Q4 2022 Duck Creek Technologies Inc Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
Okay.
Good day and thank you for standing by welcome to Duck Creek Technologies fourth quarter 2022 earnings Conference call.
At this time all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session.
To ask the question during the session you will need to press star one one on your telephone.
I would now like to hand, the conference over to your speaker for today.
Ryan did you you may begin.
Good afternoon, and welcome to Duck Creek screens conference call for the fourth quarter of fiscal year 2022, which ended on August 31.
On the call with me today is Mike Schakowsky Duck Creek, Chief Executive Officer, and Kevin Rhodes Duck Creek, Chief Financial Officer.
Complete disclosure of our results can be found in our press release issued today, which is available on the Investor Relations section of our website.
Today's call is being recorded and a replay will be available from the conclusion of the call.
Statements made on this call may include forward looking statements regarding our financial results products customer demand operations the impact of COVID-19 on our business and other matters.
These statements are subject to risks uncertainties and assumptions and are based on management's current expectations as of today.
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 actual results.
And events may differ from any forward looking statements I imagine would make today.
Additional information regarding the risks uncertainties and other factors that could cause such differences appear in our press release.
And Duck Creek latest Form 10-K, and other subsequent reports filed by Duck Creek with the Securities and Exchange Commission.
We will also refer to certain non-GAAP financial measures to provide additional information to investors I.
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 their related tax effects of these adjustments with that let me turn the call over to Mike.
Thank you, Brian and good afternoon, everyone. It's certainly a pleasure for me to share with you. The success that we achieved in fiscal year 'twenty, two and how we're thinking about fiscal year 'twenty three mm.
I am pleased with our fourth quarter performance, which was a strong finish to the year.
Activity in the quarter was significantly better than earlier in the fiscal year as we signed a number of exciting wins with carriers of all sizes.
Our Q4 performance reflects good execution from our team and customers adapting to the macro environment as we expected.
While current market conditions remain fluid, we enter fiscal year 2023 with momentum and optimism on our ability to capitalize on our growth opportunities.
I'd also like to take this opportunity to send our best wishes to everyone in Florida, and South Carolina, They were impacted by the devastation of hurricane in.
Duck Creek is proud to support several insurers as they provide critical really to their customers in this difficult time and help people families and businesses restore their lives.
On today's call I'll review some of our key achievements in fiscal year, 2022, and the fourth quarter and I'll provide an update on market dynamics and our early success with <unk>, XL, which will now call episodic.
Lastly, I will finish by reviewing our key priorities for fiscal year 2023.
Let me start with a quick overview of our financial results for both the fourth quarter and the full year.
For the fourth quarter, we reported total revenue of $80 $7 million up 14% year over year.
This was underpinned by subscription revenue, which is our revenue derived from SaaS or $40 2 million up 21% year over year.
Our annual recurring revenue or <unk> was $169 3 million.
Which resulted in 25% growth over the prior year. This includes just over $5 million of IRR from episodic.
And we're also profitable in the quarter with adjusted EBITDA of $6 8 million.
For the full year, we reported total revenue of $303 million up 16% year over year subscription.
<unk> revenue of $153 5 million, which resulted in 23% year over year growth and adjusted EBITDA of $24 2 million, which increased 43% year over year.
Fiscal 2022 was an important year for the company and we delivered a number of notable highlights.
We exceeded $300 million in revenue, which has nearly doubled in the last four years. We continue to have success executing on our land and expand strategy with important core SaaS deals with highly respected insurance carriers like secure Tokio Marine and Star insurance.
We saw an increased interest in migrating to Duck Creek on demand for some of our on premise customers last quarter's win with Hollered insurance was an important example of this opportunity and we signed two additional migrations in the fourth quarter that I'll review in more detail shortly.
We successfully completed our first acquisition as a public company with episodic we.
We also significantly strengthened our partner ecosystem and we ended the year with more than 6400 Duck Creek implementation experts across 23 systems integrators the.
Continued investment that these firms are making in their duck Creek practices is a great indication of the growth potential they see in partnering with us.
On the product front, we strengthened our support for consumer lines launching our consumer access channel our policy holder portal and launching digital customer service in partnership with Gilead.
We expanded the digital capabilities of our platform and ease the burden of integration with the release of additional Apis and extension points, which provides carriers greater configuration power across our suite.
And we expanded the international support of our products delivering support for localized insurance products for the U K, Spain, and Australia as well as the launch of Duck Creek producer for International markets.
And more broadly on the international front, we made progress on our efforts to expand our global footprint landing our first Duck Creek on demand customer in Europe considerably expanding our market share in Australia, and making instrumental investments in our products to develop localized insurance products.
I am proud of what the Duck Creek team has accomplished in a year that saw significant changes in the market and the economy. We believe that our low code SaaS approach empowers insurers to streamline their operations launching modify insurance products rapidly and provide an industry, leading consumer and agent experience where car.
That are delivered combination of better business performance and lower operating costs will resonate with customers in all market conditions.
Our fourth quarter performance was a strong indication of our success as we have discussed on recent earnings calls customer demand and interest in modernizing their core systems to Duck Creek on demand our industry, leading SaaS cloud platform has remained quite strong.
During the fourth quarter, we signed a number of SaaS wins, including some of the deals that we expected to sign earlier in the year and while sales cycles in Q4 remains subject to additional scrutiny and reviews, our understanding of how to manage through these additional steps has improved.
While customers are still facing some of the same challenges we have discussed in recent quarters. We are encouraged by the sales performance in the fourth quarter and our pipeline entering fiscal 2023.
I'd like to highlight some key wins in the quarter, which reflects the breadth of our success.
We signed two sizable on premise conversion and expansions in the quarter with axis insurance and Coaction specialty insurance.
Access has been a duck creek customers since 2016 and experienced great success more than quadrupling, the DWP under management and Duck Creek.
As they look to take advantage of our latest product innovations access chose to migrate their overall on premise installation to the full Duck Creek suite on demand.
Speed to market was a major consideration in access his decision to move to on demand to help facilitate their aggressive growth goals.
Coaction specialty insurance, so like a duck creek on demand to upgrade the commercial specialty writers core policy billing and commercial templates from their on premise you are cloud SaaS platform Duck Creek technology suite will efficiently consolidate coaction technology solution on to Microsoft Azure cloud.
To increase our speed to market and ease of connecting with customers and industry partners.
We also closed a full suite on demand deal in Australia, with Catholic Church insurance or CCI.
<unk> has been operating on legacy systems, and Duck Creek demonstrated the value expertise and advantages of moving to the cloud with Duck Creek on demand I'm proud of the Duck Creek was chosen to help improve service to their clients through better products and technology.
An exciting new customer win in the quarter was with the California Fair plan or CFP, which chose Duck Creek after a competitive market search at the top technology providers in the space sector.
Duck Creek is doing a full suite replacement that move CFP away from legacy systems.
It is important for them to sign with a partner who offered a full end to end capabilities, including distribution management and the full suite of core systems.
Cfe has told us that Duck Creek team culture ecosystem and ability to support them long term were critical factors in this deal.
Agni as our systems integrator provider was also instrumental in partnering for supporting Duck Creek, and helping the California Fair plan deliver on their overall strategy.
Next I'm thrilled to welcome Michigan based frankly mutual insurance company as our latest distribution management customer frankly move insurance offers its products through an independent agent network and as part of their distribution strategy. They require a single technology solution that can operate as a sole source of truth for agency and.
Producer data, which will allow them to execute on their plans for significant growth.
Duck Creek proved to be the solution of choice to help them to continue to maintain positive relationships with our agency force by leveraging cost effective and modern technology.
We also signed some important expansions with our existing customers, including Star Insurance group and slide insurance, who added additional digital enablement services and capabilities.
We are very excited about our new go to market offering in digital customer service. It creates a great opportunity for carriers across the globe to seamlessly support customers in a digital world. This is built on a capability a new strategic partnership with ecosystem partner clear that we announced in Q2 and.
And in Q4, we signed a significant deal with one of our existing customers met Pro group a member of the Berkshire family and the largest medical professional liability provider in the industry. The combination of glia and Duck Creek is essential for bed pro to create a seamless digital experience to modernize and enhance its customer service capabilities.
<unk>.
We were also pleased with the very strong start we achieved with <unk>. We closed the acquisition in July and have made great progress on our integration plans, we've been thrilled with what we've seen with the business since its closing the product is world class and an obvious market leader globally in the reinsurance category.
We have received incredible feedback from customers on the capabilities of episodic reinsurance management solution and how it drives substantial performance improvements and cost savings across an insurer's entire reinsurance offering.
There is exciting momentum in the marketplace for RMS Zelle, and we are pleased with the growing pipeline and the cross sell opportunity within our base.
We had an important early success with episodic in the fourth quarter, including wins with <unk>, which made an additional by up to support their global strategic work and in this instance, implementing <unk> European operations Division <unk> is obviously, an important reinsurance management customer and we're thrilled to partner with them across our international.
Business.
We also won a key deal with France space, Matt mood to undergo a major upgrade from their on Prem installations to our SaaS based reinsurance management solution. This migration is consistent with the traction we see across our core business to transition on prem customers to modern cloud based SaaS.
Turning to fiscal year 2023, we are focused on building upon our success in the fourth quarter and executing on our growth strategy.
Our key priorities. This year include expanding our efforts to migrate on premise customers to the cloud.
Now that we have successfully completed a number of on premise migrations, we're taking those learnings to create a more standardized migration roadmap for customers as we have done historically, we will focus on situations, where a migration as part of a broader strategic effort with the customer to bring a greater portion of their business onto the Duck Creek platform.
Our second priority is to increase our footprint globally <unk> will help with our international expansion plans as we look to leverage our global footprint in several different countries.
They have strong customer relationships with a number of international insurers, including Axa, Beasley, Covia QB and audience among others having.
Having feet on the ground in reference of all customers in different countries is critical in our market. We believe there is a sizeable opportunity to build upon episodic success with our core systems modules.
We'll also continue executing our cross sell and upsell strategy. There continues to be a substantial opportunity to expand our penetration of both core and noncore systems, among our existing tier one and tier two customers. In addition, we believe there is a sizeable opportunity to continue cross selling distribution management as well as begin selling <unk> industry leading.
Reinsurance management solution back into our installed base of more than 150 customers.
On the product front, we will continue to invest in our leading SaaS insurance platform with new targeted capabilities to extend our products platform and low code configuration tools, we've AI and advanced analytics more natively into our platform.
Build additional international insurance products and drive additional efficiencies to improve subscription gross margins through our focus on multi tenancy automation and customer self service.
Finally, we will continue to expand and deepen our partner ecosystem. We recently hosted our annual partner summit, which highlighted the great momentum we have with our solution and delivery partners. We have developed a compelling partner program that is differentiated and how closely aligned Duck Creek is with our partners and pursuing new business opportunities.
We are focused on leveraging our relationships with leading partners like Accenture Capgemini co forge and <unk> among others to drive a greater percentage of our new business wins through the channel.
Finally, I'm thrilled to welcome tells US love to our board of directors held as SVP and Chief Information Officer of Baxter International where he is responsible for the development and delivery of digital.
<unk> cyber security and risk across the enterprise.
He also held previous CIO technology positions at Cardinal Health and TD Bank.
<unk> extensive experience with technology enterprise architecture, and cyber security will be an invaluable addition to our board.
Before I turn the call over to Kevin I, just want to finish by reiterating our excitement about the future of Duck Creek, we have the best SaaS cloud core systems platform in the market and we continue to strengthen our solutions each and every quarter.
Customer interest in moving to the cloud remains very high and we are in a great position to benefit from this trend for years to come.
Our focus on executing on our strategic priorities that will effectively balance investing for growth and generating profitability with that let me turn the call over to Kevin to walk you through the numbers Kevin over to you.
Thanks, Mike Today, I'll review, our fourth quarter and fiscal year, 2022 metrics and results in detail and I will provide guidance for our first quarter and full year fiscal 2023.
First SaaS AAR at the end of the fourth quarter was $169 3 million.
Up 25% year over year.
<unk> on our performance this past year, while we experienced some elongated sales cycle earlier in the year, we had a strong fourth quarter performance.
We closed and some of the opportunities that we're building up and our sales funnel.
As Mike noted we had some good cloud migration deals in the quarter and still believe we can drive incremental subscription revenue growth within our base.
They continue to adopt our SaaS solutions in addition to driving deals for new logos.
Going forward, we're going to calculate <unk> as an annual value of all contracts enforced at the ended the quarter. We believe this will better represent our future expected revenue and will eliminate the timing of deals that are signed at quarter end.
Total revenue in the fourth quarter was $80 7 million.
Up 14% from the prior year period, and well ahead of our guidance.
Within total revenue subscription revenue, which is comprised solely of subscriptions to our SaaS products was $40 2 million up 21% year over year.
In the fourth quarter subscriptions represented 73% of our software revenue.
At the stop which closed on July 12 contributed approximately $2 million.
Of revenue of which subscription revenue contributed approximately 40% during the quarter.
Revenues from on premise software licenses with $7 8 million.
And maintenance with $7 $2 million.
This represented 19% of total revenue, which was higher than in recent quarters and seasonally high for us in the fourth quarter as we had several on premise renewals in the quarter that impacted license revenue.
Services revenue was $25 4 million down 6% year over year.
We continue to embrace our strong systems integrator network and we are happy to have those integrators Brent.
Most of our implementation.
We are often subject matter experts and run alongside our partners to ensure implementations are on time and on budget meeting our customers' expectations for a high return on their investment in our platform.
That net dollar retention as at the end of the fiscal year with 108%.
That net dollar retention in the quarter reflected the cumulative impact of the churn that we have discussed on prior earnings calls as well as the lower mix of up sell activity.
As we look ahead SaaS net dollar retention is likely to be below some of the historical levels that we've seen.
In large part due to the fact that on premise migrations are not typically captured in our retention calculation.
That has historically been a small part of our overall bookings, but is expected to increase going forward.
Now, let's review the income statement in more detail. These metrics are non-GAAP , unless otherwise noted and will provide a GAAP to non-GAAP reconciliation of our financial in our press release.
Firstly on a GAAP basis, our gross profit for the fourth quarter was $47 5 million and we had a loss from operations of $2 1 million.
We had a net loss in the quarter at $2 4 million or.
Core <unk> per share.
Just on weighted average basic shares outstanding of $132 6 million.
Turning to our non-GAAP results.
Gross profit in the quarter was $50 million.
<unk> gross margin of 62%.
Up 40 basis points compared to 61, 6% in the fourth quarter of fiscal 2021.
Subscription margin in the quarter was 64, 5%.
120 basis points compared to 63, 3% in the fourth quarter of fiscal 2021.
Total adjusted gross margin was better than expected in the quarter due to strong subscription margin and a greater mix of license revenue.
We are pleased with the continued strength in our subscription margin, but I want to remind you there can.
The quarterly variation due to the timing of when revenue recognition begins for certain contracts and the timing of expenses at the early stages of new deployments.
We believe our subscription margins are an important demonstration of the scalability ease of use and the performance of our SaaS platform.
Professional services margins were 39, 2% in the quarter and were in line with our expectations.
Our long term target in the high 30% range.
We continued a balanced sustainable utilization rates and our ongoing efforts to increasingly leverage our systems implementation partners.
Turning to profitability adjusted EBITDA for the fourth quarter was $6 8 million.
Which was ahead of our guidance due primarily to a combination of better than expected revenue and lower than expected expenses.
Adjusted EBITDA margin was eight 4% for the quarter up 170 basis points from six 7% in the prior year period.
This represents our 15th consecutive quarter of adjusted EBITDA profitability, an important indication of our ability to profitably generate high levels of subscription revenue growth.
non-GAAP net income per share in the quarter.
With $4 5 million.
For <unk> based on approximately $133 9 million fully diluted weighted average shares outstanding for.
For the year non-GAAP net income was $15 1 million.
<unk> 11 per share based on approximately $133 5 million fully diluted weighted average shares outstanding.
Turning to the balance sheet and cash flow, we ended the quarter with $273 million in cash cash equivalents and short term investments and we remain debt free.
Free cash flow in the fourth quarter was $15 7 million, which was up meaningfully from $6 9 million in the fourth quarter of fiscal 2021.
For the full year, we generated $8 million of free cash flow compared to negative $11 million in fiscal 2021.
I would now like to finish with guidance beginning with the first quarter. We expect total revenue of $75 5 million to $77 $5 million.
Subscription revenue of $40 5 million to $41 $5 million.
We expect adjusted EBITDA at breakeven to $1 million.
And our non-GAAP net income is expected to range from negative $1 million to breakeven.
<unk> <unk> to breakeven on a fully diluted basis.
For the full year fiscal 2023, we expect total revenue of.
$328 million to $336 million.
Subscription revenue of $175 million to $179 million.
Adjusted gross margins are projected to be at 60%.
We expect adjusted EBITDA of 25 million to $27 million and our non-GAAP net income is expected to be in a range of $15 million to $17 million or 11 to 13 on a fully diluted share basis.
There are several things to keep in mind as you think about our outlook.
We continue to take a prudent approach to forecasting deal close rates.
As Mike mentioned, our go to market team did a great job in the fourth quarter adapting to increased scrutiny.
We are seeing on transactions in recent quarters.
While we are encouraged by this performance the environment remains fluid and I believe it's too early to assume further improvements.
We expect subscription gross margin to expand by 100 to 150 basis points year over year.
On a total gross margin basis, this will be more than offset by our proactive efforts to bring down professional services margins to a sustainable level as well as a lower mix of license revenue as we do not expect the fourth quarter performance in fiscal 2022 to repeat itself in fiscal 2023 given.
Some of the migrations that were booked in the quarter.
In terms of seasonality. Please keep in mind that the first quarter is typically our lowest bookings quarter and we would expect sequential improvement in the SaaS AAR to be relatively modest.
And finally.
We expect <unk> to contribute approximately $12 million to $14 million of revenue for the full year fiscal 2023.
At the staff will not make a meaningful impact to our adjusted EBITDA next year as we will continue to make additional investments to integrate them into our business into our SaaS platform.
To wrap up we are very pleased with how we performed in the fourth quarter.
We're at the early stages of a large global growth opportunity and believe we are well positioned to build upon our fourth quarter results and fiscal 2023 and beyond and with that we would like to open up the call for Q&A operator.
Thank you.
As a reminder to ask a question you will need to press star one on your telephone please.
Please standby, while we compile the Q&A roster.
Again, Thats star one to ask a question.
Okay.
Our first question comes from the line of Dylan Becker with William Blair. Your line is open.
Yeah, Hey, guys. Thanks for taking the question, maybe higher level kind of macro perspective too for you. Mike here is these are highly strategic discussions with those customers, there's probably again, a multi year kind of roadmap in place before it actually gets to that decision point I guess, how are you thinking about the resiliency.
The core system modernization initiatives among carriers.
There maybe has been any shift in priority relative to how they're allocating their their internal it resources.
Sure. Thanks for the question Dylan.
Yes, I would say even in the macro uncertainty we continue to see strong demand for technology solutions. So the pipeline continues to build we continue to have very thoughtful conversations with existing customers as well as new customers and I think as insurers are looking at how to respond to changes in the marketplace. They know that.
He is going to play a key role in responding to these changes. These are changes like reducing overall expenses through automation, we're making product and pricing changes. However, what we are seeing is that carriers are being a little more conservative in terms of committing to big long term multi year multi transferred.
<unk> initiatives, so theyre going through some extra steps in terms of their decisions they are going into their fiscal year 'twenty three planning.
We think that we've adjusted very well to this new environment in terms of our overall forecasting and we've worked this into our guidance. So.
Under the current environment. This is what we expect.
Things don't get worse, we think we're going to do quite well.
Per our guidance for fiscal year 'twenty three.
Yes that makes sense and I would think that.
Strategic roadmap helps add from a visibility perspective as well.
Do you think about to those conversations and the value of the integrations and the partner ecosystem.
Being able to kind of build on top of the Duck Creek platforms. How much have that has that served as a.
The driver of broader adoption as well so it seems like a channel you guys have been investing investing in but wondering how that ease of implementation costs of the upfront burden there from some of these more complex systems, maybe plays out as well. Thanks, yeah. Thanks Dylan.
We do think it matters, obviously, we obsess every day about how we can lower the cost of implementation for insurance carriers, how we can bring that burden down and one way. We do do that is by pre integrating or pre plumbing into many of the industry solution providers that are out.
There and that's why now in our ecosystem, we have over 80 solution providers and within that we have.
Pre built over 100 integrations with them and a lot of these just serve to displace workdays that would otherwise be workdays integrate with our solutions. So we do think that that is a key element and a differentiator of ours and it's why we're investing in that space as well.
Okay.
Great. Thanks, guys.
Thank you.
Please standby for our next question.
Our next question comes from the line of Alex Skylar with Raymond James Your line is open.
Great. Thank you Mike I wanted to ask about the faster cadence of on premise migration Youre talking about for next year, what's driving that change I think in the past you've talked about waiting until the customer is ready.
It's a function of the customers are ready now or is there anything proactive that you all are doing to encourage those moves.
Alex I would say that our philosophy on migrations has not fundamentally changed we're not taking an approach to force customers down. This path, we really want to focus on our strategic inflection point for them, but back to your question around what has changed and how this is accelerating I think one item is just our formation.
This past spring, where a lot of customers came to the event. They saw the investments we're making in the cloud product.
Certainly triggered a lot of discussions they're also seeing.
We're being much more deliberate of sharing our roadmap with our customers. So that they can see that the investments that we're making and I think many of them are drawn the conclusion that being on that strategic code line is going to be very very important for them. So that's an advanced several of the discussions with many customers. So we're pretty excited about it.
And we're going to continue to focus on lowering that cost in coming up with more repeatable models to bring them into the cloud and we think that will help us hit our objectives in fiscal year 'twenty three as well.
Okay great.
And Kevin on the implied kind of profitability ramp as the year progresses can you just talk about how much of thats being driven by the <unk> acquisition, how much is seasonality how much youre kind of efficiencies that youre still going to get.
Yes sure.
Pardon me.
Their comments were not really going to look for a lot of contribution from episodic in year mid EBITDA perspective, as we make some of those investments.
Bringing them into our platform et cetera, where we are seeing is obviously with the guide we are going to see an acceleration of EBITDA come throughout the year fourth quarter. As we just discussed discussed has a seasonally higher amount of license revenue in it than any other quarter. So I'd say, it's probably.
A little bit more back weighted towards the fourth quarter, but in general that's what we're looking at.
Okay. Thank you all.
Yes.
Thank you.
Please standby for our next question.
Our next question comes from the line of Richie Deloria with RBC capital market.
Okay wonderful thanks, so much for taking my questions.
Maybe I wanted to go back to talking about the migrations in some of the success that youre seeing with existing customers and migrating them to the cloud.
Can you maybe talk a little bit more about what sort of incentives.
You are giving customers if any.
Not forced them, obviously, because I know that's not your approach.
But Tim maybe software incentives to drive those migrations.
When we think about like a multiplier uplift from the early migrations what does that tend to look like and then I've got a follow up.
Sure Rishi in terms of incentives.
We're in deep discussions with our customers around their overall approach to migrate and we're looking at we developed a tooling internally to help them offset some of the things that they have to take care of so we have some automation on how we're doing that but in terms of the overall financials they understand that our SaaS.
<unk> product is a different product so they have to move to that.
So we will come up with a mechanism of which we would.
Essence overtime sunset their on premise agreement and then move them over to the new SaaS.
<unk> or structure, but in terms of the way that our deals look on the SaaS side of things. They look like typical new customer SaaS deals for us.
Because customers understand that they are going to realize more value that's tied to that overall product.
Got it that's helpful. And then when we think about international you talked about some of the.
Efforts are making to grow the presence there and then bringing in some of the learnings from Microsoft.
Longer term, how should we be thinking about.
The international business right now, it's still you know mid to high single digits as a percent of our revenue over time, how should we be thinking about what that looks like for Duck Creek as a whole. Thanks.
Yes, Rishi you're right today, our international business is mid to high single digits I do want to highlight that we classified as international if it's contracted international we do have several customers that have a contract that sits on U S paper and they will have usage rates internationally.
But we are.
Excited about some of the recent momentum that we had last quarter, we talked about hollered in Australia. This quarter a win with Catholic Church.
And we have a buildup of our pipeline in Europe , and some things happening there. So I think over time. What you can expect is we will have more bookings internationally relative to our international presence. So our growth right now I don't think youre going to see us kind of jump up to double digits.
Anytime soon in terms of our overall.
Share of revenue, but we think we're going to grow more internationally than we will organically in the U S and we're pretty excited about some of the discussions that we are having with carriers outside of the U S. Right now and excited about the progress we're going to make in fiscal year 'twenty three and then finally, we think the acquisition with episodic helps us it helps us with relationships with.
International players as well as our global footprint.
To build off of.
As we engage in those conversations and look at our go to market strategy as well.
Awesome all right. Thank you so much.
Thank you.
Please standby for our next question.
Our next question comes from the line of Parker Lane with Stifel. Your line is open.
Yes, hi, thanks for taking the questions and congrats on the quarter I'm curious with the uncertainty Thats out there right. Now if you are seeing customers' demand or ask for shorter deal durations or is that something that.
<unk> actively engaged in over the last quarter or if that's not the case. Thanks.
Thanks Park Parker.
I would say that we have seen more conservative behavior from our customers and I think that the way that that's manifesting itself in our deal flow is especially in the tier ones and twos, perhaps smaller deal sizes to start out we're not seeing that.
Deal duration is shrinking on us we think that when customers.
Do these types of projects they tend to be committed over the long term. They know that they have to go through a substantial project to get that life and once they start building premium they have to be committed to the platform. So we're not seeing.
I'm going to say the length of the term of our contracts be reduced we are seeing in the larger carriers.
Our average deal size reduced but we do think that's still represents goodbye up opportunity in the future. So nothing concerning for US. It's just out of the gate, we're going to get less but I'm not going to say a shrinkage of the deal term or the like.
Got it understood and then I think it was last quarter that you had a couple of contract renegotiations or Reworkings and maybe there is an anticipation of some of that in the future again with all the disruption out there was there any of that during the quarter or do you anticipate any of that in your 2023 guidance.
The answer is no there is nothing this quarter.
That came up and Kevin you could talk about some of the assumptions that you made coming into the Q4 guide and how thats impacting us.
Yeah, I think from a promote.
From a guide perspective, sorry, Parker could you just repeat the question really quickly from me I was a little distracted by that were you asking about the guidance.
Last quarter, you called out some contract renegotiations or at least one large amount that impacted yes, im wondering if theres any of that baked into the FY 'twenty three.
No. Okay. So so we did bake in a course churn assumptions that we would have in 2023 I will say a couple of things like I made a comment last quarter that I was being a little bit conservative on about $600000.
That actually did play out well for us. So we were able to actually solve for that in the fourth quarter. That's why we did have a little bit better contribution in the quarter and the fourth quarter, but in general I would say we are pretty much in line with what we'd expect for a normal kind of churn in 2023, and it's all baked in.
Nothing unusual there okay.
Okay. I appreciate you taking the questions. Thanks.
Yes.
Thanks Parker.
Thank you.
And our next question.
Yes.
Our next question comes from the line of <unk> Kalia with Barclays. Your line is open.
Okay, Great Hey, guys. Thanks for taking my questions here, Mike maybe maybe just to start with you I was wondering if you could just comment on the competitive backdrop at all or just anecdotally on unwavering rates I mean, I know that that can ebb and flow kind of quarter to quarter, but as you sort of do a postmortem on the year, how do you feel about sort of the.
The win rate in sort of the shops that youre getting on goal as you think about just the.
The competition in this market.
Yes, I would say overall, we're pleased with our competitive positioning.
We have not seen broadly that our win rates have changed.
Some of our competitors are aggressively going into their install base and migrating.
For all of their on premise customers and we don't always get an opportunity to compete with that but I will say that for instance, this quarter.
Several of the deals that I mentioned, we're highly competitive.
With some of the most notable players in our industry and we feel like we're getting great feedback and we're coming out on top so I think broadly not a lot has changed in terms of the overall win rate that we've seen over this past year.
Got it got it that's really helpful and then Kevin maybe for you.
No.
Helpful helpful to understand the how the AOR methodology is going to change and I think it makes a ton of sense.
Understand historically, we haven't guided to AOR here, but are there any comments or just any sort of guide rails that you wanted to if you want to make sure. We know as we think about AOR for next year, yes.
Yeah, sure I think fundamentally I'm simplifying the metric, which is the sustained metric and it's always been which is.
The timing of deals when they used to come in I think or.
No our old method was take the revenue in the quarter and multiply that by 12, and so the way our methodology of revenue in the past was trying to there was a cutoff period. If you will in the quarter that you would either.
Wait or not take revenue in the quarter based on provisioning and that sort of thing and I think I'm just simplifying it to be honest with you at the ended the quarter through the end of the quarter. If we land a contract then we're going to include that in our IRR calculation looking back over time, because we did look at that it doesn't really change what we've done historically.
From an AUR perspective.
Just some timing that we had one quarter versus another.
Not material, but from me in the future I, just think it makes sense to simplify it and make sure that at the end of the quarter I've got a contract in place whatever that contract value is for that year is what we're going to put in the IRR calc.
Got it makes a ton of sense. Thanks, guys. Okay. Thanks.
Thanks.
Sure.
Thank you.
Please standby for our next question.
Okay.
Our next question comes from the line of Alex Zukin with Wolfe Research. Your line is open.
Hey, guys. Thanks for taking my question I'm, sorry, I missed.
Little bit on that.
The question is redundant I apologize I guess I wanted to ask what the.
What's driving.
What's driving an IRR.
100 <unk> level.
Generation and what gives us confidence or what gives you guys confidence that that's going to stay stable from here.
Then I have a quick follow up.
Yes.
When you think about the net dollar retention rate right Theres <unk> Theres net dollar retention rate right and I think youre asking about the net dollar retention rate the one away at it.
Been higher traditionally.
When you think of when you breakdown.
What our growth rates with Upsells.
More capacity there is cross sells take reinsurance management and cross selling across the base and then there's new logo activity and then there is migration to the cloud.
When you think about what doesn't get included in the net dollar retention rate. It's those last two categories typically new logos and then migration activity don't get included in the net dollar retention rates and we're seeing a bit more of our bookings in the future come through with all the activity and migration activity and.
That's why we think that the 108 is that a bad number. It's a matter of fact, when you think about a SaaS business at 108 to 110 115 is actually a very good number we're retaining customers theyre happy customers and we are still upselling those customers, but as a percentage of overall bookings, we think that that's going to be a little bit more and then.
Ah captures all four of those activities. It captures all four so you can see with the 25% growth year over year and our activity that's more indicative of capturing all of that.
Got it and then just a clarification question I guess.
The 12% to $14 million, that's coming from the acquisition how much of that is going into subscription.
And.
Given the changed.
Simplification of the IRR calculation.
Yes.
Is likely going to change some of the patterns around seasonality that we've seen so I just wanted to understand are we going to get a look back in our bridge.
The previous years.
<unk> calculated under this new method, so that we can better understand those seasonal trends.
To make it simple for you Alex is about $5 million that we had from IRR from the from the acquisition. So we had said that earlier.
That's no problem.
And then in terms of our brands as we look at the IRR calculation that we have today and we look back over time. It doesn't substantially changed there is no bridge that needed to be given because effectively in one quarter versus another quarter. If youre missing just a small amount in one quarter. It's made up in the next quarter. So our IRR calculation in general over there.
The last several years is still very consistent with the new methodology.
And just to remind our new methodologies basically any deal that we closed within the quarter and the value of that on an annualized basis will capture an AOR.
Got it and then just about $12 million to $14 million for next year is not growing.
<unk> owns a subscription or housing again broken out.
Yes in the $12 million to $14 million, 40% of that approximately is subscription.
Perfect. Thank you Youre.
Youre welcome.
Thanks, Alex.
Thank you.
Please standby for our next question.
Our next question comes from the line of Pete Pete Heckman with D. A Davidson your line is open.
Thank you good afternoon, everyone given your comments on win rates and maybe a little bit more momentum in the business.
It's a little bit it's certainly early but.
I guess is there anything changed in your mind.
Duck Creek, Shouldnt be able to get back to 20% to 25% subscription revenue growth.
Once we've lapped.
Just one customer loss and some of the slowdown.
Yes Pete.
Obviously, you can see within the high end of our guide for next year.
And we do think our guide is reflective.
The two dynamics right the challenging selling environment that we're seeing because of the macro environment. So we made some adjustments to.
And then we did talk about.
Some of the churn that we've recently had but with that said.
If the environment were to normalize and get back to the buying behaviors that we had seen two years ago or a year ago even.
Yes, we think that this business and the opportunity in front of us with definitely normalize above 20% subscription growth.
We feel very confident on that.
There is a lot of opportunity that's out there you could see this there's continues to be a lot of pent up demand.
Carriers look at replacing their legacy systems, and a ton of opportunities in tier ones and twos now what's going to happen. This fits.
Fiscal year with some of the macro uncertainty in their buying behaviors, we're still watching very closely how they react to that the good news is we're seeing carriers already work new additional rates into.
Into the system. So even the first half of the year and best reported that the top 100 carriers have taken over 10% of rate increases. So that is good because they are getting to a place where theyre going to at least try to offset some of the inflation that they've seen but we're still seeing some conservatism in buying but I can say long term we are.
Very ambitious and we believe that if everything normalizes on the buying side that this business should expect subscription growth over 20%.
Okay. Okay. That's good to hear and then just in terms of the balance sheet.
How are you thinking about additional M&A.
Potentially other uses of capital and what would you consider to kind of be the minimum cash that you'd want to keep on the balance sheet or would you be willing to go into a net debt position.
Yeah, I mean, I think right now the way we look at it is we're going to be a disciplined acquirer and.
I want to emphasize even as we went off of episodic there was something that I got very proactive on and something that strategically you said. This is a space we want to be in and it had a halo effect of being.
European based business it helps our global expansion as well and I think with the cash on the balance sheet.
We'll always look to be a disciplined acquirer. So if it's the right thing that drives the right growth strategy I think it's something that we would go after and action.
And right now we feel really good about our capital position with the cash on the balance sheet. The fact that we carry no debt.
We have lots of dry powder, so to speak to go after what we need to.
I think right now it's more opportunistic.
And I think we're in a good position as we sit today.
Okay I appreciate it.
Okay.
Thank you.
As a reminder, ladies and gentlemen to ask a question you will need to press star one one on your telephone please.
Please standby for our next question.
Our next question comes from the line of Kyle Peterson with Needham <unk> Company. Your line is open.
Hey, good afternoon guys.
This is Kyle Peterson on for <unk>, Thanks for taking the questions.
Just wanted to kind of square with the commentary you guys kind of hinted that some of the bookings and demand seem to actually improve as the quarter progressed switch kind of runs a little contrary to what we're seeing with a lot of other software companies in the space.
Some of this just your kind of geographic mix of business that you guys are a little heavier on the domestic front in <unk>.
Smaller international business today or.
Or is there anything else going on that we should be mindful of with regards to bookings.
Yes Kyle.
I wouldn't say that.
Our Q4 result was because of our international presence or our geographic outreach what I would say is I have been talking about the fact that many deals throughout the year, we seen push.
And we were excited that a couple of deals that did push we did finally get closed and then we had a couple of close on the timeframe that we expected and that helped and then C are seasonal.
Bookings Q4 is typically one of our stronger quarters.
We do expect bookings to be lighter in Q1 can see from a seasonality perspective. It is usually one of our lighter quarters. So we're planning for that in our overall guide and you can see that in the overall numbers.
But I think to answer your question more broadly on this overall concept when others are reporting the opposite.
One thing that I'll say is insurance is.
<unk>.
An industry that tends to do quite well through economic ups and downs just because for many aspects of insurance is not a discretionary expense like retail would be or like marketing expense would be.
You need to have insurance they have a mortgage on your house to drive your cars or we need insurance to run our business and I think that helps and now really it's about as carriers addressing the inflation and can they get rates to offset it because they are seeing an impact in their.
Loss ratios and that takes a little bit of time and some of them are working that in their rates now they're going to set their fiscal year 'twenty three budgets.
So we still think it's going to be conservative in fiscal year, 'twenty, three but again I think compared to other industries I think it's an industry that will probably.
<unk> worked through some of the economic uncertainty better than other industries.
Got it that makes sense and that's helpful. And then maybe just a quick follow up on inflationary pressures impacts you guys are kind of seeing in your own business.
There is the profitability overall, but particularly on the services gross margin side was.
Really impressive in light of you know what a lot of whether its the size or other companies in the space have been kind of reporting here.
How are you guys kind of managing wage pressure and just other cost inflation and then you guys kind of guided towards the services gross margins cooling off a little bit in the coming quarters, but how have you guys been able to navigate that and how should we think about inflationary pressures in your business.
For FY 'twenty three.
Yes.
I'll cover that.
All right. We all are going to have wage inflation, we're all going to have cost inflation from vendors. We've done actually a really good job recently of doing some some good negotiations on the vendor side to keep some of that inflationary.
Growth in check.
But we're also focusing on making sure that we can get CPI increases in the business that we're able to generate that to offset some of that inflation net one would experience on the cost side as well. So when you kind of neutralize that a little bit from a from a revenue versus the expense side, that's a lot better.
That's a good way to approach it and it's all good.
All of that is baked into our guidance both on the expense side as well as the CPI increases.
And I'll just add I think one thing we are quite proud of is the discipline that we've run this business.
You could see.
We hit some strong profitability to finish the fiscal year and I think we do run the business with discipline and then as Kevin said, we have some mechanisms on the revenue side that could help us DWP based pricing so if they raise premiums.
Not in every it's kind of a stair step approach. So we don't always get it but in many circumstances, we do.
As well as CPI in many of our contracts. So we think we've got protections on both sides as we vigilant.
Exercise vigilance on the expense side and the revenue side.
Got it.
Really helpful and I appreciate the color thanks, guys.
Thank.
Thank you.
I'm not showing any further questions I would now like to turn the call back over to Mike for closing remarks.
Thank you everybody for participating in our Q4 and fiscal year 'twenty two earnings call. We're proud to end our fiscal year with a strong Q2 that exceeded our expectations for all key metrics were also we're also thrilled to close the deal with episodic which positions Duck Creek to be the leader in reinsurance management and also assist in our ambition to expand globally.
We head into fiscal year 'twenty, three with terrific momentum as we finished fiscal year 'twenty two with our SaaS <unk> of $169 3 million up 25% from prior year and let me just wrap by again emphasizing that we have an enormous opportunity to continue to grow as the insurance industry continues to migrate core system.
So the cloud thank you and have a good evening.
Yeah.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
Yes.
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Okay.
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