digital interface using <unk> or use.

Use guidewire go like I talked about to instantiate, a new product line and so theres a variety of things.

Specifically related to operating a core system in innovating in an insurance company, there now enhanced and accelerated.

Guidewire cloud and that's just going to keep building.

As much as we can pack into each release, it's going to keep building and building and building and I hope to see that sort of story play out across the various product lines. So thanks for the question.

Okay. Good and then just one more on the Si partners you know one thing we heard at connections was this idea.

Actually I would like to grow by Guidewire practice faster, but I need to hire and then I need to get that higher cloud certified and that that becomes the inhibitor.

Our partners seem to be handling a decent amount of your cloud activity do you think those factors in at all on kind of your forward outlook for cloud deal signings.

Well I don't know if it factors into cloud deal signings, but I would say and this is I think it's not just true in this industry. It's true in a lot of industries as the capacity of.

The technical experts, who are available to do an implementation and run an implementation.

The amount of those people in the world.

Dictate to some degree the costs and the expense of doing those sorts of implementations and so.

When there is a constraint and there is a.

Our limited resource pool, the expense of doing these implementations kind of goes up and so the more people, we can bring into the system into the ecosystem and train them up and get them certified the more opportunity here is for them to be put onto projects and those projects to deliver innovation to the to the customer base.

You know I look at it like this.

This is a you know there's just almost an unlimited amount of technology driven innovation.

Potential in the P&C insurance industry.

That increase improving convenience and digital interactions with customers and automating claims in.

Look we talked about here a couple of great. Examples detecting fraud proactively predicting things with analytics more effectively like all of that stuff is enhanced and accelerated by how many technical experts there are out in the world that can drive these projects and so that's a big part of the.

<unk> and the enablement of resources in our ecosystem and at Guidewire is a big part of our strategy and the more we can do that you know the.

The faster this whole system will grow and so you know I kind of see it is yeah. It is it a potential limiter, yes. It certainly is but is it something that people are stepping into and learning and growing yeah. That's also true because there's a huge demand out there.

Okay. Thank you very much.

Thank you.

Thank you. Our next question comes from Parker Lane with Stifel. Please proceed with your question.

Right.

Hi, This is Matt kicker for Parker, Thanks for taking my question and congrats on the quarter.

My question revolves around Dobson and some of its new functionality.

The first building off the previous question on tier ones are you seeing more interest with the platform from those tier ones kind of the higher end of the market or instead from the lower end in the market or is the interest about equally distributed between the two and then secondly, when these customers.

We do choose to expand their deployment what are the most common tools you are saying that they are adopting on dobson. Thank you.

Yeah.

Okay. Great question, So let me touch I'll touch on the demand okay. So.

With respect to our customer base. There is a lot of interest in Guidewire cloud and getting updates about what's going on and what's the latest in how things evolved since the last time, we talked regardless of whether they are on cloud because that's obviously important to the program, but then theyre not yet made that.

Decision, it's important to that decision.

How they think about.

When asked to go.

That's equally distributed across all the customers what theyre specifically interested in changes.

Depending on the size of the customer and the complexity of the implementation.

That really is what drives their specific interests, if theyre running claim center.

The whole complex implementation and Theres a lot of integration is there going to be more interested in the integration framework and claim center in auto pilot, but if there are policy center customer and launching new lines and rolling out to new states, they're going to be wanting to talk to us about advanced product designer. So I would say, it's not so much tier base, but it has to do with the use case.

That we're supporting in their company and how that lines up to their innovation objectives.

They have four.

Their departments and their corporate strategy.

With respect to adoption and what people are most interested in first it's pretty early right. So it's just it's just launch just released and so we're in the early stages of working with customers around it.

But I first I would say.

My take of the feedback and maybe I'm going to give you an answer that's across the board.

The changes that we've made to the way our advanced product designer.

And the <unk> digital platform the way that that works together, it's very interesting to customers because like we're starting we're able to do things a lot more seamlessly in a lot faster with that approach.

And I think that is something that I saw a lot of interest and especially at connections and then the conversations that I had the other side of it just because it's such a big part of it.

The other side of the answer is just because it's such a big part of every implementation to guidewire as the integration framework.

And being able to extract logic out of the core system and put it into this integration framework and create the ability for people to build and rollout. These integrations faster to other cloud services is there is a real change I think to the way. The Guidewire has been implemented and is very.

Interesting to customers.

Hopefully that helps.

Okay, that's fair.

Right.

That's all from me thank you.

Yeah.

Thank you. Our next question comes from Michael <unk> with Wells Fargo. Please proceed with your question.

Hey, folks this is David on the on for Michael just once a month.

Can you just talk about the appetite you're seeing for purchases that include data analytics and perhaps any flexibility you may have on pricing when you're selling to that customer base. Thank you.

Sure I'll take that.

So.

One of the things that we've been able to do with cloud is that we've been able to incorporate a little bit of data and analytics into the implementations and theres a lot of interest and that was one of the highlights of the last couple of quarters has been.

Looking at the business plans to justify the investment in Guidewire cloud and how often the data analytics components of that.

Implementation incorporates.

The value proposition driven by smarter decisions.

But the analytics business at Guidewire is also.

Healthy independently right. So it's not just reliant on our core customer base that selling independently highlighted obviously the deal that we did in Q1 at S&P and also <unk>.

Cal for science and cyber.

But also.

We're seeing.

Positive feedback very positive feedback actually about hazard hub and the acquisition and the momentum that we're seeing there. So that's been pretty strong and obviously, that's mostly driven so far and the customer base just because those are the first folks that we've been able to talk to you about it and the reasons behind the corporate.

<unk> it into Guidewire.

But that also has been has gone very very well since we since we did the acquisition. So hopefully that gives you a little bit of color about how we're seeing it it's like it's successful and the and the <unk>.

<unk> deals and also independently.

That's excellent color. Thank you very much.

Okay. Thanks, a lot David.

Thank you. Our next question comes from Tyler Radke with Citi. Please proceed with your question.

Hey, good afternoon I wanted to ask you just about the on premise customers I think in years past you've talked about.

A fair amount of customers still on older versions, you know version eight.

And nine how would those kind of migrations progressed and to what extent.

Is the.

Significant partner growth kind of helping in accelerating those migrations from some of the older on Prem versions.

Yeah.

I can try to give you a color on it I think that the.

Upgrade cycle as we've talked about before continues to be.

Great.

Forcing function for us and customers to have a conversation about what the plan is for them and what version theyre going to target and whether or not cloud makes sense. So that is still healthy and still ongoing.

We do still see some customers, making the decision to move to the the version 10 of Guidewire on Prem.

Just for a variety of different reasons and I suppose like the ecosystem and the consultants are.

Facilitate that those kinds of programs effectively.

But I wouldn't say, it's you know.

It helps or hurts really it's just kind of a normal operating procedure normal operating mode of how the overall guidewire ecosystem works.

But the that the overall takeaway with respect to.

You know the the opportunity that exists for us and our customer base that is driven by the upgrade cycle is still very important driver for cloud transitions.

Behind each one of these stories about our decision to move to cloud is partially at least a factored in there.

Necessity to make some.

Move from whatever version there on <unk>.

To the latest and therefore cloud.

So that dynamic is still happening and still playing out.

In our in our customer base and an important driver for our cloud momentum.

Great and then if I could sneak in a follow up but maybe this one for Jeff but can you just give us an update on how youre thinking about kind of the moving pieces in <unk>.

Cloud or subscription gross margins I know with with some of the new new cloud releases you have here.

With Dobson and one coming up in.

The first part of 2022 and in some of the automation you're building just just help us understand kind of what your baseline assumptions are.

Around the you know the factors that's that's underpinning your gross margin outlook for cloud. Thanks.

Yes sure.

We talked briefly in the call that.

You should think about the subscription margin that underpins a subscription and support margin that that kind of should grow from around 23%.

Last year into around 30%. This year. So we are starting to see a little bit of leverage on that line.

We feel very confident in how.

Durable the overall subscription revenue growth will be as we execute against this opportunity in front of us and start moving our on Prem customers to the cloud in addition to.

Seeing more modernization activities in general in the industry as the industry gets more comfortable with buying cloud. So those are those are driving the top line and then as we think about the margins. We've invested a lot to ensure that we have the right cloud operations team in place today to allow us.

To successfully execute the current customers that we have and the future customers that we expect to add so we've we've invested quite a bit in building out that team. It is our expectation that we can start to leverage that investment quite significantly moving forward.

Obviously in Q1 saw a little bit more.

Cloud infrastructure expense than we were expecting.

I noted that we've been optimizing for speed and customer success in that particular area.

But we certainly have our eye on the ball in terms of how we can optimize and make that much more efficient.

And as we inspected our our forward looking plans, we still feel confident with the longer term margin profile that we put out there what's driving that is these investments that we're making in products that will allow us to deliver the product in a much more efficient way both from a head count attach perspective, but also just in terms of.

How it's architected and as we add more customers to the platform and gain that scale, that's where we get confidence that we'll see that margin expansion.

Great. Thank you.

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

Hey, Thanks, very much I just wanted to say.

We had a we felt like it was a very solid start to the year.

And look forward to continuing to execute effectively throughout the rest of the fiscal I want to thank everybody for joining us today and have a great day.

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

Goodbye.

[music].

Yeah.

[music].

Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded it is now my pleasure to introduce your host Alex Hughes Vice President of Investor Relations. Thank you Alex you may begin.

Thank you operator, good afternoon, and welcome to Guidewire earnings Conference call for the first quarter of fiscal year 2022, which ended on October 31st My name is Alex Hughes, Vice President of Investor Relations and with me on the call 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 <unk>.

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 <unk>.

Today's call is being recorded and a replay will be available following the conclusion of the call.

Statements made on this call include forward looking ones regarding our financial results products customer demand operations and 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 as of any subsequent date. Please refer to the press release.

I'll now turn the call over to Mike.

Thank you Alex good afternoon, everyone and thanks very much for joining us today on.

Above the high end of our guidance range. It was a great start to our fiscal year end points to continued strength in our cloud business and strategy and.

In the quarter, we signed five more insurance suite cloud deals on top of 17 last quarter and saw another six successful cloud customer deployments.

This is a great illustration of success leading to success.

Interest in Guidewire and the overall insured tech market was on full display at our recent connections customer conference, which was held as a hybrid event in Las Vegas last month, we had over 300 people in physical attendance, which I think is phenomenal considering the current environment and international travel restrictions, which are broad.

Rod participation from across our customer base and partner community and it was great to see a heightened focus on cloud and insurance innovation from everyone in our ecosystem.

<unk> was a great platform to show the Guidewire community exciting new developments and innovations and Dobson, our fourth release of the Guidewire cloud platform I'll talk more about dobson in a minute, but I think it is getting clear and clear to our customers, but the six month release cycle of Guidewire cloud platform offers a superior track.

<unk> to the faster and continuous innovation needed to advance their objectives as.

As I mentioned cloud deal activity in the quarter was phenomenal with five new insurance suite cloud upgrades in the first quarter spanning both Americas and EMEA.

<unk> accuracy and cost of service management.

Franklin mutual based in New Jersey, and gaining back to $18 79 elected to migrate to the Guidewire cloud platform to take advantage of our auto pilot roadmap data strategy and the combination of our deep R&D and innovation cadence delivered to the cloud through our fast six month release cycle Franklin.

Mutual came to Guidewire through our acquisition of Ics decided to migrate to insurance suite V 10 from insurance now in 2018, and we are now excited to take them to our cloud as they look to further expand.

A tier two insurer based in Canada chosen migrate claim center in order to simplify its technical ecosystem and to accelerate speed to market. This builds on their adoption earlier in the year of policy Center and billing center for the Guidewire cloud.

<unk> assurance is founded in $19 seven and now want to Belgium's largest insurers elected to migrate insurance suite to the cloud because of our platform strong fit with its strategic imperatives.

We also saw continued success in analytics in the first quarter S&P as I briefly mentioned last earnings call expanded their relationship with us in a very significant and strategic way.

We will work with S&P to use science to develop the first cyber risk impact quantification of credit and financial Health. This is an outstanding validation of what we already know that cyber risk is an important consideration when evaluating credit risks and it is exciting to partner with S&P on this initiative. Additionally, mark.

<unk> Corporation, a global insurance and reinsurance carrier based in Virginia selected science.

In addition to deal activity, we continued to drive strong cloud deployments with six more cloud go lives in the quarter.

<unk> to successfully transition a large long standing and highly configured customer to Guidewire cloud.

We also saw a private mutual insurer with over 120 years of experience serving individuals families and businesses in multiple states throughout the United States deploy policy Center billing center producer engaged and cloud data access and Guidewire cloud. This sets the foundation for multistate expansion and additional lines of business.

On Guidewire cloud and.

In addition, a fast moving commercial insurer targeting evolving mobility market successfully launched claim center on Guidewire cloud in less than 10 weeks, which speaks to the fast time to market advantage. The guidewire cloud brings to Greenfield initiatives. This follows the policy Center and billing Center go lives a year ago, meaning they are now in production with all three core.

Insurance suite cloud products at the same time, we also deployed insurance now at through more insurers bowhead specialty and innovated holdings.

Customers adopting and deploying Guidewire cloud are doing so in large part to take advantage of the superior speed and innovation. It delivers every release the release adoption last month demonstrates these advantages and delivers exciting new enhancements that accelerate innovation integration design and insights innovations.

At connections. We also launched Guidewire live a suite of analytics applications designed to allow insurers to be brilliant in every stage of the insurance lifecycle.

With Guidewire cloud momentum, increasing we are seeing this community move quickly to become Guidewire cloud certified Guidewire cloud certified consultants grew 287% year over year to over 2800.

This ecosystem will unlock tremendous value on top of and alongside Guidewire and developments such as our new cloud integration framework and you throw our important components facilitating this.

We finished the first quarter with over 140 solution partners up 50% year over year, we understand the strategic importance of the insured tech ecosystem through our customers looking to build competitive advantage. So we are investing in this area further to identify and incubate. The next generation in short to excess potential solution partners through <unk>.

Our new insure Tech Vanguard program.

We're also investing directly in leading ensure tech solutions and last month, we invested in two exciting innovators Frits and AI powered end to end fraud prevention and detection solution for global P&C insurers and shift a provider of AI, driven automation and optimization solutions for global for the global insurance.

St.

In summary, we had a fantastic first quarter on the heels of a strong finish to last year.

I feel good about how the fiscal year is shaping up with our strategy and execution coming along nicely.

To transform with that I'll turn it over to Jeff to talk about our financial results and our full year outlook.

Thanks, Mike let.

Let me jump right into our Q1 results, our strongest first quarter ever from a bookings perspective, which fueled our IRR outperformance and over 90% of our bookings activity came from our cloud products.

<unk> ended the quarter at $594 million ahead of our expectations about 16% year over year.

We were thrilled with the activity, we experienced which continues to be highlighted by insurance suite cloud momentum.

Our ongoing cloud strength is also visible in our subscription revenue, which was $57 1 million up 53% year over year.

Subscription and support revenue was $79 million up 36% year over year.

License revenue was $40 2 million down $25 million or 38% when compared to Q1 last year.

While we expect term license decline as we successfully upgrade on Prem come with on premise customers to our cloud. The decline in Q1 was also due to $15 million of incremental revenue from term license deals that deviated from our standard contract terms in Q1 last year.

We discussed this at length last year and much of this incremental revenue was due to a multiyear contract consolidation at one of our largest customers.

As a reminder term license revenue is recognized upfront for multiyear contracts.

Services revenue was $46 8 million.

This was lower than our expectations due to three complex customer engagements two of which are cloud migrations, where revenue recognition is tied to project percent complete assumptions, rather than our typical time and materials arrangements.

Given project complexities, we adjusted our percent complete assessment, which impacts the timing of revenue recognition.

Yeah.

Even with this adjustment total revenue in the quarter was $165 9 million at the high end of our guidance as strength in subscription revenue largely offset lower than expected services revenue.

Turning to profitability, which we will discuss on a non-GAAP basis gross profit was $73 9 million.

Overall gross margin was 45% down from 54% last year.

Subscription and support gross margin was 43% down from 48% a year ago.

This decline was due to large investments we have made to support our current and future cloud customers.

Additionally, accelerating cloud activity in Q1 led to higher than expected cloud infrastructure costs.

Services gross margin was 4% up from 2% a year ago.

Operating loss was $28 7 million.

This was below our guidance range due to a few factors.

Moving into fiscal 2022, we updated our employee attrition assumptions.

During the pandemic, our overall employee attrition was at historically low levels and looking ahead, we modeled and higher employee turnover to reflect what is commonly being referred to as the great resignation.

Thankfully, we have not seen a spike in attrition at this point and we are Recalibrating our models.

Over the long term retaining our existing outstanding employees as a much better outcome for guidewire, but this does have an impact on our assumptions for the year.

Second as I previously mentioned cloud infrastructure costs in Q1 were a bit higher than expectations.

<unk>.

Finally, we did see a bit higher commission expense as well in Q1, as we had strong bookings activity in much of this activity occurred early in the quarter.

We ended the quarter with $1 $1 billion in cash cash equivalents and investments.

Additionally, we invested $26 million on the repurchase of 226000 shares in the quarter.

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

For the year, we are increasing our <unk> guidance to $569 million to $566 million, representing 14% constant currency growth at the midpoint.

There is no change in our total revenue expectations.

We now expect total gross margin for the year to be closer to 50% 50%.

But this gross margin percentage will ultimately depend on our final revenue mix.

We expect services margins to be in the low single digits.

With respect to operating income.

Expect an operating loss of between 58% and $48 million for the fiscal year.

This adjustment to our operating losses due to the Recalibration of our employee attrition assumption built into our forecast model and due to higher public cloud infrastructure costs.

We are building out more controls and constantly optimizing our architecture to ensure efficient management of our public cloud spend.

Cash flow is expected to be impacted by these factors as well as such we now expect cash flow from operations in fiscal 2020 to be between 10 and $20 million.

Turning to our outlook for Q2, we expect <unk> to finish between 613 and $616 million, which represents 18% growth at the midpoint, we're just under 17% on a constant currency basis.

We are managing the much better linearity in bookings activity this year, which is really positive.

In Q2 benefits from the realization of ramp sold in prior periods.

We expect total revenue of between 195 and $199 million, we expect subscription revenue of approximately $16 $65 million and services revenue of approximately $49 million, we expect an operating loss of between 15 and $11 million in Q2.

In summary, we are thrilled to see strong momentum in Q4 continue into Q1.

And subscription revenue continues to track nicely to our near term and longer term targets.

This validates our investment thesis as we bring insurer core systems to the cloud.

While we are now seeing a bit higher expense in fiscal 2022, we do not think these increased costs pose a challenge to our longer term margin expectations are.

Operator, you can now open the call to questions.

From the start Q1.

Please while we poll for questions.

Thank you. Our first question is from Jackson Adair with Jpmorgan. Please proceed with your question.

Great. Thanks for taking my questions.

I guess the.

First one is.

Maybe on the expenses, Jeff so.

I guess can we just dig into it a little bit more I would've thought that.

Better build for IRR and.

And more cloud deals would ultimately help the operating expense or I'm, sorry, the operating income line.

So just curious what happened there and then also on the <unk> build.

Is any kind of strength in the first or second quarter coming from pulling forward, the third and fourth quarter pipeline. Thanks.

Yes.

So first of all I just wanted to clarify I think I misspoke on the call I mentioned <unk>.

Our guidance of $5 59 to 569 that should have been $6 59 to 60 69. So I just wanted to clarify the record there and then Jackson on the expense side.

I think one of the things as we're working through this transition to the cloud there are a couple of things going on.

We're obviously very complex engagements that we're working on hand in hand, with our customers and some of these projects.

Have are taking a little bit more effort to get to work get them to where we need them to get to in and we're certainly committed to customer success. We know we are at a critical part of this overall journey towards this industry adopting cloud systems. In these early cohorts of customers are absolutely critical so we're.

We are investing a bit on the on the services side to ensure that these projects are successful.

That's part of what's going on in the overall expense Arena I do think that some of this was a bit of a modelling artifact as we were exiting the pandemic.

Operating at historically low levels of attrition on the employee side recognizing.

Recognizing that everybody has been talking about the great resignation, we did embed a little bit more attrition into our forecast model and we gave a license to the business to continue to hire aggressively because we are concerned we want it and you know this is a real critical time for us and we want to make sure that these projects in the PD velocity that we have.

Going on right now continues and so we wanted to be prepared for an acceleration of employee attrition and we haven't seen that yet so that that played into the numbers a bit on the cost side and the.

Then finally.

We did see a bit of spike in usage with respect to some of our public cloud spend.

We have teams digging into that to make sure that we are optimizing our spend and being thoughtful about how we architect certain things. There were certainly some decisions that were made on the architecture side that we're more focused on.

Making sure we can move and a fast cadence and with products that will meet the needs of our customers and then as as we evolve those products, we will make them more efficient over time, but that caught us a bit off guard in the quarter.

You see that reflected in the guide and then finally on.

Forward any deals into Q2.

Okay, Great and then a quick follow up you mentioned employee attrition, which which reminds me Frank.

Chief sales officer departure.

<unk>.

I guess early last month any update on that search.

And yes just.

Any additional color you can give on Frank's departure would be great. Thank you.

Yeah, Let me, let me take it I.

I guess first thing I'd say is I've been.

Now just elated with how the teams responded and how Priscilla has stepped in.

Lead the organization and continued driving.

Success, we missed Frank.

But the companies moving forward and we're just really really excited about you can see it in the results of the quarter.

How were executing and the view that we have into Q2 in the pipeline and the perspective on the year.

We are engaged with with folks about talking about that role.

I don't feel.

I personally don't feel like this is something that I need to rush, just because I feel like we've got a very very good team and I feel great about the leadership that <unk> is providing right now and I think thats. What you that's reflected in the confidence that we have about the sort of top line.

Outlook for the company right now.

Okay, Alright, thank you guys.

Yes. Thank you.

Thank you. Our next question comes from Pavan <unk> with William Blair. Please proceed with your question.

Hey, guys. This is dylan on for <unk>. Thanks for taking the questions I guess, maybe let me first.

<unk> excuse me had fully kind of happened.

Virtual environment, so maybe any any color commentary.

To support kind of that reference selling motion.

The event in person.

Sure Great question.

I am just right now so happy that we decided to proceed with doing the event in person and other feedback that we've got across the board from customers.

That we are able to attend partners on the on the.

On both sides of the aisle so to speak the systems integrators as well as.

Progress that we've been able to make over the last 18 months or settle about the cloud products.

It was altogether a positive event.

You do an event like that and it certainly has a positive influence on the.

The deals that we can touch and influence.

Pipeline that we can connect with at the events.

It also provides.

Super Super, forcing function for us to be able to put together.

<unk> sort of presentations that are going to enable the teams to be able to execute on programs more effectively so across the board very very positive.

<unk>.

The biggest one if I could give you a one takeaway that I had from the event was just simply consistent feedback from customers about how the Guidewire cloud products story.

It's really coming through consistently across teams and the consistent ability to deliver the releases and to deliver the new functionality in the release and follow through on the.

On the on the roadmap.

<unk> was the major takeaway that I had from the event.

But overall very positive I mean on the downside, it's still frustrating that we're living in a N a.

World that is constantly dealing with this with COVID-19 and the international audience with someone who's a lot we're pretty limited in terms of their ability to attend the event. So it's also very positive there we were able to run the thing is the hybrid event in broadcast it make it available to people to watch a synchronously and I think that'll be a positive pattern for us going forward.

So hopefully that gives you a little bit more color.

The outcome of the of the event.

Yes, that's really helpful. Thank you and then I guess, maybe one other one too so you've announced some recent marketplace partnerships here around kind of digital claims payments.

I would like to kind of maybe get a sense of how youre thinking about the broader opportunity around digital payments kind of where maybe this fits with adoption.

Within kind of insurance carriers and their end customers today and how that's also kind of ties into the broader claims automation initiatives that we're seeing with carriers.

Okay sure let me touch on the second half of that first so you've heard me talk about autopilot a couple of times in terms of the color behind some of the implementations in the transactions that we've done.

We think and are a significant number of our customers think that theres, a very very significant.

I would call efficiency opportunity that exists in claims automation and there's a lot of excitement about the autopilot roadmap and Thats, a big part of a lot of the.

The cloud upgrade and new sales activity around claim center.

Specifically, we are excited to talk about trig.

As they sort of push us and push the industry forward. So that's really exciting with respect to payments my perspective is that.

Again, it's an opportunity for you to not only improve the efficiency of an or of an insurance organization, but also improve the convenience and the customer satisfaction associated with.

Making a claim or making a payment in our view.

I'd point, you back to the <unk>.

Work, we've done around our integration gateway in the cloud API in the marketplace and just making it easier for these partners.

To plug into a guidewire core system makes it.

It just reduces the barrier to try and implement these types of solutions.

They're just almost obviously a.

Smart thing to do for most insurance companies and so if we can make that easier and easier and easier it is going to drive <unk>.

Innovation in the industry is going to drive demand for cloud for our cloud platform. So.

There is a.

Couple marketplace solutions that.

We are excited to work with in this area unexpected.

Unexpected like a lot of other areas in the marketplace to just help us grow.

Very helpful. Thank you guys for taking the question and a really nice job on the quarter.

Thanks very much.

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

Yes, thanks for taking the question guys.

Maybe following up a little bit Jeff.

Jeff on the comment you made to one of the questions earlier about continuing to be very focused on.

The execution of deployments and having a very customer centric approach how is that pressuring the capacity of the services staff.

As you built up some sort of muscle memory, I think the best way to rollout the Guidewire cloud deals.

And let me take that I think that's your question sort of describes exactly how we're looking at it.

It's definitely something we watch very closely because.

The work required the people necessary to do these to execute on these programs is something we pay very close attention to and it's.

We sell more and get into more of these programs.

Potential limiter on our ability to grow and so getting the partners involved.

It's not something that I would call out now as.

A limiter, but it's something that we're closely following in managing closely.

<unk>.

It's working as hard as we can to keep up with the demand and ensure that the projects are delivered successfully like I said in the prepared remarks.

Very very complicated programs that we work through with the with our customers.

<unk> gives us an ability to be a little bit more efficient on the next one.

And also transit transitioning that information that learning out to the broader ecosystem.

Working hard to increase the capacity for us to.

To meet this demand so it's a great question I think your the way you posed it lines up very well so the way we're managing it.

Great and then I guess.

So as you continue to have the discussions with a number of especially your largest tier one customer.

Customers about their path to the cloud what it might take and when it might happen.

Are you still getting any pushback of Oh, I don't see any reference customers you know that sort of looked like us or operate and the markets we operate in.

Or do you feel like you are kind of over the hump now where you've gotten enough of a sample across your entire customer base.

That's no longer a limiter and instead you really are on the the win not if for virtually every customer in your portfolio.

I would say it.

Implementations and go lives that we have the more experience that we have the more releases under our belt on the Guidewire cloud platform. The more functionally ready we are to support them.

So that experience just continues to build and.

Kind of Whittle away at the questions and the concerns but for sure the tone of the interaction with our top customers is.

Has shifted as I've said before to a more of a question of when they plan to do it and when they feel like they are ready and we are ready as opposed to the way a more sort of existential question about if it's the right approach.

I am.

Cleveland confident now that we are on the right technical approach for our customer base.

But.

We constantly say these decisions and implementations are so complicated that it may take multiple years for that.

Sort of decision to sort of proceed makes logical sense.

It's for them and so.

The trend is very positive.

But.

Theres nothing magical about any particular moment.

It's just positively working through.

These these implementations and the experience we gained from them and continuing to execute on the roadmap and continuing to improve our improve our readiness.

So hopefully that helps answer the question.

That's great. Thank you.

Thank you.

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

Great. Thanks for taking my question.

Mike I wanted to maybe build on that that tier one theme. It sounds like you guys had pretty good traction this quarter I think a peer of yours indicated some maybe some uncertainty with with tier one deal activity just wanted to check to see if anything youre seeing as far as sales cycles of change or just customer interest from some of your largest.

Customers.

Okay.

Wouldn't say anything's changed quarter to quarter, we continue to see.

Interest build integrate the innovation agenda, the automation agenda the efficiency agenda at customers continues to build.

I would say.

Over the course of the last six months or so and I think we've touched on this a bit in Q4 as the COVID-19 concerns about the economy et cetera seem to be past.

The working model associated with work from home or hybrid project work has passed and so people feel comfortable about taken.

<unk> taken on these programs now.

We see that across the board, so I wouldn't call out anything with respect to tier ones.

Like I said, we had some we had.

Some good activity in the quarter.

And we continue to make positive progress, especially in our customer base about building that confidence.

Got it perfect.

Jeff just one for you on the on the <unk> increase.

It looks like Q1 Q2, you guys are getting better than what we're used to seeing from a sequential increase.

And you mentioned some of the ramp deals starting to flow through.

Should we think about the contribution from ramp deals versus maybe net new <unk> as far as yes.

Keeping those numbers elevated.

Yeah, I mean, we've talked about this a bit in the past, we don't we don't get too explicit on breaking that out but.

I will note that Q2 in particular has a fair amount of activity coming in from prior deer sold which is which is great to see.

But that is a bit of a tailwind that we're seeing in Q2 and as we think about the full year. The context. We've provided in the past is that we expect a little bit more from the backlog are coming in from ramp deals. This year. When you compare that to what we need to go out and get that data.

Okay, great. Thank you very much.

Thank you. Our next question comes from Peter Heckmann with D. A Davidson. Please proceed with your question.

Good afternoon. Thanks for taking the question you know after reviewing the Gartner reports for both North America and Europe.

It seems as if.

Number of marginal players continue to get squeezed out is as more and more.

Carriers decide to upgrade their technology with one of a handful of leaders.

Do you feel that's the case and do you see there is an opportunity for either yourself or someone else to consolidate some of those smaller players.

Overtime.

Okay interesting question.

I would say.

There certainly I think the investment necessary to instantiate, a cloud platform to serve core systems and property casualty insurance requires a pretty significant investment and so.

The idea that.

There wont be 25 vendors cecily competing in this space over the course of the next 10 years.

Is it good.

Conclusion.

And.

Certainly I'm biased being a leader but.

But we see that and I see that just based on my experience in the the view into what it takes to really do this well and the long term investment necessary in the specificity.

<unk> to win in this market and serve this customer base and these these needs specifically.

Size is going to play a big positive factor in the success of those kind of companies.

Whether or not it creates an opportunity.

To consolidate I would say I'm not sure I think when you do think these systems are implemented for a long time and the expectations customers have about the duration of that investment is pretty significant and so.

Not the same as other SaaS industries, where the implementation might be turned over once every year. Once every two years when the implementation is only turned over in the best case. Once every 10, then you've got to be careful I think about the assumptions associated with consolidation.

But I feel great about our position and the investments that we've made over the past 20 years and over the past three to take that expertise and turn it into a winning cloud platform.

And so.

Hopefully that gives you a little bit of color in terms of how I see it.

Yeah no. Thank you for the thoughtful answer and just as a follow up Jeff did you say.

$49 million of services revenue.

In the second quarter and if so could you just review that issue around the timing materials versus versus.

The other accounting method that you mentioned.

Yeah, So we said $49 million in Q2.

<unk> $49 million is our expectation at this point in time and essentially we typically do services arrangements on a time and materials basis.

Some of our customers have invested significant amounts to put in place the on Prem system, and we are now asking and working with those customers to shift them over to the cloud and we have done some of these projects on a more fixed bid type.

Type of arrangement and the accounting around a fixed bid arrangement is is you have to constantly assess.

How complete how much work have you done and what percent of the overall project is that and we had that in Q1. There was some reassessment of the effort required in order to complete projects. So that had an impact and you saw that how we ended we executed in the year on the services revenue line, which would be the expectations, we set last quarter okay.

That makes perfect sense. Thanks.

Yeah.

Thank you. Our next question comes from Joe <unk> with Baird. Please proceed with your question.

Great Hi, everyone.

I wanted to go back claims automation that was obviously, a big focus at connections a year ago and within the band freely.

Now claims is where youre, having a lot of deal momentum.

Is it fair to make the association between the two and think about Canada 12 month timeframe between the biannual release and starting to get some pipeline conversion with I guess the obvious implication is you're now on four releases and overtime, it's only going to increase more so that those kind of broadens.

The potential opportunity if those kind of connection and 12 month time frame makes sense.

Yeah sure I think it's a great insight.

A lot of as I mentioned, there's a lot of very very positive feedback and interest from our customer base around.

The auto pilot products and.

It just it takes a bit of time for us to launch something explain it to everybody what our vision is.

We're getting used to launching things based on the idea of what we call early access that enables us to work with a couple customers directly and limit that interactions. So that we can learn from the implementation feedback.

And then factor that into the next couple of versions of the product having that cadence facilitates us building better software and so yes, I think it is absolutely valid to say that hey, it was about a year ago. We launched it and then we went through a cycle in bound some interest and now it's driving some deals.

On a more active way I think the other way to think about this more broadly is that we.

We are more clearly now release after release after release differentiating the service and the value we can provide to customers through the cloud beyond just the where it runs and who runs it and how it's upgrades, but actually what it does and how quickly you can build new.

<unk> using it with advanced product designer or roll out a new digital interface using <unk> or.

Use guidewire go like I talked about to instantiate, a new product line and so theres a variety of things specifically related to operating a core system in innovating in an insurance company, there now enhanced and accelerated.

Guidewire cloud and that's just going to keep building.

Okay. Good and then just one more on the Si partners. One thing we heard at connections was this idea.

Actually I would like to grow by Guidewire practice faster, but I need to hire and then I need to get that higher cloud certified and that becomes the inhibitor.

Partners seem to be handling a decent amount of your cloud activity do you think those factors in at all on kind of your forward outlook for cloud deal signings.

Well I don't know if it factors into cloud deal signings, but I would say and this is I think it's not just true in this industry. It's true in a lot of industries as the capacity of.

The technical experts, who are available to do an implementation and run an implementation.

The amount of those people in the world.

Dictate to some degree the costs and the expense of doing those sorts of implementations and so.

When there is a constraint and there is a.

A limited resource pool the expense of doing these implementations kind of goes up and so the more people, we can bring into the system into the ecosystem and train them up and get them certified.

More opportunity areas for them to be put onto projects and those projects to deliver innovation to the to the customer base.

Look at it like this is a there's just almost an unlimited amount of technology driven innovation.

Potential in the P&C insurance industry.

Debt increased improving convenience and digital interactions with customers and automating claims in.

Well look we talked about here a couple of great. Examples detecting fraud proactively predicting things with analytics more effectively like all of that stuff is enhanced and accelerated by how many technical experts there are out in the world that can drive these projects and so that's a big part of the.

<unk> and the enablement of resources in our ecosystem and at Guidewire is a big part of our strategy and the more we can do that the.

The faster this whole system will grow so.

I kind of see it as yes. It is it a potential limiter, yes. It certainly is but is it something that people are stepping into and learning and growing yeah. That's also true because there's a huge demand out there.

Okay. Thank you very much.

Thank you.

Thank you. Our next question comes from Parker Lane with Stifel. Please proceed with your question.

Okay.

Hi, This is Matt kicker for Parker, Thanks for taking my question and congrats on the quarter.

My question revolves around Dobson and some of its new functionality.

First building off the previous question on tier ones are you seeing more interest with the platform from those tier ones kind of the higher end of the market or instead from the lower end in the market or is the interest about equally distributed between the two and then secondly, when these customers.

We do choose to expand their deployment what are the most common tools.

Saying that they are adopting on dobson. Thank you.

Okay. Great question, So let me touch I'll touch on the demand okay. So.

With respect to our customer base. There is a lot of interests in guidewire cloud and getting updates about what's going on and what's the latest in how things evolved since the last time, we talked regardless of whether they are on cloud because that's obviously important to the program, but then if they are not yet made.

Decision, it's important to that decision and.

How they think about when and if to go.

Thats equally distributed across all the customers what theyre specifically interested in changes.

Depending on the size of the customer and the complexity of the implementation.

That really is what drives their specific interests, if theyre running claim center.

Ross a whole complex implementation and Theres a lot of integration is there going to be more interested in the integration framework and claim center and autopilot, but if there are policy center customer and launching new lines and rolling out to new states, they're going to be wanting to talk to us about advanced product designer. So I would say, it's not so much tier base, but it has to do with the use case.

That we're supporting in their company and how that lines up to their innovation objectives.

They have four.

Their departments and their corporate strategy.

But I <unk> I would say.

My take of the feedback and maybe I'm going to give you an answer that's across the board.

The changes that we've made to the way our advanced product designer.

And I think that is something that I saw a lot of interest and especially at connections and then the conversations that I had the other side of it just because it's such a big part of it.

The other side of the answer is just because it's such a big part of every implementation to guidewire as the integration framework.

Interesting to customers.

Hopefully that helps.

Okay, that's fair.

Great.

That's all from me thank you.

Yeah.

Thank you. Our next question comes from Michael <unk> with Wells Fargo. Please proceed with your question.

Hey, folks this is David and one for Michael just once a month.

Can you just talk about the appetite you're seeing for purchases that include data analytics and perhaps any flexibility you may have on pricing when we sell to that customer base. Thank you.

Okay.

Sure I'll take that.

So one of the things that we've been able to do with cloud is that we've been able to incorporate a little bit of data and analytics the implementations and theres a lot of interest and that was one of the highlights of the last couple of quarters has been.

Looking at the the business plans to justify the investment in Guidewire cloud and how often the data analytics components of that.

Implementation incorporates.

The value proposition driven by smarter decisions.

But the analytics business at Guidewire is also.

Healthy independently so not just reliant on our core customer base that selling independently highlighted obviously.

The deal that we did in Q1 at S&P and also Mark held for science and cyber.

But also.

We're seeing.

<unk> it into Guidewire.

That's excellent color. Thank you very much.

Okay. Thanks, a lot David.

Thank you. Our next question comes from Tyler Radke with Citi. Please proceed with your question.

Hey, good afternoon I wanted to ask you just about the on premise customers I think in years past you've talked about.

A fair amount of customers still on older versions version eight.

And nine how would those kind of migrations progressed and to what extent.

Is the.

Significant partner growth kind of helping in accelerating those those migrations from some of the older on Prem versions.

Yeah.

I can try to give you a color on it I think that the.

Upgrade cycle as we've talked about before continues to be.

Great.

We do still see some customers, making the decision to move to the the version 10 of Guidewire on Prem.

Just for a variety of different reasons and I suppose like the.

The ecosystem and the consultants are.

Facilitate that those kinds of programs effectively.

But I wouldn't say it's.

Helps or hurts really it's just kind of the normal operating procedure normal operating mode of how the overall guidewire ecosystem works.

But the that the overall takeaway with respect to.

The opportunity that exists for us and our customer base that is driven by the upgrade cycle is still very important driver for cloud transitions.

Behind each one of these stories about our decision to move to cloud is partially at least.

Factored in there.

Necessity to make some.

Move from whatever version there on.

To the latest and therefore cloud.

So that dynamic is still happening and still playing out.

In our in our customer base and an important driver for our cloud momentum.

Great and then if I could sneak in a follow up but maybe this one for Jeff but can you just give us an update on how youre thinking about kind of the moving pieces in <unk>.

Cloud or subscription gross margins I know with with some of the new new cloud releases you have here.

With Dobson and one coming up in.

The first part of 2022 and in some of the automation you're building just help us understand kind of what your baseline assumptions are.

Around the you know the factors that's that's underpinning your gross margin outlook for cloud. Thanks.

Yes sure.

We talked briefly in the call that.

You should think about the subscription margin that underpins a subscription and support margin that that kind of should grow from around 23%.

Last year into around 30%. This year. So we are starting to see a little bit of leverage on that line.

We feel very confident in how.

Durable the overall subscription revenue growth will be as we execute against this opportunity in front of us and start moving our on Prem customers to the cloud in addition to.

Obviously in Q1 saw a little bit more.

Cloud infrastructure expense than we were expecting.

I noted that we've been optimizing for speed and customer success in that particular area.

But we certainly have our eye on the ball in terms of how we can optimize and make that much more efficient.

How it's architected and as we add more customers to the platform and gain that scale, that's where we get confidence that we'll see that margin expansion.

Great. Thank you.

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

Hey, Thanks, very much I just wanted to say.

We had a we felt like it was a very solid start to the year.

And look forward to continuing to execute effectively throughout the rest of the fiscal I want to thank everybody for joining us today and have a great day.

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

Q1 2022 Guidewire Software Inc Earnings Call

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