Q3 2022 Duck Creek Technologies Inc Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial stolen.
[music].
Yeah.
For standing by and welcome to Duck Creek Technologies third quarter 2022 earnings call. At this time, all participants are in a listen only mode.
After the speaker presentation, there will be a question and answer session.
I ask a question during the session you will need to press star one on your telephone.
Please be advised that today's call is being recorded.
Now I'd like to hand, the call over to Brian .
Please go ahead.
Good afternoon, and welcome at Duck Creek Earnings Conference call for the third quarter of fiscal year 2022, which ended on May 31 on the call with me today is Mike Caskey Duck Creek, Chief Executive Officer, and Kevin Rhodes Duck Creek, Chief Financial Officer.
A complete disclosure of our results can be found in our press release issued today.
Available on the Investor Relations section of our website.
Today's call is being recorded and a replay will be available following conclusion of the call.
Statements made on this call may include forward looking statements regarding our financial results products customer demand operations.
Impact of COVID-19 on our business and other matters.
These statements are subject to risks uncertainties and assumptions that 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 as of any subsequent date.
You should not rely on forward looking statements as predictions of future events as actual risks 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 that cause such differences appear in our press release.
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 with the primary differences being stock based compensation expenses.
Amortization of intangibles and change in fair value of contingent earn out liability and the related tax effects of these adjustments.
With that let me turn the call over to Mike.
Thank you, Brian and good afternoon, everyone. Thanks for joining us today to discuss Duck Creek third quarter results during the quarter, we signed multiple wins with new and existing customers, who recognize that leveraging duck Creek industry, leading SaaS of course systems can deliver significant operational improvements that create substantial.
Business value.
On today's call I'll highlight some of these key wins provide an update on market dynamics.
And also provide an overview on pre Max out and exciting and strategically important acquisition that we announced yesterday.
Let me start with a quick overview of our financial results for the third quarter. We reported total revenue of $72 4 million up 7% year over year.
And this was underpinned by subscription revenue, which is our revenue derived from SaaS of $38 million up 13% year over year.
Our annual recurring revenue or <unk>.
Was $155 3 million, which resulted in 25% growth over the prior year.
And we delivered our 14th consecutive quarter of profitability with adjusted EBITDA of $2 $4 million.
From a new sales perspective, we closed several important deals in the quarter one with a notable global tier one insurer. However, the sales environment in the third quarter was similar to what we saw in Q2. The PC market continues to face some near term uncertainty as our customers and prospects navigate the complex cross currents of rising inflation.
Political uncertainty and in some cases staffing challenges.
Last quarter I told you that my confidence in the business was driven in part by the number of deals at the most mature stages of our pipeline.
<unk> deals, where we have won the technical decision and agreed on financial terms that still remains true. We closed a few of these deals in the third quarter, but as we experienced throughout the year. Several deals that were targeted to close in this quarter were pushed out in a similar manner.
With the growing maturity of our overall pipeline I remain bullish on our future prospects.
<unk> confident that the current spending environment will be transitory and that we will begin to sign more of these deals in our pipeline. However, we do not expect sales cycles to normalize until fiscal 2023.
Importantly, our demand generation efforts continue to be very strong and we're pleased with the level of interest in the market from carriers of all sizes for our SaaS platform Duck Creek on demand.
I spoke to a number of CIO is during the quarter and their appetite to invest in digital transformation projects has not changed they understand their long term competitive positioning requires investing in flexible scalable and intuitive cloud core platforms.
How are the employees to provide better products and a higher level of service to their customers.
So while the interest and the capacity to invest remains very healthy customers are being mindful on the timing and scope of new projects as they adapt their business to recent market conditions. The P&C industry has a long track record of performing well through economic cycles and due to the fact that insurance is not considered a discretionary expense for families.
And businesses, we do expect that the insurance industry will remain strong despite today's uncertain economic climate.
One other dynamic that I would point out to you in our results for the quarter was a SaaS fee contract adjustment with an existing customer.
This insurer has faced significant challenges in its business, primarily due to specific dynamics and their target end markets. As a result, their book of business declined by more than 50% in recent years. We have worked with this customer to adjust the size of their contract that lowered the amount of capacity in the coming year and better reflect the current business requirements.
This adjustment drove a reduction in our IRR of nearly $2 million during the quarter with a contract does provide the future possibility for expansion there.
Their business outcomes were to improve.
<unk> pricing our business off of DWP is a benefit to Duck Creek and drive incremental growth, but occasionally.
Situations like this may arise.
Can tell you this customer is very happy with our performance of our platform and our commitment to their success.
Like to highlight some of our key wins in the quarter, which reinforces our success in the market.
First we expanded our relationship with a leading tier one P&C insurer, who will now be deploying decorate policy on demand. This strategic deal will enable them to provide a modern flexible underwriting platform for the global specialty business.
We are excited to extend our relationship with this tier one insurer, who has an existing duck Creek on demand claims customer.
This is an important win for decorate that shows how our on demand suite meets the needs for some of the largest most complex insurers in the industry and it also demonstrates that we have multiple avenues to engage with customers and create value with multiple on demand SaaS solutions.
During the quarter Duck Creek also signed our first large Canadian distribution management deal with STI, a $2 billion multiline P&C carrier across five Canadian provinces, and who also provides government mandated auto coverage in Saskatchewan.
<unk> chose Duck Creek distribution management to more effectively manage their network of independent brokers and issuers by streamlining relationship management performance metrics compensation changes and self service with their strategic distribution partners.
An area, which we are beginning to see more traction is migrating duck Creek on premise customers to the cloud.
This quarter, we signed another cloud migration deal with Hollered insurance, a leading Australian carrier power.
We will upgrade their core policy billing and rating Duck Creek on premise installation to Duck Creek on demand.
Jan providing market, leading cloud based core systems.
<unk> proved to be a perfect fit to integrate hollywood's existing and new ecosystem partners as well.
Cited to be part of hollered solution of choice to modernize our underwriting service and support technologies using Duck Creek on demand.
Another notable win for Duck Creek, and one of the largest deals of our quarter with a full suite on demand win with a mid market personal lines insurer that has roughly a $500 million book of business and written premium they chose that creek for our ability to significantly improve their back office insurance operations and seamlessly integrate their chosen insure tech.
<unk> as well as our ability to support their agent distribution and direct to consumer business models with a leading digital experience.
Thrilled to partner with this forward thinking carrier and to help them deliver a digital first highly personalized insurance experience for their policyholders.
We continue to see further adoption of our solutions from industry, leading insurance carriers. In fact, we achieved a major milestone for the company. This quarter, surpassing 1000 go lives across the Duck Creek suite since we began tracking this statistic in 2012.
These wins and with a high level of demand we are seeing in our pipeline are ultimately driven by the superiority of Duck Creek on demand cloud native low code platform.
And while the technical sophistication scalability and security of our platform are important differentiators what customers are most drawn to is our ease of use.
Spent years engaging directly with business users and our customers to develop an intimate understanding of their roles and responsibilities and what they need from their core systems to be successful.
What we learned is that no two carriers are alike. Each insurer has their unique strategic priorities and way of doing business. So we built a platform that cater to the various ways. They wanted to work rather than building a platform that require them to work a certain way well that sounds obvious in reality, it's very hard to do in our industry.
And we hear from customers consistently the Duck Creek and demand lets them innovate faster service clients more efficiently and deliver better topline and bottom line results.
An important part of our strategy is expanding and deepening our partner ecosystem. We recently expanded our strategic relationship with Microsoft with our announcement that Duck Creek on demand is now available in the Microsoft Azure marketplace.
This provides P&C carriers of all sizes and opportunity to capitalize on their existing Microsoft Azure consumption commitments and.
And more easily take advantage of Duck Creek solutions.
And we're thrilled that Microsoft has chosen Duck Creek as a winner of their 2022, Microsoft financial services partner of the year and as such an honor to be recognized for our outstanding customer centered innovation and for leveraging the Microsoft Azure platform.
Through this partnership we are modernizing the insurance industry in delivering a new standard of agile intelligent and evergreen solutions.
It's not just our customers and partners that are recognizing the strength of our solutions.
A leading research and advisory firm recently gave highest honors the Duck Creek claims solution based on both our advanced technology and breadth of functionality and importantly, so let's rankings are based on customer feedback, which noted improving customer satisfaction increased efficiency of operations and reduced loss.
Cost from deploying Duck Creek claims on demand.
Building upon our product leadership and expanding the capabilities of our platform is a key priority for us to that end. We are thrilled to have entered into a definitive agreement to acquire <unk> XL and compliance which is a carve out from premise solutions.
This transaction positions Duck Creek as a leader in the reinsurance market.
This acquisition is strategically important for Duck Creek, and <unk> XL delivers on two key priorities first it significantly expands our portfolio of non core system solutions into reinsurance a sizeable market that is ripe for modernization and is currently transitioning to cloud based solutions.
This acquisition provides a broader foundation for our international strategy. The Premix Zell organization is based in France and has relationships with more than $35 nine U S insurers around the world as I have said in prior calls pursuing acquisitions that would accelerate our international expansion plans has been a key priority for Duck Creek and this transaction.
<unk> achieved that goal.
<unk> has developed a fantastic multilingual multi currency SaaS platform for reinsurance that is deployed at a number of leading insurers around the world, including Axa Beasley, Covia, FBL QB and state auto among others.
Reinsurance for those who are not familiar is a key risk management strategy in the insurance market, where an insurer seat part of its insurance liability to another insurer or specialty reinsurer to help insulate itself from concentrated risk segments or major claim events.
This is a complex market that required a platform that can digitize complicated multifaceted reinsurance contracts and support the detailed tracking of catastrophe and financial accounting transactions related to those contracts.
We believe <unk> is a premier reinsurance SaaS platform in the world and opens up parts of a carrier's budget that were not previously addressable by that crude.
We expect this transaction to close later in this quarter I want to congratulate the premix Alan compliance team for the incredible job they've done at solving some of the most difficult problems facing the insurance industry.
Look forward to welcoming all of you to the depth Creek family and I am incredibly excited about the possibilities ahead as we come together.
We also continue to strengthen our management team and board of directors. We are thrilled to have recently added two outstanding executives to our leadership team, Jeff <unk> joined US as Chief product Officer, having previously held senior positions at zoom info in UK G and Rohit Betty will be joining Duck Creek in early July as our new chief revenue.
Officer after serving in leadership roles over the past 25 years that metric stream cognizant peoplesoft and stable.
Chasse and Rohit bring a wealth of enterprise SaaS experience of Duck Creek and will be instrumental in our future success.
I'm also thrilled to welcome Sunil Roger <unk> to our board of directors. So Neal is the president and CTO of mind body, a leading technology platform and consumer marketplace for the fitness wellness and beauty industries and previously held senior engineering roles at ebay and lithium technologies.
<unk> extensive product development experience will be an invaluable addition to our board.
Before I turn the call over to Kevin Let me just finish by reinforcing the strength of the customer conversations we are having we continue to see very high levels of interest and commitment to core systems modernization and ultimately we believe the P&C industry. We will continue to make technology core modernization investments to help streamline their operations as insurers.
To adapt to rising inflation and interest rates.
Duck Creek is in a great position to benefit from this trend as carriers look to transition their core systems to the cloud which is still in the early stages.
With that I'd like to turn the call over to our new CFO , Kevin Rhodes, who will walk you through the numbers in more detail as you know Kevin join US in April he has hit the ground running and has brought great energy and ideas to the team I am thrilled to have him onboard Kevin over to you.
Thanks, Mike I wanted to start off by saying that I'm thrilled to be part of Duck Creek.
I joined because I'm passionate about that creek's purpose to provide leading technology solutions to the P&C industry and the great opportunity we have to build a much larger more profitable company over time I'm really excited to close on the Premier acquisition and believe it will add a lot of shareholder value now and in the future.
Today, I'll review, our third quarter fiscal 2022.
Our results in detail and provide guidance for the fourth quarter and full year of fiscal 2022.
Total revenue in the third quarter with $72 $4 million.
Up 7% from the year ago period.
Within total revenue subscription revenue, which is comprised solely of subscriptions to our SaaS products was $38 million.
Up 13% year over year in.
In the third quarter subscriptions represented 81% of our software revenue at 53% of our total revenue.
Revenues from on premise software licenses of $2 9 million.
And maintenance of $6 million or 12% of total revenue.
Services revenue was $25 4 million.
Down 1% year over year.
Services revenue was lower than expected in the quarter, primarily as a result of the delayed software bookings Mike described earlier.
Yes.
Which we calculate by annualized recurring subscription revenue recognized in the last month of the period was $155 3 million as of May 31.
Up 25% from the prior year.
As a reminder, SaaS AAR as a snapshot in time subscription contracts that are generating revenue during the last month of the period. It can be impacted by timing as mine as Mike mentioned <unk> reflects the impact of approximately $2 million decrease related to a contract adjustment that we had with.
The particular customer.
SaaS net dollar retention as of May 31 was 112, 3%, which was in line with our historical levels.
As a reminder, our net retention is driven by a combination of high gross retention rates sales of new products into 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 provide a reconciliation of GAAP to non-GAAP financials in our press release.
First on a GAAP basis, our gross profit for the quarter was $43 million and we had a loss from operations of $4 $7 million.
We had a net loss in the quarter at $5 8 million or <unk> <unk> per share based on a weighted average basic shares outstanding of $132 5 million.
Turning to our non-GAAP results.
Gross margin in the quarter was $42 4 million.
Our 58, 6% compared to 62, 2% in the third quarter of fiscal 2021.
Subscription margin in the quarter was 65, 5% as we 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.
Our professional services margins down to a more sustainable level in the <unk> in the high Thirty's has been a goal for the company.
Turning to operating expenses R&D costs were $13 7 million or 19% of revenue up one point year over year as a percentage of revenue.
We currently expect R&D spend as a percentage 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 in our SaaS platform.
Sales and marketing expenses were $13 1 million or 18% of revenue from 16% of revenue in the prior year period.
The year over year increase was driven in large part by hosting our formation user conference in person. This year, we expect to continued sales and marketing spend as a percentage of revenue for the full year to remain consistent with data fits at fiscal 2021.
G&A expenses of $13 5 million.
Our 19% of revenue down from 21% of revenue from the prior year period.
G&A remains the most levered to oil area cost area for us and it's declining as a percentage of revenue in line with our expectations.
Adjusted EBITDA for the third quarter was $2 $4 million, which was ahead of our guidance.
Adjusted EBITDA margin was 3% for the quarter compared to 8% in the prior year period.
This represents our 14th 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 <unk> based.
Based on approximately 134 million fully diluted weighted average shares outstanding.
Turning to the balance sheet and cash flow, we ended the quarter with $365 million in cash cash equivalents and short term investments and we remain debt free.
Free cash flow was $16 5 million in the.
Order compared to $6 6 million.
And the prior period quarter.
We had a particularly strong cash flow quarter, driven by strong collections in the period.
And with that I'd like to finish with guidance beginning with the fourth fiscal quarter. We expect total revenue of $72 8 million to $74 8 million subscription.
<unk> revenue of $36 7 million to $38 2 million.
Adjusted gross margins are projected to be 58, 5%.
Nine 5%.
We expect adjusted EBITDA of $3 million to $5 million.
Our non-GAAP net income is expected to be in a range of $1 $4 million to $3 4 million or $1 <unk>.
On a non-GAAP EPS basis.
For the full fiscal 2022 year, we are updating our guidance to the following.
Total revenue of 295 million to $297 million since.
Subscription revenue of $150 million to a $151 5 million.
Adjusted gross margins are projected at 58, 5% to 59, 5%.
We expect adjusted EBITDA of $20 5 million to $22 $5 million and.
Our non-GAAP net income is expected to be in a range of $12 million to $14 million.
We're nine to 10 per share on a fully diluted basis.
As you think about our guidance there is a couple of things to keep in mind.
Professional services revenue is expected to be flat to slightly down from Q3 levels are.
Our professional services performance in the second half of the year reflects a couple of things.
Lower than expected year to date software bookings and a lower attach rate of professional services to those bookings that slowed our rate of growth in our services bookings backlog.
And we continue to push more of our non strategic professional services engagements.
Our system integration partners.
In terms of subscription revenue our updated guidance reflects the following the cumulative impact of the year to date bookings performance.
And approximately $500000 decline in revenue sequentially related to the contract adjustment Mike discussed.
An assumption that we've recognized little revenue from in quarter bookings and lastly, we have taken a conservative approach to revenue guidance by excluding approximately $600000 of subscription revenue related to a couple of customers that are facing similar business dynamics as the two customers we discussed.
On our most recent earnings calls.
Matter of Prudence, we have reflected this in our revenue forecast. This will be a focus area for me in the fourth quarter to wrap up definitely continues to be well positioned to benefit from the trend towards technology modernization and the global P&C industry, our acquisition of premium <unk> and premier compliance expand.
And the capabilities of the Duck Creek on demand portfolio.
Significantly accelerates our global expansion efforts, we are confident in our ability to deliver on our long term financial and operational objectives.
With that wed like to open up the call for Q&A operator.
Thank you again to ask a question at this time. Please press star one on your Touchtone telephone again Thats Star one on your Touchtone telephone to ask a question.
Please standby, while we compile the Q&A roster again Thats star one to ask a question.
Okay.
Our first question comes from Lane Parker of Stifel. Your line is open.
Yes.
Hi, Mike and welcome Kevin.
This is Matthew kicker for Parker.
You mentioned the lengthening of the sales cycles continued into this quarter I'm. Just curious what are some of the key reasons the customers and prospects are citing for those deal delays.
Hi, Matthew Thanks.
Look I think what we're seeing is carriers are faced with some additional challenges in their business, obviously theyre looking at the macro uncertainty.
And how they're going to adjust their business for some of the rising inflationary environment that we're seeing.
And that's a lot of change for them to take in so what we are seeing is that customers are still committed to technology projects and moving forward, but theyre exercising some more caution in terms of sizing deals.
Signing deals.
We're just finding that that's resulting in some delays with the buildup of our pipeline. So we feel good about the pipeline. It's just the timing.
Aspect that were.
Adjusting our guidance for.
Okay.
Got it and then secondly.
If we could touch on the acquisition of three months.
Specifically, how you think the premium acquisition would accelerate your go to market efforts in the European region, and what synergies you see between their offering and Youre Duck Creek platform right now.
Thanks, Matthew we think it's obviously, a great acquisition and a great add to our portfolio, adding reinsurance is great and reinsurance is something that is used by carriers globally.
And in terms of the European aspect of it.
They have over 35 customers that are outside of North America. They are based in Paris. So they have a sales team and a sales motion calling on these carriers and then also gives us a really nice non U S installed base as I mentioned my prepared remarks, they have some global international carriers like <unk>.
In <unk> and we know that this will further our relationship with them and be an opportunity for us to engage in further discussions on other duck Creek on demand assets as well.
Got it thank you very much.
Thank you. Our next question comes from <unk>.
RBC capital markets. Your line is open.
Hi, This is Richard Cohen on for Richie Deloria, Thanks for taking my question.
First one for me just on the.
600000 that is assumed in the full year guide for customers facing.
Similar dynamics to the two customers the one who downsized the contract and the one who bought out a contract last quarter.
Can you just help walk us through the logic there in terms of embedding that in the guidance and is that part of I guess ongoing discussions with those customers in terms of downsizing contracts or any color you could give around that would be great. Thanks.
Sure Richard.
It's Mike I would just say that.
We had some inbound requests because we have a similar situation now I do want to highlight that we have contracts in place and we feel good about those contracts.
But as I said in my prepared remarks, having DWP based pricing is in the long term, it's very good for Duck Creek, because we're facing some of this uncertainty in the market carriers are looking at their overall capacity needs and they're just bringing in some inbound questions.
And as Kevin is getting his arms around some of these inbounds, we've decided to just be a little bit more conservative in the guidance that we're putting out in Q4.
Got it Super helpful. Thank you and just as a follow up.
In terms of what you've seen from the pipeline and it's good to hear the pipeline still looks strong in terms of.
Kind of the deals in there and no slippage it sounds like or I guess last scales, but could you help us understand.
For the customers that youre hearing some.
Pause for.
Is it particular to any segment of the market. So maybe it's some of the smaller insurers or maybe tier one tier two is seeing some of that.
Just kind of delay and deal cycles, but just any color in terms of the bifurcation across customer segments would be great. Thanks sure sure and we are seeing some more conservative patterns from carriers of all sizes.
Although we are seeing some deals get signed and we did get some nice deals signed in the quarter.
But I would say that the difference in terms of tiers of carriers is really not a slippage because we're seeing that across all tiers, but I would say that the tier ones are being more conservative in terms of the size of the deal. So if we look 12 months ago quite often carriers would have a larger commit.
And I think in the current environment Theyre really looking at what are their immediate needs and doing a more focused project around perhaps launching a line of business or doing something.
As strategically important for the organization, but not committing multiple years in advance now we still think thats good for Duck Creek, because if we.
Go with a smaller contract as an initial contract we know that there is plenty of upside.
Selling motion and opportunity for us in the future and with the tier one that we did announce on the policy side, we saw something similar to that where we're helping them with a specific line of business, but we know that upon our success there will be future opportunities for Duck Creek within the account.
Great. Thank you.
Thank you. Our next question comes from Bill <unk> Becker of William Blair. Your question. Please.
Hey, guys. Thanks for taking the question and I just wanted to maybe double click you guys called out some of the same kind of macro headwinds and near term uncertainty that you talked about last quarter is there any incremental change that youre seeing.
That customer purchasing behavior again these are highly strategic discussions.
I guess, how should we think about that pipeline confidence and then it seems like as well.
The bigger impact kind of obviously flowing through to the services front.
As a lag to that subscription provisioning is that has that kind of the best way of thinking about the timing impacts to it to what you guys are calling out in Q4.
Yes.
I think as we're looking at it we're seeing a continuation of what we saw.
<unk> in Q2, so in Q3 it was much of the same I would say that bookings did improve but they did not improve as much as we expected because even though the pipeline is rich we see deals continuing to slide.
And then obviously, we have kind of a knock on effect into our services, but what I really want to highlight on the services side is what we did do is temper some staffing and hiring so that we can proactively manage our cost structure.
With that and and then also enable our partners. So we continue to be very committed to strategically enable our partners and grow our ecosystem. So we know we have capacity to pick up new work, but really it's just some small adjustments as we saw some of these deals slide out of the quarter and sometime in the future.
Got it okay that makes sense.
Then maybe kind of pivoting higher level here as you think about the combination and leverage ability of data and automation from a carrier perspective, they're obviously focusing on business agility, but again, John Locke automation you have to have your proverbial ducks in a row on the data front, how do you think about the puts and takes here.
Around half of that more effective decisioning. It seems like kind of one potentially leads to another.
Relative to again, the data side playing into the automation piece of the equation.
Without a doubt and we know that the data side is very important for automation.
We've been going after that base.
Basically with two work streams.
The first one is we are at work on a low code analytics platform that will be woven into Duck Creek, and we talked a little bit about that and our formation users' conference last quarter.
And in that organic build out we're excited that we have Jeff <unk> and she is bringing in some great talent from the outside to really help us focus on that analytics work effort. The second element is we continue to work with leading partners in our ecosystem, where we're pre plumbing solutions into Duck Creek on.
<unk>, which allows a lot of that automation to take place and that's one of the beautiful things about our low code platform is when we get Decisioning from our third party solution partners.
And data and analytics it allows.
Carriers to use our low code platform to configure automation. So that we can automatically buying policies or process claims are open claim coverages. So.
A lot is wired into Duck Creek that enables Africa areas today, but we continue to invest heavily in that area as well.
Got it thank you guys.
Okay.
Thank you once again to ask a question. Please press star one on your Touchtone telephone again Thats star one to ask a question.
Our next question.
Comes from the line of Alexander.
Of Wolfe Research. Please go ahead.
Hey, guys. Thanks for taking the question I guess, Mike you mentioned confidence of normalizing sales.
Sales cycles in fiscal 'twenty, three I guess I just wanted to understand.
And what gives you that confidence as the macro environment continues to deteriorate.
And then if I think about the commentary on the contract that.
The adjustment to the contract that was made for the carrier.
W.
<unk> loss.
Can you help us understand what type of risk profile you have as you analyze the cusp.
Customer base in terms of you mentioned a couple of customers, reaching out youre asking for similar type of contract adjustments, but what is the risk.
Inherent in the kind of current customer portfolio.
Subsequent to that how should we be thinking about MLR, both next quarter, but also going into fiscal 'twenty three.
Sure Alex.
First on what gives us confidence in terms of things opening up in 2023.
I'll, just say with my experience in the insurance industry.
I've seen this movie before where the insurance industry.
Is very resilient to the economic climate in downturns in the economy.
I think what happens is when there's a sudden change in the economic environment carriers go through a short term set of decision making to really look at how are they going to deal with a short term swing in profitability, which we've seen this past year, even though written premiums grew 9% overall loss costs grew about two.
<unk> percent. So they grew at a much higher rate than they can get rates in there. So what carriers need to do is they need to make adjustments and those adjustments to have to find where do they want to take more rate to get more premium in and then once they decide where they would like to take it they have to go through a regulatory filing process and that creates a little bit of a lag in terms.
Then getting.
The revenues back in the door that they want but what I found is once they get through some of that uncertainty it's back to business as usual.
And I think we would expect nothing to be materially different in terms of the way carriers will behave through some of this economic uncertainty. So that gives us a degree of confidence and then on your second question in terms of the overall risk.
Our very confident just in the contracts that we have in place.
And the beauty about our business model is because where the core processing engine kind of the heart and lungs of an insurance carrier.
Is the reason why we are very very sticky within that but also as I've indicated in past calls.
Our relationships with each customer is very intimate and very personal.
So we want to focus on their business success, and I think time to time, we will look at what they're trying to achieve and how that would work with Duck Creek and if we can work with them then.
Time to time, we'll make some changes, but I think when we look at the overall risk portfolio. We think we will continue with a very healthy net dollar retention.
Been between 112% to 120%, we would expect us to be somewhere in that range for the foreseeable future with no indication of it having a material drop.
Sure.
Understood and I guess, maybe just as a follow up question.
I'm not sure you've given this metric out recently, but as you look at the written premium growth inside of your customer base how.
Again, given these current dynamics.
Has that changed how do you expect that to trend for this year versus last year and just as a clarification are you anticipating any incremental revenue contribution to the model to come from the acquisition not necessarily in the quarter, but how should we think about it beyond that yes, when we look forward we.
Would expect the written premium of our installed base to grow over the coming year more than it has in historical years, but what I want to caution you on is the growth in written premium is still one of the smaller contributors to our net dollar retention most of our net.
Dollar retention increase is coming from cross selling product into the carrier and also cross selling into different subsidiaries, we think with our DWP model. It gives us protection in the inflationary environment.
But at the same time, please know that they have to cross through a threshold in order for us to get more dollars in the door for Duck Creek and.
And sometimes we'll cross over the threshold and sometimes if they want based on their premium.
Changes so.
It will be a contributor to revenue growth, but I just wanted to make sure that you don't over model that it's not going to be as significant as some of the other mechanisms like cross selling into the account.
Let me just comment on that too we did not because we have now closed the acquisition. Yet. This is Kevin we have not modeled into our guidance any contribution from Brahma in the fourth quarter. When we get to 2023 guidance at the end of this next quarter. This fourth quarter, we will provide them.
Little bit more insight into what premise.
Contribution is to the company at that time.
Perfect. Thank you guys.
Okay.
Thank you. Our next question comes from Michael Funk of Bank of America. Your line is open.
Thank you very much I appreciate the time Tonight, a few if I could.
So first you mentioned the pipeline remained very healthy in some deals are stalling a bit about taken the python situation at this point. So first what is the stimulant to get those deals moving through the pipeline.
Where are they stock back at what phase of the pipeline are they stock right now and then I guess kind of third part of that first question would be what is your confidence in your ability to provision those contracts once they do become on stocking transition those to wrap it up.
Sure.
First off what is the work that we have to do to have them unstuck. What I'll say is we've seen a buildup in the latter stages of the pipeline and a lot of that decision is out of our control. We do everything we can to work on a business case to work on the.
The benefits for our overall customers and prospects to really help them tell the story to their respective boards.
In terms of doing the projects and the good news is even though they're deferring I've had a lot of discussions with cio's over the past quarter, and Theyre, saying Theyre committed to technology spend it does come down to a matter of timing, so quite often and executive team or even aboard maybe deferring decisions and not giving us a clear date into.
When they are deferring them so.
That's why we're exercising some caution because now we've watched this occur about two quarters in a row and I want to make sure that I'm just adequately.
Setting expectations.
And then.
I'll, just say that we're highly confident.
We are with our automation and where we're at when we're ready to go on a contract we're highly confident in our ability to get that provision and start recognizing the revenue. There is typically somewhere around a 30 day lag between the booking and when we can start recognizing that revenue.
And that leads to the second question and then the guide for <unk> applies a pretty sharp step down in year over year revenue growth. Once again I appreciate all your commentary on the drivers there but.
At fiscal 'twenty, three consensus I understand youre, not giving guidance right now for 'twenty three but.
That's a pretty big Delta, implying high teens revenue growth of about $350 million in fiscal year, 'twenty, three sort of tying that back to your comment about and on sticking up this revenue in our pipeline and 23 any kind of commentary on guard rails for thinking about revenue growth and 23, how that Mike.
Ramp and timing because I think Thats me a major question for all of US going through our model is trying to figure out where that consensus should go from $3 50. It obviously you can't be there just given the step off in four Q. So any kind of commentary on guard rails or color around that ramp on sticking in 'twenty three would be helpful.
I appreciate that Mike I'll take this because it's related to kind of guidance I mean, obviously youre right. We can't get ahead of ourselves in terms of what 'twenty three is going to look like today, because we're not guiding on 23 that being said I actually think fourth quarter is going to be.
Fourth quarter first quarter kind of a meaningful quarters as it relates to what revenue is going to look like for 2023, I would say that our pipeline looks healthy.
And as we look at the bottom end of the pipeline the mature levels of the pipeline. There is still very strong. It's of this macroeconomic kind of environment that we're talking through right now that whether it's a deferral of whether it's a slight delay.
It really kind of depends on what we do in Q4 and Q1, that's going to set up for 2023.
It's going to come down a little bit given that we thought that Q3 was going to be stronger than it was like we thought the second half was going to be stronger than it's going to be now right. Given the Q3 kind of underperformance of the bookings that as expected. We still think Q4 is still got enough pipeline to make Q4 at good quarter, but at the end.
The day it really we have I think wait until we get through Q4 to give you a lot more guidance on what 2023 years other than I would say it is going to come down a bit.
Got it and I'm trying to put you on the spot I know still been away from the <unk> guidance and one more if I could call last.
It may be concern people might have heard the commentary about tier one.
Being more conservative on deal size I think it might be that last few years companies have been spending like drunken sailors right any capital with cheap.
Cfos were handed out big projects so.
How much of a risk as it is right sizing is more kind of a back to normal <unk> ultra conservatism given the macro environment.
Yes, I would say that when I look at overall technology budgets and that is a question I've been asking every CIO that I could talk to over the past quarter is how are the <unk>.
Looking at the remaining budget this year and how are they shaping up for their budget next year and the feedback that I get is that insurers are committed to there are certain technology spend levels. They think about it as a percentage of written premium.
And in the average across the industry Youll see some where around three 5% or 4% of premium as an average youll see some carriers that are higher.
Or maybe for a period of time higher and some that are lower.
And we're not.
There is no evidence that that's going to materially change. So I think we're confident that.
There's still going to be available budget. The one thing that is changing is boards I think are more cautious about approving multiyear multimillion dollar spend so commitments without really understanding what's going to happen in the economy, making those commitments right now for the <unk>.
Two to three to four years out so what they are doing is taking those plans and breaking those down into smaller digestible projects and thats really kind of a trend that we've seen.
Hey, Thank you all for time.
Thanks, Mike.
Thank you again to ask a question. Please press star one on your Touchstone telephone again Thats Star one to ask a question at this time.
And our next question comes from.
Pete Heckmann.
D. A Davidson your line is open.
Good afternoon, and thanks for taking my question Mike.
You think about M&A.
Things like Premix clear compliant how much do you think about that as basically being introduction to the customer.
So that you can cross sell into them or taking their solution cross selling of your base and given that how do you think about additional M&A here.
Adding <unk>.
To add either company technologies or or add geographic scope.
No.
The way that I'll say that we are Peter the way, we think about M&A is just as you said an opportunity to add meaningful capabilities into our portfolio.
And how we can cross sell those capabilities. So the first thing that we look at doing M&A is the quality of the technology that we will acquire first and we're looking for things that are meaningful business problems for insurance carriers, that's really important to us we.
We like business problems that are highly complex to solve because.
This is our sales motion in terms of helping carriers understand and how to solve complex business problems and that's why we enjoy such high net dollar retention and high high gross retention. So we look at.
The technology that we're going to acquire that way as well and then from there I would say that we look at other relations to our strategy. So in the case of <unk> XL.
I've made it clear that I'd love to get a noncore asset that is domiciled outside of North America, we know that that would mean benefit Duck Creek in a meaningful way.
So can I assist us in our broader strategy and I think that is a <unk>.
Great thing that <unk> is going to do for us. They are located in France in Continental Europe to have global accounts they have.
Again over 35 customers that are outside of North America that help us with introductions to those accounts and to establish a duck Creek brand.
So I think thats, a halo effect as well, but first and foremost we're buying a very highly high quality.
Technology SaaS solution that we think is really the industry leader in its category. So that's important for US and then your last question is are we thinking about more M&A.
But again, we're going to.
Look at M&A for the technology and assets that our customers really would like in that.
Ads very well to the core that we offer so we're not going to rush into transactions and we haven't to date I think we're going to be a very disciplined acquirer, but we're going to continue to look at future opportunities as well.
Okay. Okay. That's helpful. And then just any thoughts in terms of looking at your underlying cost base looking at yes, certainly it seems that.
Given some of the multiyear decision, making plans of these carriers there can be short term decision push outs, but generally they're going to stick to alter your plans, but it doesn't necessarily make sense for you to throw a lot more resources that sales and marketing.
In North America, probably maybe in Europe , but yes.
The changes in the way Youre thinking about kind of the long term economic model and getting to those target margins.
Let me start Pete with that and then I'll hand, it over to Kevin.
The one thing I've repeatedly said is I feel like we've run our business with discipline.
We've been.
In essence like I said in an adjusted EBITDA basis, we had 14 quarters in a row of profitability, we had a really good.
Cash flow quarter, this quarter and when we look at our overall expenses were always mindful around.
The hiring that we're doing and.
What that's going to do for our business and our sales and marketing front, we feel like we've made really strong investments in sales and marketing.
So we're not missing opportunities.
The new investments that we are making are more on an international basis and trying to strengthen ourselves outside of North America, but I think as we look at bookings we look at revenue.
Making sure that we're exercising discipline in our cost structure.
We know that making money and showing a profit is important but Kevin you have some perspective on this I'd love for you to add that I mean, I think you nailed that Mike but also.
I'd say, even though some revenues coming down and the rest of this year, we are maintaining our EBITDA guidance that we had before.
Throughout the rest of this year so.
Despite some revenue challenges from these delayed bookings we had also right sized our cost structure is going to be.
At least from either new costs coming in or in general. So we're doing a good job, there and being prudent in and kind of exercising discipline around what our cost structure will be in terms of the future like what's the model look like I actually I'm very excited about what we can do with this business and the <unk>.
Growth that we can I think we are a disciplined company that looks at profitable SaaS business and we're looking at the services with reasonable expectations of what those services are we're not trying to buy business with very very low margins, that's maybe going to hurt our model in the future, but we're really trying to.
Do is build a business.
Fairly consistently that is going to be profitable and expand that profitability over time.
Alright fair enough I appreciate it.
Thank you at this time I would like to turn the call back over to Mike <unk> for closing remarks, Sir.
Okay. Thank you everyone for participating in our Q3 earnings call and let me wrap up by highlighting the enormous opportunity that we continue to have in front of us as the insurance industry continues to migrate core systems to the cloud I'm also thrilled to continue to expand our Duck Creek product offerings to include what we believe is the premier reinsurance management and compliance cloud solution in.
The market as we look to acquire and integrate prima XL in compliance.
Not only does this provide duck creek with an expanded set of SaaS offerings, but this acquisition will also help us with our international strategy is <unk> is a European based organization and they also provide us an additional installed base of over 35 customers outside of the U S. Thank you and good evening.
This concludes today's conference call. Thank you for participating you may now disconnect.
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