Q3 2022 Guidewire Software Inc Earnings Call
Greetings welcome to the Guidewire third quarter 2022 financial results Conference call.
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Austin and answer session will follow the formal presentation if.
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I will now turn the conference over to your host Alex Hughes, Vice President of Investor Relations at Guidewire Software, Inc. You may begin.
Thank you operator, good afternoon, and welcome to Guidewire Software's earnings conference call for the third quarter of fiscal year 2022, which ended on April 30th My name is Alex Hughes, Vice President Investor Relations with me on the call today is Mike Rosenbaum, Chief Executive Officer, and Jeff Cooper, Chief Financial Officer, a complete disclosure of our results can be found in our press release issued today as well as in our related.
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.
The conclusion of this call statements made on this call. Good forward looking months regarding our financial results product customer demand operations and the impact of COVID-19, and geopolitical events on our business and other matters. These statements are subject 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 and risk factors in documents, we file with the SEC, including our most recent annual report on Form 10-K, and our quarterly report on Form 10-Q to be filed with the SEC 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.
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 so with that behind US I will now turn the call over to Mike.
Thanks, Alex good afternoon, and thanks for joining us today I'm excited to begin by saying that Q3 was another great quarter for us we exceeded expectations on <unk> and revenue as we continue to see strong interest and momentum in Guidewire cloud.
We continue to make progress on our cloud product offerings and see demand from existing and new insurers all over the world, we serve customers and an industry that is remarkably resilient and that fact combined with our product momentum should serve us well through this period of economic uncertainty.
As most of you already know we serve the property and casualty insurance sector of $2 five trillion dollar global industry that sells a wide variety of essential products indemnifying individuals and businesses against all sorts of risks.
Many insurance products are non discretionary, which contribute which contribute to industry resilience during periods of economic uncertainty.
We serve this industry with mission critical indispensable systems of record sold in a recurring revenue model.
Most of our customers have been in business for decades, and some for over a century.
They have demonstrated an ability to weather down markets periods of inflation and periods of macroeconomic uncertainty.
This is an important and durable industry and I'm proud of the role Guidewire plays in supporting it.
And thankful for the stability it provides our business model.
In the third quarter, we continued to see strong sales momentum for Guidewire cloud with cloud again, comprising approximately 90% of our bookings we closed eight cloud deals in the quarter, bringing our year to date total to 24.
I was particularly pleased to see sustained cloud momentum with tier one and tier two insurers as larger insurers gain greater confidence in Guidewire cloud.
We added three deals at tier one insurers in the third quarter. This included Cincinnati Financial Corporation, a top 25 insurer in the United States as measured by DWP and the new Guidewire customer. We also added national indemnity as a new cloud customer national indemnity.
Is an existing on premise claim center customer and we are thrilled that they decided to modernize their policy and billing systems with Guidewire cloud.
The momentum we're experiencing with tier one customers is reflected in the fact that we've had a total of eight tier one cloud wins, so far this fiscal year.
We're also pleased to see this cloud adoption remained healthy and balanced across existing and new customers momentum with existing customers in the third quarter was driven by two more cloud migrations at both sand Tam and San Cristobal and for more cloud expansions Sam Tam is our first cloud.
<unk> in South Africa, and San Cristobal or first in South America. So it's exciting to see our cloud model and strategy continued to play out internationally.
We also added two new cloud customers.
Excluding previously mentioned tier one Cincinnati financial and a new insurance now customer.
Finally, I was pleased to see 20 deals in data and analytics during the quarter, including including two meaningful deals for science and another 18 for hazard as insurers increasingly seek better real time data throughout their policy and claims workflows. The hazard hub integration is going extremely well and we are seeing strong cross.
Sales success with hazard hub reflected both in the number of deals and also deal size.
Also in the quarter one of the largest reinsurers in the world adopted hazard hub.
Turning to our cloud deployment activity, we continue to see healthy progress in the number of go lives. These are large complex projects and with each successful deployment, we deepen our learning and expertise in the third quarter. We added five customer go lives, including four with insurance suite and one with claim center. This brings the total number of cloud.
<unk> to date 59 across insurance suite and insurance now.
In addition to our cloud deployments one of the largest insurers in the World went live with a significant line of business on policy Center as part of their self managed implementation.
As I said earlier Guidewire deployments are large and complex projects. So it's important that we fostered deep and talented partner community that can be leveraged across the growing number of cloud implementations and we continue to make great progress on this front the number of Guidewire cloud certified consultants increased 169% year over year.
Nearly 4400 as the partner community continues to align around our cloud first strategy. There are now 18000 total consultants from Si partners up 42% year over year that our customers can draw from.
Also continued to grow our valuable solution partner community, where we added eight new.
New solution partners this quarter, bringing our total to over $150 each new application on our marketplace enables our customers to more easily leverage innovation from across our ecosystem.
In Q3, we also launched Elysium, our fifth Guidewire cloud platform product release, it provides the flexibility and agility ensures needs to deliver innovation faster to their customers.
He and delivers new innovation supporting accelerated speed to market better risk insights and embedded insurance solution and an elevated developer experience.
Are all feeling great about our product momentum and our ability to establish this new release pattern with our cloud customers.
In summary, we're excited about our momentum heading into Q4, which is reflected in our guidance for the year, which Jeff will share on today's call, but I'll just add that we are pleased with the operational progress, we're making and believe we are positioning ourselves to drive profitable and durable long term growth we have a strong foundation.
<unk> and a stable customer base that is resilient to market fluctuations and a product that creates world class customer retention as insurers increasingly embrace cloud. The success. We have demonstrated to date sets us up to drive further cloud adoption from customer migrations expansions and new model.
<unk> and with that I'll turn it over to Jeff.
Thanks, Mike.
We had another strong quarter with <unk> and revenue ahead of our expectations third quarter IRR into that $637 million up 18% year over year or 17% on a constant currency basis.
Growth was driven by both new sales activity and deal ramps.
As a reminder, we report <unk> on a constant currency basis during the year and then updated currency exchange rates at year end.
If we were to adjust third quarter IRR for current FX rates than <unk> would have been $624 million as we have seen in the U S dollar strengthened since our fiscal year end.
Total revenue was $197 4 million ahead of our expectations due to stronger performance across all components of revenue.
<unk> strength continues to be visible in subscription revenue, which was $66 4 million up 49% year over year.
Subscription and support revenue was $86 9 million up 34% year over year.
License revenue was $53 9 million up 6% when compared to Q3 last year.
Services revenue was $56 7 million up 18%.
Services revenue has benefited from ongoing increases in the number of cloud implementation programs.
Turning to profitability for the third quarter, which we will discuss on a non-GAAP basis gross profit was $89 million.
Overall gross margin was 45% compared to 50% a year ago.
The year over year decline resulted from revenue mix shift towards subscription and support revenue and away from higher margin term license revenue.
Subscription and support gross margins were 44% compared to 42% a year ago.
And services gross margin was negative 2% compared to positive 10% a year ago.
To meet the high demand for cloud and to drive early success, we have made some investments alongside our early cloud customers.
This is also meant hiring additional services talent and while these new hires onboard and become billable.
Have used more subcontractors impacting services gross margins in the interim.
Additionally, we have entered into a number of fixed fee arrangements with customers and some of these projects have extended longer than originally anticipated.
Operating loss was $24 9 million.
This included a onetime charge of $3 million for a bad debt expense related to a Russian customer that had signed a multiyear term license arrangement.
Where we are no longer invoicing.
This bad debt expense expense impacted G&A expenses.
Adjusting for this operating loss would have been $21 9 million.
We ended the quarter with $1 $1 billion in cash cash equivalents and investments.
Turning to our outlook for the full.
For the full year fiscal 2022, we are increasing our outlook for IRR by $4 million to between 668 and $674 million.
This reflects our continued optimism in guidewire cloud market success.
As Mike notes, we sell mission critical software to a very resilient industry.
We have continued to see healthy demand in our attrition rate is less than 3% on a trailing 12 months basis and this includes the removal of $3 million in IRR from Russian customers in Q3.
The non discretionary nature of our platform provides strong durability in periods of economic uncertainty.
For our usual approach our outlook assumes foreign currency exchange rates as of the end of our last fiscal year.
For the last couple of years exchange rates have benefited <unk> at year end.
If current exchange rates remain unchanged, there would be a negative impact of approximately $13 million to our IRR at year end.
We are also increasing our outlook for total revenue, which we now expect to be between 794 and $800 million.
I am pleased to be able to raise this outlook, even with the backdrop backdrop of a strengthening U S dollar, which has had a negative impact on non dollar denominated revenues.
We expect our subscription revenue to be a threat to be a $3 million higher than prior guidance.
Due to sorry, we expect our subscription revenue to be $3 million higher than our prior guidance to approximately $257 million and overall subscription and support closer to $340 million, representing 52, and 35% year over year growth respectively.
Expectations for license revenue are largely unchanged and services revenue is now expected to be approximately $205 million.
We continue to expect subscription and support gross margins to be 44%.
Services gross margins are expected to be negative, 1% to breakeven and total gross margins are expected to be 49%.
With respect to operating income, we expect an operating loss of between $53 million and $47 million for the fiscal year and this reflects our updated services margin expectations.
And the impact of the bad debt expense that I, just mentioned, which is partially offset by higher revenue expectations.
There is no change to our cash flow from operations expectations.
As we look ahead to fiscal 2023, we are confident that we can continue to deliver mid teens IRR growth next year.
Total revenue growth in fiscal 2023 is expected to accelerate to 10% to 12%.
We also expected overall operating margin and cash flow cash flow from operations will grow off of the low point of this year.
We will give more insight into our expectations for fiscal 2023 on our Q4 earnings call and our analyst day event in early October .
In summary, we are pleased with our performance in the third quarter, our confidence is reflected in our higher revenue guidance for the fiscal year and we're looking forward to Q4, which is always a seasonally strong quarter for us.
Operator, we can now open the call for questions.
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One moment, please while we poll for questions.
Our first question is from Peter Heckmann with D. A Davidson. Please proceed with your question.
Hey, good afternoon. Thanks for taking my questions I wanted to see it certainly sounds like it and looking at the overall cloud deals.
Do you feel that your current.
Self managed customers are getting more confidence and youre seeing an acceleration of the self managed to cloud migrations or and do you think that will continue in 'twenty three.
Yes for sure I would say I don't know if I'd use the word acceleration. It's just building the confidence is building with the successful.
Implementations and go lives that's why we'd like to highlight those every quarter, we pay a lot of attention to that as does the customer base.
As the broader market.
So we're just we're growing in our in our confidence they're growing in confidence around us and this is.
I keep saying this quarter over quarter.
Certainly feels.
I like the word inevitable is more appropriate.
If when exactly these things fall in line and when the projects lineup.
Move to cloud is.
Time's, a little bit outside of our control, but certainly the success.
In the sales to date this year and especially those implementations gives us a lot of confidence going into next year.
Okay, Great and then when you when you talked about that preliminary commentary, maybe 10% to 12% total revenue growth preliminary for next year does that include.
Some sort of FX headwind, maybe 150 to 200 basis points.
Yes, I think Thats fair as we were kind of using current FX rates as we build up our forecast models. So that would include some headwind there.
Okay, great I'll get back into queue.
Hey, Thanks, a lot.
Yeah.
Our next question is from Dylan Becker with William Blair. Please proceed with your question.
Hi, Thank Bruno on for Joel Thanks for taking my question I guess on the fat.
Foreign perspective, just looking at the content like how much this platform build with getting this up to speed and the integration is ready for the different line of businesses.
Especially if you think about the global application.
Yes, it's a good question I guess I'll answer it less around specific lines of business and it's more around.
Our ability to prove out.
The upgrade thats normally associated with the migration to cloud.
Any kind of.
I don't know.
Redevelopment reconfiguration of those implementations that are necessary to get it to cloud.
And successfully get.
Get the use case whatever line of business. It is rolled out and supported on the product. The international side of this has a lot to do with our ability to run guidewire cloud in different regions all over the world that's what's behind.
<unk>.
The win that we talked about in South Africa.
So sort of that flexibility of the cloud operating model certainly helps us.
And so it's just building up now.
<unk> 50 of these production go lives.
Pretty it's pretty exciting to start to see this sort of experience build not just with us actually but also the partners.
And having the ecosystem start to get these projects under their belts and start to get that experience built into the.
Effectively sales cycles to convince new customers to make this move at.
It all certainly adds up and helps give us confidence so hopefully that answers your question.
No thats part if I could one quick follow up on apologies Youre, probably getting this one in time just about the overall macro environment, just what discussions are happening internally.
Earlier, you touched on like what you are hearing from copyright they've been through similar situations before I get to given the longevity on them, but.
New coming up anything important conversations that youre having.
Nothing beyond just the durability that we wanted to call out it was we've had a phenomenal year.
On attrition and Thats why we wanted to call it out in the prepared remarks, and I think it speaks to.
The use case that we support and the general durability of the customers that we serve.
I think everybody is looking at.
What does a period of inflation look like and how does that flow through the insurance industry and how does that relate to we think about how that does relate to guidewire, but a lot of there's a lot of controls and built into the system such that a.
Even if it is unfortunately, and hopefully not a prolonged period of inflation the industry will do well the industry will continue.
To support the use case it provides and we will continue to support the industry with the platform we provide so.
The conversations I'm, having are basically.
Can you can't ever say that this industry is immune from this.
Certainly watching it and dealing with it and adjusting to it but.
It isn't it is something that they will get through and that's sort of built to be built to be resilient. Despite the uncertainty that we that you see in the broader economy.
Alright awesome. Thank you for taking my question.
Thanks very much.
Our next question is from Matt Van Vliet with <unk>. Please proceed with your question.
Good afternoon, and thanks for taking my question.
Maybe Mike I'm curious on the Cincinnati financial net new deal. There if you could walk through maybe some of the key drivers for why <unk> selected and sort of what the.
The competitive process looks like they're either what you're displacing or maybe.
Was it the <unk>.
Normal sort of cast of characters on the competitive front, there and then sort of in line with that looking at maybe even the national indemnity choice to move to the cloud is there a different set of drivers there that are influencing the migration deals or are some of them very similar to the Cincinnati financial deal for example.
Yes.
Thank you for questions. Thanks, very much yes.
We're incredibly excited about the opportunity to partner with and serve Cincinnati financial.
It was a phenomenal organization big tier one insurance company. This is a claim center implementation and what we're replacing is it is effectively a 20 year old enterprise system Thats out of support needed to be refreshed and so they ran a process.
They ran an extensive process that looked at what was available.
We participated in all the gory detail of that evaluation and we're excited to have come out.
Like I said with the opportunity to prove it in real life.
To make the to make them one more successful claim center customer and in fact that day. The fact that we're now at the point, where these kinds of implementations are obviously going to cloud.
Is.
I think it's something that we should all be very very proud of endpoints and it is a very positive signal.
This was a cloud deal from the very very beginning.
We are excited about like I said, making sure that that's successful implementation for let's say 20 more years and maybe 40%.
So that was the Cincinnati financial.
When and.
On National Indemnity, we've talked about this in previous quarters.
It's great to be able to have a positive customer relationship in.
In the base case.
So that when a new component of the core system.
It's up for grabs so to speak in terms of modernization.
That we can compete for that successfully and we can prove ourselves for that other component of that company's architecture.
Yes.
I think that there is a lot of benefit to our product strategy around the insurance suite, we think that claim center and policy Center and billing center logically work together and that companies that see that.
Synergy between those products between the functionality across those products. The single vendor of the single approach to how it's going to run in the cloud how its upgraded how it's maintained how it's configured all of those things I think lend to a sort of a bit of a advantage we have.
In those types of in those types of opportunities, but again I would just say like this is a real exciting customer for us and we're excited about.
Getting to work on the hard stuff, which is the implementation and the eventual success. The successful go live of that.
Policy Center and billing center implementation. So thanks for the question.
Yeah, no very helpful and then.
I mean now that we've seen a number of quarters in a row now.
Close to 90% cloud mix and I think you mentioned over 50% Golar 50 customers live now.
Should we think start thinking about maybe a little bit nearer term of you.
Starting to maybe Shepard from customers with a little bit more influence to the cloud.
And maybe Jeff is there any way to think that we should see some reduction or a reallocation of resources on the.
The customer support side that will be.
To start winding down supporting so many number of versions out there or.
Or are we just not far enough along in that process, yet and we're still maybe a couple of years away from that being a meaningful driver to gross margins.
I guess I wont, let me take this first first half of this.
Want.
This to be all carrot no stick.
Appropriate way to describe this.
I think that.
We talked a lot about in the prepared remarks, how important these implementations are for our customers and we take that very seriously I think it's an important part of the brand its important part of the brand promise and it's an important part of what customers are buying when they think about building very often greater than a decade.
Long relationship with Guidewire so.
I really want to recognize that we do need to recognize that.
These projects are super complicated and Theres very often a whole bunch of things that are constraining, our company's ability to take on one of these transitions and so any attempt that we would have to sort of force. This issue.
I think I, just think it's detrimental for us in the long run.
So we want to create a really compelling product in the cloud we want to create an on ramp to the cloud by building.
And doing real engineering to facilitate that transition make it smooth and make it easy and make it as cost effective as possible, but I don't really want to push in terms of sort of supporting versions I really just think that it's part of the.
It's part of the implicit may be contract that customers have with Guidewire. This expectation that we will support them.
And obviously not forever, but as long as they really need us to.
So anyway, I don't know, Jeff could comment about how that will show up in the financials, but just strategically thats, how I feel about it and I think as we evaluate how this market is playing out vis vis our expectations to date, it's been pretty in line in terms of the momentum that we're seeing how we're investing to support that momentum our product organization is constant.
Investing in making our platform more scalable to allow us to handle more and more of these customers and as we do that.
We can add customers without adding the same levels of head count that we've had.
Previously so all of this is largely playing out in line with our expectation is certainly a little bit of a delicate balance navigating the early part of this journey, because how complex and how.
Just all encompassing some of these projects are and our ability to kind of manage those continue to add efficiencies to the platform. So that we can scale that but it's playing out in line with how we expected which is a which is a positive thing.
Alright wonderful things for the insightful answers.
Thank you.
Our next question is from Rishi <unk> Joey.
<unk> <unk> with RBC capital markets. Please proceed with your question.
Hi, This is Richard calling on for Richie Deloria, Ed. Thanks for taking my question.
In the context of just.
The macro backdrop I know you guys have gotten a lot of questions on that but I'm just curious.
On your ability and willingness to use the inflationary environment as a source of maybe pricing leverage.
Maybe how that's considered in some of these.
Gration contracts and renewals in general.
That's what I can comment quickly on that.
So we enter into very long term relationships with our customers and.
Our customers view this as a decade, plus long relationship and so our contracts tend to be negotiated.
For long term surety now there are certainly avenues within our contracts that.
We can.
Make sure that we're not falling behind in inflationary environments.
But it's not something that we would expect to kind of weave through our pricing annual renewal cycle like.
As our customers take a very long term approach to this now.
We generally price our software on direct written premiums, which does grow along with the industry.
And so we think we are well protected in an inflationary environment, but not necessarily something that we would capitalize in a in.
And our pricing increase cycle.
And so another way to think about another way to think about this with respect to DWP and inflation is.
As inflationary pressures cause claims to go up.
Over time that will be reflected in premiums in DWP going up which over time will be reflected in guidewire pricing.
So it is all tied together it doesn't exactly play out quarter over quarter, but it does play out I think and expect year over year, and so that sort of.
Sort of protection to inflation is to some degree built into the model at Guidewire.
Got it that's super helpful.
And then on.
Just.
One on the data and analytics products saw another strong quarter 20 deals similar to last quarter.
<unk> hazard habitat I think last quarter you mentioned.
Yes, I think is around six or so the hazard had deals around over 100 K last quarter.
To see the same size.
Deals on that front and then can you just maybe.
Give a little bit more color on what the land and expand motion tends to look like on that data and analytics product side of the business.
Sure Great question, Yes, so we do continue to see.
I would call it very healthy.
<unk> sizes. This is something that we're very excited about with respect to hazard hub and we did see some healthy deals in the quarter.
Chose not to call it out in a specific count like we did last quarter, but.
We are still seeing those those healthy deal sizes and so in addition to this being a sort of business, that's maybe a bit sort of youth usage and demand driven we're also seeing with the direct sales approach and the relationship. The Guidewire has with large insurance companies and like I called out in the remarks, a large reinsurance company the <unk>.
<unk> to manufacture.
Pretty big deals that were very very excited about them with respect to use cases Im glad you asked this.
As I said kind of in the.
And the sort of narrative.
We really see data and analytics as a core part of our business workflow and insurance.
You can think about every single step in an underwriting workflow every single step in our claims workflow you can predict those steps you can use data to make to allow people to make better decisions you can use data and analytics to automate steps and drive better efficiencies.
I really think the industry is just getting started unlocking the potential for.
Better smarter faster insurance, but also just more efficient.
Underwriting and claims operations using data and analytics and so.
The hazard hub, we called out hazard hub, just because of the.
Position that is growing in importance for us strategically, but we also have a product called predict.
<unk>.
It's completely embedded.
With insurance suite, such that we can extract data out of the insurance suite core products build models using the predict platform and then inject the results of those models back into the workflows that are running in claim center and policy Center.
That use case across the 30, some lines of business that we havent production in the sort of let's say, let's call. It.
A few dozen specific analytics models and predictions that we can make that's just a natural thing for us to be talking to customers about either around what you should be doing when you initially deploy guidewire or how can you be getting more value out of your installed guidewire incidence and the investment that.
<unk> already made in Guidewire. So we're real excited about both of those products as they relate to.
As they relate to that sort of cross sell and connections to the core business opportunity. So anyway. Thanks, So hopefully that helps.
Really appreciate the question.
Yes. They were helpful. Thank you.
Okay.
Our next question is from Tyler Radke with Citi. Please proceed with your question.
Hey, Thanks for taking the question. So you called out the strength in data and analytics and I think one of the things we saw at Guidewire.
The conference last year was the.
Some of the product releases around autonomous claims some of which you're working on with partners I'm curious to what extent.
That was the driver in the quarter and then just how much do you think the overall environment around labor cost issues and just companies looking to reduce cost is helping on the data analytics and autonomous side. Thank you.
Yes, great question.
Tom is.
The way how you think about it is it's a great vision, it's a great direction and its a great goal, but it's not something that you achieve in a single step there is no sort of magical model that we're going to deploy that is going to make everything autonomous instead, what's really the way. This is really going to play out is this is going to be.
A concerted effort on.
From Guidewire from partners, both on the application side and the implementation side and customers just working hard day. After day after day to identify areas that can be automated and building out those rules and those analytics and machine learning models to facilitate those rules running them in testing.
And getting more and more efficient over time to where eventually I think you can you can see a day in which things are largely autonomous maybe not completely <unk> because.
One of the things, we always talk about whenever we are <unk>.
Discussing this with insurance executives is very often when you have had a catastrophe and your houses flooded or your roof has blown off it's pleasant to talk to somebody in an insurance company is going to tell you that everything is going to be okay, and theyre going to walk you through the process for managing that so there is always a human part of this but I do.
The industry in general really sees that this this sort of drive to operating efficiency as possible, what's driving it I think yes labor cost is certainly part of it.
Also think that just technically it's much more possible much more feasible now theres a whole bunch of different platforms and tools that are available. These days they are probably they were.
Arent, there 10 years ago. They werent there five years ago, they're there now and so the potential to do this exists.
And I also think that.
Part of it is you've got to do the hard work first especially on the claims side.
You have to do the hard work one of them.
Of getting to a system like guidewire getting to a modern platform with structured data with a.
With a modern application CERN that Hasnt integration framework that enables you to be able to build these systems that.
That can be automated and so now that I think the industry has put in a lot of.
At work.
Guidewire I think we have 200 over 250 implementations to claim center, either self managed or cloud. So now now that work's done and that sort of space is created to automate it.
It creates a lot of potential for this.
<unk> future.
So yes labor is driving its potential is driving it.
Operating cost is driving it competition is driving it.
Probably you can tell from the tone of my voice, it's exciting to be a part of it but I think the last thing I just want to repeat that it's not going to be sort of magic button that we press that makes the whole world of autonomous it's going to be a whole lot of hard work over years.
Little by little going to really improve the operating efficiency of the insurance industry.
So does that help.
Yes, that's great.
Glad to see the enthusiasm and excitement.
Maybe one for Jeff. So you talked about a few moving pieces just on the gross margin side and operating margin side.
And then you gave us some good.
Preliminary comments for next year I guess as we think about those comments do you feel do you still feel like Youre tracking to kind of your mid term targets are.
Are these these kind of one off issues in the.
The expense side of the equation that you think go away or.
Are these kind of something that we should be thinking about in terms of headwinds.
Mid term targets.
So the items we mentioned.
On the call are more transient rates, so we talked a little bit out lower services margin this quarter and our expectations for the year. We think that is confined to some of these investments that we're making with these early cloud customers. These are really critical investments for us to make.
Our longer term model it assumed that we would drive towards a more normalized services margin and I don't think theres anything that it gives us pause that we can't continue to see that the other item that we called out.
That was a little bit unique in the quarter was the bad debt expense related to.
<unk>.
The Russian customer that had signed a five year.
Term license arrangement, but was paying us annually and we're obviously in the longer collecting that so that flowed through through G&A expense. So those are the two things.
We highlight both of those.
My opinion don't have any longer term impacts those are kind of more.
More to this to this fiscal year and then.
We're doing a lot of work right now as we're thinking around next year budgeting and impacts on the ERP.
We're feeling like that work is very productive and we will update folks in a more material way.
But as we think about the longer term potential it's still very consistent with how we thought about in the past.
Thank you okay.
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<unk> total indicate your line is in the question queue.
Our next question is from Michael <unk> with Wells Fargo Securities. Please proceed with your question.
Hey, there thanks.
Thanks, Good afternoon.
You referenced the resilience of the customer base.
The macro backdrop.
<unk> is clearly changing a bit youre talking about FX and some of those things, but still providing a preliminary outlook for 10% to 12% growth.
For next fiscal year here in Q3, we haven't seen those growth levels from the company in a number of years. So maybe you can just expand on the visibility you have.
What's assumed in what informs that initial outlook for next year here currently.
Sure happy to do it and it is our typical cadence to provide an early look we understand that our business is complicated to model and so helping people with a little bit of an early look into next year is consistent with our typical cadence I think there is.
The biggest the most important thing is just the continued growth and durability of the subscription revenue line and as that grows.
And becomes a more meaningful part of the overall revenue mix that will inform and help us drive to the levels that we talked about on the preliminary FY 'twenty three outlook.
There are some other dynamics and this year in particular that made for difficult year over year comparison on the license revenue side license revenue will continue to decline.
Our expectation is just maybe not at quite the same levels that we're experiencing.
This year due to some some factors and then as we look ahead to next year, we are seeing healthy demand on the implementation side and the delivery services side and so we are expecting to see a bit of growth there.
Not too too much not too much not more than the overall revenue growth, but maybe.
Maybe a little bit more than what we're seeing this year and so that's kind of how we put it together and then the visibility into that is we just continue to see steady and growing demand with the cloud deals.
As you know a lot of these deals have significant ramps associated with it we've seen our overall our attrition rate come back to historic levels, which are.
Best in class and so all of that gives us increasing visibility into this model and how it is going to play out.
That's all very helpful.
So reference the balance sheet with more than a $1 billion in cash.
Does the current market environment at all change how you think about capital allocation are there areas of insure tech that could prove out at in purchased other levers you're thinking about.
Just given your durable position in some of the changes we've seen in the market environment.
Yes, it's a great question and we're certainly paying close attention to it.
And I think we are.
We're happy with that.
Flexibility that the cash position affords us.
We.
I've said, a number of times that the more confidence that we have in <unk>.
Our cloud.
Product and the ability to move their customer base to the cloud product builds the potential for us to expand into new product areas and so we're feeling good about that I wouldn't I think that overall.
Overall macroeconomic conditions multiples things like that obviously has an impact on.
On potential.
Strategic activity.
But it will mostly be that's mostly driven by what's a logical and strategic fit for guidewire and so we feel good about the cash position and the flexibility that it offers.
Our.
Really feeling better and better every cycle around cloud maturity and our ability to execute on that baseline.
Component of the company.
Thank you.
Yes. Thank you.
Our next question is from Joe Goodwin with JMP Securities. Please proceed with your question.
Oh, great. Thank you for taking my question and congrats on the quarter.
During the Elysium announcement are you sure that Guidewire, managing 30 billion records in 135 terabytes of data and you're in your daily.
And that's expected to grow to $60 billion and 300 terabytes, respectively by the end of the year.
Let's obviously exponential growth of data there, but just whats driving that and then two how should we think about that in relation to demand for your data analytic solutions is there any correlation there.
Yes, great question.
Yes.
Part of the switch to Guidewire cloud platform.
One of the key components of this is this data lake that you touched on.
This is it this is a significantly different approach to data and analytics for our core customer.
Use cases, then is probably traditionally deployed as part of our.
A core system implementation.
Were streaming every transaction out of the insurance, we instances to this data lake.
Which creates a lot of records.
Everything every single time, something changes, we stream that information to this data lake and that effect that makes it available.
For a company to analyze either immediately here.
10 years down the line right that transactions available to them. It can be analyzed it can be utilized to create an analytics that can be then used to operate the company more effectively.
One way to think about it is that you don't often know the <unk>.
Or analysis that you want to be able to do.
And so taking this approach.
He sort of sets you up to be able to do whatever sort of analysis do you think of on the data this year as old right. So this is an exciting component of the cloud platform and something I think customers are interested in.
Not just for today, but out into the future as the as the use cases for analytics increased with respect to.
The analytics product offerings, absolutely they are connected.
We think that the more.
Transactional data that we make available to customers and to our predict platform. The more benefit and positive use cases that we will be able to build and sell into the customer base and so.
I think that it's more of an opportunity that will build over time as we get more and more of these companies to the cloud, but it is an important part of the long term product strategy.
Yes, thanks for the question.
Thank you.
We have reached the end of the question and answer session and I will now turn the call over to Mike Rosenbaum for closing remarks.
Hey, Thanks, very much I want to thank everybody for participating on the call today.
Obviously thrilled with our continued cloud momentum across new and existing customers and with tier one and tier two insurers its a great validation of the strategy and it gives us increasing confidence in.
In the long term opportunity here at Guidewire, So look forward to catching up with many of you throughout the rest of the quarter otherwise we will see again on the Q4 call. Thanks very much.
This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.
Okay.
Goodbye.
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