Q2 2022 Duck Creek Technologies Inc Earnings Call

Hello, Thank you for standing by and welcome to the Duck Creek Technologies' second quarter 2022 earnings Conference call.

At this time all participants are in a listen only mode. After the speaker presentation there'll be a question and answer session to ask a question. During this session you will need to press star one on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today.

Ryan <unk>. Please go ahead.

Good afternoon, and welcome a Duck Creek, earning conference call for the second quarter of fiscal year 2022 which ended on February 20 years.

On the call with me today is Mike Koski Duck Creek, Chief Executive Officer, and many Chip Perry Duck Creek, Chief Financial Officer.

Complete disclosure of our results can be found in our press release issued today, which is available on the Investor Relations section of our website.

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

Statements made on this call may include forward looking statements regarding our financial results products customer demand operations the impact of COVID-19 on our business and other matters.

These statements are subject to risks uncertainties and assumptions and are based on management's current expectations as of today and may not be updated in the future.

Therefore, these statements should not be relied upon as representing our views of any subsequent date.

You should not rely on forward looking statements as predictions of future events and actual results and events may differ from any forward looking statements that management may make today.

Additional information regarding the risks uncertainties and other factors.

Cause such differences appear in our press release and Duck Creek latest Form 10-K , and other subsequent reports filed by Duck Creek with the Securities and Exchange Commission.

We will also refer to certain non-GAAP financial measures to provide additional information to investors.

A reconciliation of non-GAAP to GAAP measures is provided in our press release, the primary differences being stock based compensation expenses amortization of intangibles change in fair value of contingent earn out liability and their related tax effects of these adjustments with that let me turn the call over to Mike.

Thank you, Brian and good afternoon, everyone. Thank you for joining us today to discuss Duck Creek second quarter results.

We have continued to deliver on our mission to help transform the P&C insurance industry is a leading cloud core systems provider on today's call I will review some key trends that we're seeing in the market outlines some key customer wins and provide some exciting highlights from our recent users conference called formation let.

Let me start with a quick overview of our financial results for the second quarter.

We reported total revenue of $76 $4 million up 22% year over year and this was underpinned by our subscription revenue, which is our revenue derived from SaaS of $39.6 million up 29% year over year.

Our annual recurring revenue or <unk> was $151.4 million, which resulted in 28% growth over the prior year and we delivered another strong quarter of profitability with adjusted EBITDA of $7.3 million.

From a new sales perspective, we closed several important and strategic deals in the quarter, one with a notable global tier one insurer and we also continue to see very high levels of interest in the market for our SaaS cloud platform Duck Creek on demand.

However, new business signed during the quarter was below our expectations due to delays of the signing of several key deals.

Specifically, we have seen sales cycles lengthen with some of our larger deals as customers and prospects worked through the impact of the current environment, including the availability of resources and rising inflation.

We expect that this dynamic will be transitory as I mentioned, our on demand generation activities continues to be very strong yielding a robust pipeline of deals many of which are in the most mature stages of our pipeline development.

As we've told investors from the beginning this is a market that has a relatively low volume of deals, but with high average deal value. So modest changes in buying behavior can drive near term swings in bookings and SaaS a R. R.

We are very pleased with some of the strategic wins that we had in Q2 first we recently announced that Philadelphia insurance companies a member of the Tokio Marine group, Japan's oldest and leading P&C insurer has selected Duck Creek policy and Duck Creek producer to launch a new line of commercial insurance in North America. After a key.

Careful review of multiple industry providers. They chose Duck Creek on demand for its scalability extensibility and ease to launch commercial lines products using Duck Creek commercial templates and leveraging our low code configuration, we're delivering a digital first approach be a duck creek producer to optimize customer experience and enhance existing distribution.

Panels.

Another exciting <unk> win was with a California based startup insure tech who is using data and telematics intelligence to price driver risk and offer compelling coverage in a unique highly personalized way.

This start up company selected Duck Creek policy, and billing and insights to power their growth. They chose Duck Creek modern core system because of our flexible highly scalable easy to configure product inheritance model, which will speed their implementation and allow them to rapidly deploy their products seamlessly throughout North America and the global markets.

This win is another example of how cloud based SaaS delivered low code solutions are making Duck Creek, the technology provider of choice for many startups and ensure text globally.

We also signed our largest ever distribution management win with E. M. C. A leading tier two insurer. This transaction will enable EMC to provide a modern flexible relationship management system to improve engagement and efficiency across our independent agent network around the country.

This is an important win for Duck Creek that shows how we have multiple avenues to engage with customers and create value.

And we had sizable capacity buy ups in the quarter with two leading tier two carriers. These types of purchases expand our customer's footprint with Duck Creek and is driven by the underlying growth of the written premium or deployment into a new business line.

These wins highlight the differentiation of our on demand platform, which has been proven to serve insurers of all sizes and help our customers deliver leading capabilities with speed.

With our customers' success as a key priority we had another strong quarter of go live activity with 19 go lives occurring in Q2.

One important go lives. This quarter was with AIG. We are very proud to continue with our contribution to the success of Aig's industry, leading transformation program AIG 200.

After a prior deployments of several commercial products on Duck Creek policy on demand AIG successfully went live with Duck Creek policy and claims on demand for the private client group Aig's insurance division that protects our lifestyles and legacies of high net worth individuals and families.

We're thrilled that Duck Creek can play a vital role in helping AIG continue to provide leading products expert guidance and concierge level claims services to their distinctive high net worth customers.

Another Great example of our fast implementation cycles was with Argyle insurance, a new commercial lines insurer in Australia that I referenced on our last earnings call. During the second quarter. We successfully brought Argyle live on Duck Creek, Ondemand policy and billing and 59 days, we believe that delivering a new core system in <unk>.

Under 60 days is unheard of in the industry.

<unk> two deployment is critically important to many insurers and as in this case with Argyle, we're excited to help insurers bring innovative products to market quickly and efficiently.

Our ability to bring greater agility and automation to carriers is also evident in on prem to on demand transitions.

Extinguished programs has been an on Prem Duck Creek customer for years and.

In collaboration with one of our partners E Y we successfully launched distinguished programs Auto line for all 50 States in Q2, along with the deployment of additional transactional capabilities for their primary hospitality G L and property lines of business.

Distinguished programs went live with their first line of business and Duck Creek policy in six months and they continue on a journey to expand their offerings on our evergreen Duck Creek on demand platform.

Another important way, we increase value for our customers is by continued expansion of our partner ecosystem. During Q2, we were thrilled to add six new partners to our solutions partner ecosystem and I'd like to specifically highlight two exciting new partnerships.

First we launched a new strategic alliance with glia.

Leah provides innovative digital customer service solutions that help the largest financial institutions in the world seamlessly support customers in a digital world as part of our new strategic partnership we entered into a new reselling agreement with Blear that Embeds its digital customer service solutions as part of the Duck Creek suite and increases our cell.

<unk> leverage the combination of Glen Duck Creek will make it easier than ever for carriers to create seamless digital experiences and drive higher conversion rates and more loyal customers.

We also expanded our collaboration with Corelogic, a leading provider of property intelligence solutions to provide greater business intelligence to our customers. So they can make real time decisions insurers running Duck Creek can access corelogic risk meter to rapidly assess properties flood risk and distance to coast to make smarter insurance.

Decisions.

As pleased as we are with these customer wins and the consistently strong feedback we receive from customers on our solutions and partner ecosystem, we're not standing still we're.

We're thrilled to recently hosted our annual users conference formation live in Orlando with a sold out audience nearly 1300 people who gathered in person and online.

Tennant's two formation by prospects was up 200% compared to the last in person formation event, we held in 2019 and customer attendance was up nearly 40%. It was incredible to be back in person with our customers and partners to hear their feedback and to show them. What we were working on to deliver even greater value from our product and parts.

Ship perspective.

During my keynote I spoke at length on what we view as a new standard for carriers to compete in today's digital marketplace. We believe that in order for carriers to be successful they need to be agile intelligent and evergreen.

With a focus on these three capabilities, we enable carriers to create product factories, which allows them to utilize duck Creek platform to easily create new insurance products and offerings and get them to market quickly using our low code configuration tools. This allows an insurer to focus on the value added steps necessary to provide tailored coverages.

For specific customer segments and markets.

We believe this approach aligns perfectly with the needs of carriers, who recognize the expectations for user experiences has never been greater carriers know they must create compelling persona based interactions to delight customers satisfy agents and retain expert employees.

A common theme for customers throughout formation was that their legacy core systems cannot deliver these experiences and they are an inhibitor to their business success.

On Duck Creek carriers are able to easily build new products from existing ones. They don't have to start from scratch every time, they have a new product opportunity. This inheritance approach reduces errors and simplifies product management under one system. We highlighted the success of this approach at formation with Axis, who launched more than.

30 products in a single year and with Berkshire Hathaway specialty who has now launched more than 200 insurance products since 2014 using this approach.

We came away from formation incredibly excited about the future for Duck Creek the transition to the cloud is in its early innings, and we feel great about our ability to capitalize on this trend.

We are incredibly excited at the opportunity Duck Creek has to deliver strong revenue growth and expanding profitability for years to come.

Before I turn it over to Vinnie I want to take this opportunity to officially welcome Kevin Rhodes to Duck Creek as our new CFO starting on April 4th Kevin is an accomplished finance executive who has previously served as CFO for multiple high growth SaaS companies, most recently <unk> or formerly Ontario systems.

He has extensive public company experience from his time as CFO of Brightcove and Edgewater consulting and is a great fit to help lead Duck Creek to even greater success in the future.

As you know Vinnie will be retiring from Duck Creek next month after an incredibly successful career. He has been instrumental in our ability to rapidly grow and scale. This business over the past six years and led our successful IPO process in the midst of the pandemic on behalf of everyone at Duck Creek, and our board of directors I want to thank many of them.

Wish him all the best in his retirement.

I would like to end by thanking the incredible team here at Duck Creek for all their hard work they make our success possible and I could not be more proud of the culture. We have built and the talent. We continue to attract a duck Creek with that let me turn the call over to Vince to walk you through the numbers Vinny over to you.

Thanks, Mike and thanks for the kind words today I'll review, our second quarter fiscal 2022 results in detail and provide guidance for the third quarter and full year of fiscal 2022.

Total revenue in the second quarter was $76 $4 million up 22% from the prior year period within total revenue subscription revenue, which is comprised solely of subscriptions to our SaaS products was $39 $6 million up 29% year over year.

In Q2 subscriptions represented 78% of our software revenue and 52% of our total revenue.

I would note that strong subscription revenue in the quarter included low single digit millions of one time revenue related to a contract where the customer changed their business model and bought out the full value of their remaining subscription.

Revenues from on premise software licenses of $4.6 million and maintenance of $6 2 million or 14% of total revenue.

Please note that our second and fourth fiscal quarters are seasonally high for license revenue based on the timing of renewals, but that on an annual basis. We expect these line items to decrease as a percentage of revenue given the strong growth of subscription revenue.

Services revenue was $26 million up 15% year over year, we had another strong services quarter, driven by continued high demand for implementation services and strong utilization rates.

SaaS a R R, which we calculate by annualized recurring subscription revenue recognized in the last month of the period was 151.4 million as of February 28th up 28% from the prior year.

Please note that the one time subscription revenue recognized in the quarter is not reflected in SaaS IRR.

As a reminder, SaaS <unk> is a snapshot in time of subscription contracts that are generating revenue during the last month of a period and can be impacted by timing.

SaaS net dollar retention as of February 28, 2022 was 115.5% as we have noted previously recent quarters that exceeded 120% were unusually high based on our sales mix that had been weighted towards existing customers. This quarter is more in line with our historical average and consistent with our expectations.

<unk>.

As a reminder, our net retention is driven by a combination of high gross retention rates sales of new products to existing customers and growth of DWP for products already operating on our SaaS platform.

Now, let's review the income statement in more detail. These metrics are non-GAAP , unless otherwise noted and we provided a reconciliation of GAAP to non-GAAP financials in our press release.

First on a GAAP basis, our gross profit for the quarter was $44 3 million and we had a loss from operations of point 4 million, we had a net loss in the quarter of point 9 million or one cent per share based on a weighted average basic share outstanding count of $132 1 million.

Turning to our non-GAAP results gross margin in the quarter was $46 5 million or 68% consistent with the second quarter of fiscal 2020 one.

Subscription margin in the quarter was 67.9% the improvement from the first quarter was due to the onetime revenue discussed previously as well as favorable timing of expenses as we have noted previously we expect subscription margins for the full year of fiscal 2022 to be in the mid sixties.

Professional service margins of 38% in the quarter were in line with our expectations as discussed in previous quarters, our utilization rates have been running unsustainably high and we have been adding capacity to meet demand.

That said, it's not uncommon for our Q2 to be a seasonally lower services revenue quarter, and we expect higher revenue in gross margins in the second half relative to Q2.

Turning to operating expenses R&D costs increased 15% to $13 8 million or 18% of revenue down one point year over year as a percentage of revenue.

We currently expect R&D spend as a percent of revenue for the full year to remain consistent with fiscal 2021 .

We continue to balance the scale benefits of our R&D organization with increasing investments in our products and SaaS platform.

Sales and marketing expenses were 10.6 million or 14% of revenue down from 16% of revenue in the prior year period.

This decrease is mostly timing in nature, as we expect sales and marketing spend as a percent of revenue for the full year to remain consistent with fiscal 2021 .

While costs, such as travel and marketing programs have run below normal levels due to ongoing COVID-19 impacts we will see a step up in spending in Q3 due in part to the in person formation conference discussed by Mike.

G&A expense was $14 9 million or 20% of revenue down from 21% of revenue in the prior year period as noted previously G&A as our most leverages full cost area and is declining as a percent of revenue in line with our expectations.

Adjusted EBITDA for the second quarter was $7 3 million, which was ahead of our guidance due to the better than expected revenue and lower expenses I just referenced adjusted EBITDA margin was 10% for the quarter up from 5% in the prior year period.

This represents our 13th consecutive quarter of adjusted EBITDA profitability, which we believe is an important indication of our ability to generate high levels of subscription revenue growth on a profitable basis.

non-GAAP net income per share for the quarter was four cents based on approximately $133 7 million fully diluted weighted average shares outstanding.

Turning to the balance sheet and cash flow, we ended the quarter with $349 million in cash and cash equivalents and we remain debt free free cash flow was $1 $2 million in the quarter compared to negative $1.6 million in the prior year period.

I'd now like to finish with guidance beginning with the third fiscal quarter.

We expect total revenue of 71 million to $73 million.

Subscription revenue of $36 5 million to $37 5 million adjusted.

Adjusted gross margins are projected at 57.5% to 58%.

We expect adjusted EBITDA of point $5 million to $1.5 million and our non-GAAP net income is expected to range from negative <unk> 5 million to positive point $5 million or breakeven on a non-GAAP EPS basis.

For the full year fiscal 2022 we are updating our guidance to total revenue of 301 to 305 million subscription.

Revenue of 151 million to $153 million.

Adjusted gross margins are projected at 58, and a half to 59, 5%.

We expect adjusted EBITDA of $20 5 million to $22.5 million.

And our non-GAAP net income is expected to range from 12 to 14 million or nine to 10 cents per fully diluted share.

To wrap up our Q2 results were strong although delayed timing in certain bookings has resulted in a bit more conservative outlook for second half subscription revenue. We strongly believe this is a near term dynamic and we're currently projecting robust new bookings in the second half of this year.

We remain highly confident in the long term growth prospects of the business as insurers continue transitioning core systems to the cloud.

And with that we'd like to open the call for Q&A operator.

Thank you.

As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key.

Our first question comes from Brian Peterson with Raymond James You May proceed with your question.

Oh, hi, thanks for taking the questions. So I just wanted to hit on the bookings environment that you guys mentioned I know you mentioned, maybe a little bit of a slowdown versus expectations is there any commonality on what's driving that and what have you guys seen maybe so far in the third quarter.

We'd just love to get an update there.

Yeah, Thanks, Bryan I.

I would say that theres not a specific commonality, although we're still pleased with the activity the level of activity that we're in discussions, we're having with customers but.

But I think as customers looked at.

Signing deals closing and getting started with projects.

The common things that we referenced is sometimes youre looking at there I T resources and their readiness along with their partners to get started and then you know there is a little bit of a knock on effect as are dealing with rising inflation in some of the increases in loss costs that they're seeing.

They're not telling us they're going to cancel projects, they're just going through another step and taking a look at what theyre going to do so as we enter in these discussions and continue with them we think.

They're going to move forward with these projects, they're just looking at the timing as to when they get started.

Understood and Mike maybe a follow up just relate user conference I know one of the big parts of pieces of news that a user conference was the relationship with Microsoft.

Anything you'd like to add there and are there any resources being put to the go to market side. Thank you.

Yeah, Thanks, Brian with Microsoft Yeah, we're very excited about that relationship and on the go to market side, you know as I indicated at formation.

We worked out an arrangement that we can be a part of their marketplace. So anyone that has azure agreements in place can leverage that is part of buying Duck Creek. So we think that's going to be very very helpful. As we talk to larger carriers that have those larger agreements.

And we're hoping what it does is incent customers to really look at their overall spend with us and with Microsoft in a unified manner and encourage them to buy more.

Understood. Thanks, Mike.

Right.

Thank you. Our next question comes from Alex Zukin with Wolfe Research you May proceed with your question.

Hey, guys. This is strecker on for Alex Thanks for taking the question I.

I was wondering if it's coming out of the conference and being in person.

Back out with customers, if you're starting to see any pickup in the pipeline there.

And then.

That's the second one given kind of the delays in some of those deals and sales cycles lengthening are you contemplating contemplating any changes.

Vessel side of your business, if there's new business new business issues persist. Thank you.

I'll start with the second part of your question and right now we're not contemplating any changes in terms of our hiring plans or our investments.

We think we're on a good trajectory to add more advanced analytics into our platform and to continue to invest in our platform and also we continue to hire and bolt. The service management, you know the SaaS services side and.

Our services side of the business.

In terms of your first question I think as we came out of formation.

Still early to tell in terms of.

New deals coming into the pipeline, but I will say this there's a number of on premise customers that were very excited about the investments, we're making and what that means for them to move to the cloud.

They're working through their overall timeframe and budgets, but we have initiated new conversations with them to migrate in and then also as I said in my opening remarks, we had you know 200% more prospects at the event.

Which again shows the robustness of our pipeline and I think they were very excited about the investments and what they saw and also took the time to talk to our existing customers and their experience and we think you know that.

It's promising for the second half in us closing deals in the second half of the year.

Great. Thank you very much.

Thank you. Our next question comes from Dawn Becker with William Blair. You May proceed with your question.

Hey, guys. Thanks for taking the questions I guess, maybe I wanted to start on the value I think you touched on the ease of the overall implementation and maybe how how the marketplace dynamics play in here and then kind of lowering that barrier to adoption I think the perception was historically at these transformation projects would be kind of at that broader big Bang, but.

Do you see it playing out with a modular ization of that implementation helps knock down that initial wall.

Customers investing in and maybe their digital transformation on the customer experience side able to integrated system in that makes that core Adele.

Adoption, maybe accelerate that overall decisioning or ease that initial upfront burden.

Yeah, Dylan I think there's two dynamics that are at play with the speed. The first one is just our technology and the technology helps a lot and that comes to play when you're defining the insurance products that the carriers, bringing to market things like the rating algorithms, they're underwriting practices and their work.

Flows and I think we've proven that we can do that as fast as any one or faster than anyone in the industry.

However, the second dynamic is we're seeing a large uptick of carriers launching new greenfield products.

Or new insurer tax go into market very very rapidly and you know what's nice about those types of arrangements is youre not dealing with the legacy integration and all of the complexity of the rest of the organization quite often you know some of them want to stand it up more greenfield so that they can move with speed.

And it allows them to do some of that work in parallel, but I think that early success and this is why we're excited about this new arrangement with Philadelphia insurance, which is a subsidiary of Tokio Marine because that early success and proof point is obviously, an entree for us to continue to expand within the account so.

We think those two dynamics play well.

Thank God again, especially as it relates to tier ones us to be able to prove ourselves and then expand is certainly in line with our business model.

Got it that's super helpful and I know, we've we've also talked a lot I think about the cyber opportunity in the past and I know, there's a lot of emphasis here, but how how valuable and how are you guys I guess working with customers to build out those initial value models right. I think maybe is it the challenge is in.

The collection and aggregation of the necessary data to effectively price that risk.

Let me going off of you don't have the same level of historical data that you might from an auto or personal or commercial.

Line to define those value models is that is that something that you guys are kind of working through with the customers now and in thinking of that opportunity gradually refining itself.

Over time, obviously as there was a lot of emphasis on that space.

Yeah, and there's certainly going to be more emphasis in that space, given what's happening in the environment, but.

But this isn't a new thing for US you know we work you know one of the areas that we thrive in his specialty insurance and commercial insurance and that's where really cyber lies and we've been doing it with many carriers for many years in terms of adding cyber coverage or launching cyber products and getting them to market, but we're all.

He's looking for new partners to help us on the analytic side and to help our customers, which is why we announced a new partnership with cyber cube that it brings advanced analytics.

At play, but the one thing I will say is each and every insurance customer that we work with they look at how they price cyber very different and you highlighted a very important point you can't look at loss history and use that as a predictor of future cyber risk like you can with auto and property and some other risks.

And this is why carriers take very dramatically different approaches on how they price cyber and I think that really comes down to the flexibility of our software and how we can ingest different types of data and then come up with different pricing algorithms based on that data and I think carriers find that we have the most flexible software in order to do that going forward. So it really.

[noise] supports them well.

Thanks for thanks for taking the question guys all the best of any in the retirement and look forward to working with Kevin in the future as well thanks guys.

Thank you.

Thank you. Our next question comes from Jackson Ader with Jpmorgan you May proceed with your question.

Great.

Good evening guys. Thanks for taking my questions.

The first one Mike.

If you know.

The booking slowdown being driven by kind of.

External factors.

What can you learn.

Got creep too internally to try and get you.

Sales cycle back on track.

Yes.

Yeah Jackson Trust me, there's a lot of conversation within Duck Creek on what we can do that and the thing that.

It makes us know that we're going to have a much much better back half of the year is because the slowdown was not a result of us losing deals or deals that went away. There wasn't a material number of deals or deals that we expected to win that went away.

In the second quarter and what we saw is deals that we expected to close just got deferred and we've been in very consistent conversations with those customers around their timing their process and do they have budgets and do they have approvals. So I think we are set up very well and we plan to occur.

Lee in the back half of the year to work with our customers on their timeframe. So I think it gives us a level of confidence that we're going to have a stronger back half of the year.

Okay, and then follow up then would be.

In many I understand that youre not.

Some guide to full year <unk>.

Growth numbers, but.

It would be the expectation would be that even though the subscription revenue coming down a little bit.

Or are.

In a year.

Might not have come down as much as revenue recognized.

Yeah, Hey, Jackson, it's a logical pattern and I think we would expect that AOR growth in the second half.

You know we'll be reasonably strong.

Certainly we expect to add more <unk> in the second half of the year than we did in the first and we're expecting strong bookings in both Q3 and Q4.

Think the only the impact on air are obviously, we've said this a million times right the impact on air ours, when we get to the fourth quarter deals how many of them close you know how many of them are provisioned and generating revenue in August .

But you know we're pretty bullish on the bookings profile for the second half and we're expecting pretty strong growth.

Okay cool thank you.

Yes.

Thank you. Our next question comes from Circuit Korea with Barclays. You May proceed with your question.

Okay, Great, Hey, Mike Hey, Benny Thanks for taking my questions here.

Mike If I may maybe hey, Mike maybe for you and apologies. If this was asked I joined the call a little late but can you just talk a little bit about the pipeline for tier one carriers I know that that wasn't that was derisk from the guide right from the get go so I realize that's not what we're talking about here for the quarter, but just maybe zooming.

[noise] out.

It feels like a lot of moving parts from just the macroeconomic perspective, I think we've talked about some of those opportunities may be being international could you just maybe give us an update just about how you feel about the pipeline for those and and and how those conversations have changed if at all.

Yeah.

I would say that we feel good about the pipeline, we continue to be in discussions with several tier ones.

Existing customers that are looking to expand or do something.

More broadly on our Duck Creek Ondemand platform. So I'm very pleased with that I will say with the current environment, they've just gotten a little bit more cautious or at least gone through some extra steps around perhaps internal staffing and some resource needs and what they need to do to get started.

So it is causing us to be a little bit more conservative on those deals but for us. It's about a matter of timing, we feel good about them happening and again I'll reemphasize that.

The deal that we did sign with Philadelphia and Tokio Marine is a deal that we're very excited about and that's a new tier one customer that we're bringing into the family and then we continue discussions with several other existing tier one customers. So you know.

I think the conversations you'll we're pleased and theyre going to keep moving forward again. The question is really when do they start the projects and when they sign up for more usage of Duck Creek on demand.

Got it got it that makes sense Vinny maybe for my follow up for you I think you touched on this a little bit a little bit with Jackson, but can you just talk about the seasonality of net new AOR from here and when we talked about the second half being bigger than the first half but.

And if I'm getting too.

Too granular you, let me know, but typically net new is kind of flat to up in Q3, but it sounds like Theres, maybe just an extra layer of confidence in in in in the back half is there any sort of spillover spillover of activity from Q2 into Q3 that we should be thinking about activation driven or just opened.

And it should we think about the seasonality from Q2 to Q3 here being.

In line with historical patterns or maybe a little different.

So as you guessed second I, you know I'm not going to.

I'm not going to head towards the guiding on a L. R path, but I'll say that you know if using your premise that Q3 could be flat to up a little bit I think we would find that rather disappointing that said, we don't have a lot of spillover from Q2 into Q3.

But we are expecting solid bookings going forward, so really it's going to come down to timing on when deals get done within Q3, and whether they are contributing to <unk> in the quarter or not now we've not forecasted a particularly aggressive path to provisioning the bookings we get in Q3, but there is as you know there's a range of Bath.

I'm there, particularly if there is a larger deal. So I think you know.

We're really confident in saying that we think second half are our growth's going to be strong I wouldn't attempt to split it between quarters.

Understood. Thanks, guys.

Thank you. Our next question comes or we should your linear with RBC. You May proceed with your question.

Alright wonderful that thanks, so much for taking my questions guys.

In your prepared remarks, you talked about some of the issues and I know a number of questions that hit on it.

I wanted to ask you. The question you referred to it as transitory, which.

The last time, we've heard that word used widespread obviously turned out to not be quite the case, but putting that aside what is it that's giving you confidence that this won't be a long lasting issue that it is something that you know, even though it's external and not within your control that it's not going to be kind of a long lasting headwind and I have a follow up.

Rishi that the thing that gives me confidence in that is that carriers are not telling us that they're going to stop the projects or shut them down or defer them for even one year and I won't give you the count, but we have the most robust pipeline that we've had in the history of the company. It is really.

Gotten robust in the later stages of.

Our pipeline.

We know that there are deals that are going to get done.

At the same time nobody has come to US and said look we're going to defer this for 12 months or more.

We had one situation where their carrier did that but that was because they had a material loss on their books.

And they're going to defer that one but short of that one they're all really talking with us about when and when they want to get things started so you know.

We just don't feel like they're slowing down and then the second thing Richy that I would say is when we look at the overall activity so new things arriving in the pipe we track all the activities of our pre sales team and our sales consulting team in terms of number of demos rfps and what they're responding to and that activity is at an all time high so it gives us a lot.

Evel confidence that carriers are interested they're not backing off I think what's happening is when they look at their approvals and they look at their economics. Some of them are putting another layer in decision, making some are deferring projects because of perhaps resourcing for maybe a quarter or some period of time and that's a signal that we're getting from them right now.

Got it that's really helpful. Thanks.

And then just as a follow up as I think about that.

Subscription growth rates that we're seeing in the business right now if I look at guidance, it's implying Q4 about 25% type subscription growth, let's imagine without getting to the question of guidance or our SaaS or our growth would be it would be a touch higher than that.

But you know again without without getting into FY 'twenty three guidance is that the sort of subscription or SaaS growth profile that you'd be happy with or or what's kind of a.

Growth rate on the SaaS side that you would consider yourself dishes, what given the opportunities given our relationships with our customer everything that we should be growing.

Well Rishi on that I'll, just make some opening comments and I don't know if you want to add anything Vinnie, but what I would say is you know obviously.

I've always talked about this business, it's relatively low deal volume high average deal value. So you can have cycles, you know quarter to quarter around what happens on growth rates.

But when we go look at forward looking next year and the strength of our pipeline, we would not be satisfied with growth rates are down where they are where we're guiding to the next quarter or two we think next year long term subscription growth rates. There I'm, sorry next year growth rates at 30% would be.

That we'd be striving for so that is.

What we would anticipate with the overall business and the bookings.

I think you know that we have one contract has been rolling off the books that the brakes will come off of that as well and that'll help a bit.

But I would say, we would not be satisfied with the short term growth rates that you see in subscription revenue in the next quarter or two.

Yep and.

Mike I would've had the same response that I think if you told US you know we're going to be 25 next year, we'd be disappointed.

And I'd point out that you know.

A number and Mike cited 30.

A number for next year, we're not prepared to guide for next year, obviously at this point, but I think we'd say that whatever that number is we believe it's sustainable for for for a number of years and the reason we say that is don't forget we think penetration levels here in terms of how much DWP is running on you know in real cloud platforms right now is still very.

Well. So we don't think that's going to be a near term phenomenon that delivering 30 or 30 plus is achievable. We think there's a lot of runway there.

Our wonderful really helpful. Thanks, Mike and Vinny all the best for you in your retirement.

Great. Thank you.

Okay.

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

Yeah, Hi, guys. Thanks for taking the question Mike wanted to circle back to the topic of the availability of resources and really could you provide some more context on what the limiting factors are there is it primarily hiring these companies are in a tough labor market trying to find the appropriate.

A number of resources to take on projects as the physical location of those resources or perhaps a reallocation of those resources to different projects here in the near term.

Yeah, I would I would not put it to physical location of resources Parker you know one thing that we are seeing is the technology and I T industry is working a lot more virtual if you will you know post the pandemic.

Than they were before.

And you know there are a lot of companies and firms now that can attract talent away from other companies, regardless of where they sit.

And I also think one thing that we're seeing is.

There's a number of deals that we have with smaller carriers are also and you know.

Ensure tech smaller carriers that.

We don't have large I T organization. So they are dependent either on a partnership or having some key hires in place and making sure that they have the right personnel surrounding these deals in order to get started properly is another dynamic that we've seen so you know it's I'm not going to say, it's a crazy number of deals that's tied to that.

But it has come up time to time in terms of actually when a carrier gets started.

The reason cited as to maybe they're going to delay until they can get some people to own the program going forward.

Got it understood and then shifting gears a bit here you know in the context of the current environment in your commentary you've given so far just wondering if you can give any update on the investment plans and I guess, what the current environment in Europe is meeting for your international expansion opportunity I think you had a few wins last quarter, perhaps in the U K.

Are you still planning to invest at the same level or is there a bit of a.

Slowdown in that investment plan related to what we're currently seeing.

Well, we're going to continue to invest at the same level and.

And I think we're happy with what we're seeing and I just want to continue to emphasize that we are still early in this international journey and our approach is just to build the foundation for future growth in international markets and we think this go live event and Argyle is a great example, getting them live and 59 days.

As a showcase in Australia, and I know, we're going to capitalize that more and I'm very pleased with the growth there and then I don't know if anyone notices but we did announce a new managing director for Amir.

And.

That Shire has a vast vast with kumar.

He comes from.

An organization of Hex aware, where he ran all of EMEA, but he also ran financial services and insurance are very knowledgeable. So we're hiring and investing in the talent to get more done and we're pleased with the progress, but like I said, it's still a bit early in terms of what we're seeing but we're going to continue.

That investment as we had planned.

Before the events of Covid.

Got it thanks again.

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

Thanks for taking my question. So what we're hearing today is that.

There does not appear to be any change in the win rate or your own internal gauge of the probability of wins.

We're seeing some sort of deferral.

Referrals.

Okay.

How should we think about your win rate.

Alright.

Duck Creek to gain share and are you seeing much.

Different in terms of the relative modules or.

You may be doing better in policy or billing anything like that.

And as well a little bit on the geography I know, it's early in the international expansion process, but just trying to figure out where do we expect some of the relative more success to be in and what areas do you consider to be more challenging.

Okay Peter.

I would say that you can expect us to get the majority of our success will still occur in North America.

And and and to go back to your earlier question on win rate. We're pleased with our win rate. We're pleased with our competitive positioning Theres no question that all of our competitors are positioning our cloud solutions.

Above all and I think we were the leader in that market and I think we caused them to make more dramatic shifts in their strategy, but I continue to emphasize that it's beyond just being a SaaS platform. Its also our low code approach.

And how are configuration tools allow care insurance carriers to configure product and get them to market with speed and where that is a tremendous value we tend to win a quite substantially so.

I'm very pleased with that.

And then you know with your final question around.

How would we expect to expand in.

I'm very happy with the land and expand if you recall.

Several about a year ago, we were talking a lot about our balance of land and expand we got pretty expand heavy last year and then now we're landing some new accounts like I referenced with Tokio Marine which lays the foundation for further expansion.

And then like I said some of our existing tier one carriers that were already in we're in advanced discussions with other SaaS opportunities within them. So we think we have a great opportunity to pick up deals there as well.

Okay. That's helpful. And then just a clarification on the one time subscription revenue in the quarter was that essentially a termination fee or was it more of a kind of a contract amendment fee.

Hey, Pete.

So.

Consider it the buy a buyout of a subscription agreement it was a customer.

Subsidiary of a larger company that kind of had a.

Really didn't deliver the performance they expect it to on their end or or they would have been able and they would not have been able to meet some minimum commitments to us and they were looking for an amendment.

So.

Effectively what they did is they at full value bought out the rest of the term of their agreement since will no longer be providing the service we had to book it all upfront.

Really not a reflection on that really not no reflection on Duck Creek, it's just a matter of how their business was going.

I understand.

Thank you and our final question comes from Michael Funk with Bank of America. You May proceed with your question.

Yes. Thank you for taking the questions a couple if I if I could so just going back to that to the sales cycle, you mentioned that the two different piece parts here, one being it head count second one.

Beat inflation.

I guess the first one is more internal right is there anything you can do as a company to affect or help that for for your customers to move the process along and then on the second one which is more external.

What's the level of confidence from.

Customer if you are in discussions with about that abating, and allowing them to move forward with projects.

Yeah on the first one trust me we are hard at work with our partners all of our delivery partners and systems integrators to make sure that we have all of the right staffing in place so that that is not a limiting factor and.

Look I think all of our partners from Accenture to cap Gemini to cognizant to many others you know there really.

Good at scaling their practices.

And doing what they can to have resources available and we work with them very closely and we continue to hire aggressively I think sometimes it just comes down to some core or critical roles within the carrier that they want to have in place and whether they're comfortable to begin a project or not and so regardless of things that we can do sometimes those things are out of our.

Control is.

And insurers not ready to start a project because they don't have the right business lead in place or something like that so.

Again, I think we're doing pretty well to work with our partners to make sure that that's not the issue but from time to time.

Have carriers take a more conservative approach and not start or delay a program.

And then on the second item just as it relates to profitability and the overall environment and what's happening with their decision making.

Like I said, we don't see them at larger broadly backing off of technology initiatives. You know in that is the evidence that we have through the pipeline and the strength of the pipeline and all the activity. What we have seen is just more meetings and taking a quick look at timing because of some of the results.

You know when we look at our fifth.

Fiscal year, 'twenty, one or calendar year 'twenty one for carriers.

The preliminary results as it.

It has a underwriting loss of over $4 billion. So.

They didn't have the underwriting profits that they've had in the past and they are seeing some pressure on that and it's just triggering new conversations, but I think I've said this on past calls whenever a carrier has to deal with some of these things changing prices.

Launching new products improving efficiency. It usually leads back to a technology conversation and we think that bodes well for Duck Creek in the long run for sure.

Sometimes it's just causing a temporary conversation around hey, let's get a handle around the short term effects before we launch its project and that's what we're seeing right now.

I understand thank you for that.

Thank you you mentioned that your pipeline is at or near record levels. So.

And obviously kind of there are a few deals that amount to a lot of potential revenue is there a way to quantify the number of deals that slipped.

The amount of bookings maybe that swept out of the quarter you thought were going to sign.

You know I think I'd, just be comfortable saying that perhaps it's around high single digit millions in that neighborhood Thats really advance that we would have liked to have had signed.

So I'd be comfortable stating that.

Okay.

And one more if I could just kind of bookkeeping on the on the one timer I know you said low single digits, but is there an exact number on the one time or for the quarter. Just so we can make a note in your models.

And just so you know where we are a we have a.

Actual compounds jollity provision, where we can't discuss discuss the exact terms of the amendment or the customer situation.

So we just wanted to check you guys have always wanted to give you something directional.

Okay. That's very that's very helpful. Thank you so much.

Sure.

Thank you I would now like to turn the call back over to Mike Jakosky for any further works.

Okay. Thank you everyone for joining us on our fiscal year 'twenty to Q2 earnings call and as I've said in my opening remarks, we continue on our journey to deliver on our mission to help transform the P&C industry through our continued adoption of our on demand SaaS platform. We had another meaningful tier one win at Tokio Marine as well as a new insure tech startup which continues.

To show that our SaaS solution is well suited for carriers of all sizes.

And finally I do want to again, thank many jafari for his partnership and his contribution to Duck Creek success and wish him well in his retirement he will always remain a very close friend again I appreciate everyone. Joining the call today, Thank you and take care.

Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.

[music].

Yes.

Yeah.

[music].

Sure.

[music].

Hum.

Uh huh.

[music].

Yes.

No.

Okay.

[music].