Q1 2023 Guidewire Software Inc Earnings Call
Greetings and welcome to the Guidewire first quarter fiscal 2023 financial results Conference call.
At this time all participants are in a listen only mode.
Question and answer session will follow the formal presentation, if anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
Please note this conference is being recorded.
I'll now turn the conference over to your host Alex Hughes you may begin.
Thank you operator I met.
Alex Hughes, Vice President of Investor Relations and with me today is Mike Rosenbaum, Chief Executive Officer, and Jeff Cooper, Chief Financial Officer, a complete disclosure of our results can be found in our press release issued today as well as in our related form 8-K furnished to the SEC both of which are available on our Investor Relations section of our website today's call is being recorded and a replay will be available.
Following the call.
Payments made on the call today include forward looking ones regarding our financial results products customer demand operations, the impact of local national and geopolitical events in 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 should not be relied upon as representing our views as of any subsequent date. Please refer.
The press release and the risk factors and documents, we file with the SEC, including our most recent annual report on Form 10-K, and our quarterly report on Form 10-Q to be filed with the SEC for information on risks uncertainties and assumptions that may cause actual results to differ materially from those set forth in such statements.
We also will refer to certain non-GAAP financial measures to provide additional information to investors all commentary on margins profitability and expenses are a non-GAAP basis, unless stated otherwise our reconciliation of non-GAAP to GAAP measures is provided in our press release reconciliations and additional data are also posted in the supplement on our IR website and with that.
I'll now turn the call over to Mike.
Thank you Alex good afternoon, everyone and thanks very much for joining us today.
We're off to a solid start in the fiscal year with steady and consistent execution towards our goal to modernize the technology platforms supporting the global property and casualty insurance industry.
And subscription revenue. Both finished ahead of our expectations and notably subscription and support gross margin came in better than our expectations.
You have heard me say before that we feel privileged to serve a critical and essential industry. One that helps families and businesses manage risks so that they can better plan and grow insurers need an agile core platform that effectively engages consumers.
<unk> faster innovation with new products and distribution channels and that enables them to grow efficiently Guidewire cloud platform delivers this agility and I am pleased to share the progress we continue to make in expanding its.
Adoption and deployment.
Around guidewire, our ecosystem and our cloud platform was on full display at our recent connections conference held in October in Las Vegas.
With nearly 2800 people attending in person, we saw record attendance more than doubling from the prior year and representing broad participation across customer segments partners and regions of the world.
At connections, we announced our sixth platform release blend.
Glenn builds on our previous releases to deliver improved self service tooling for faster production deployments and introduces a new approach to release updates.
Cloud customers can now update their implementations to new releases far more easily which will structurally change how customers approach upgrades, allowing them to stay on the latest guidewire Virgin and take advantage of platform and application innovation more continuously.
We also released our digital framework future out which enables customers to launch new digital experiences built on insurance suite quickly and easily together these product capabilities to provide much greater speed and agility to our customers and help us manage our customers' cloud deployments far more efficiently.
But the real highlight of connections was hearing customers share their cloud vision journey and outcomes with Guidewire.
Hey, <unk>.
<unk> has served us veterans and their families for 100 years and has over 13 million members is halfway through a multiyear modernization journey to increase engagement innovation inefficient growth guidewire.
<unk> cloud platform is a key foundation of this journey.
And already USAA has been able to introduce a touchless claims experience for members and launched its new small business insurance line of business and less than nine months.
Greg the largest property and casualty insurer in Scandinavia.
With over 5 million customers moved to Guidewire cloud platform with the goal of fully automating the claims process to further drive efficiency and customer satisfaction.
Craig has already been able to reduce the amount of time spent per claim by 26% and the percentage of claims leakage by 58%, while also significantly increasing customer satisfaction.
Hey, Oh insurance part of Nisei, Goa insurance, the eighth largest insurer in the world was able to replace its core system with Guidewire cloud platform in 12 months and achieved greater flexibility security and optimization.
They were able to double their new business capacity by reducing manual steps in cutting claims acceptance time in half.
As we continue to increase platform maturity with each release, we are driving healthy adoption across existing and new customers over 20% of our core insurance, we customer base has already adopted Guidewire cloud platform and we added another four cloud wins in the first quarter.
Budwah group, a Swiss tier two insurer founded over 125 years ago chose to upgrade to insurance suite on Guidewire cloud platform for a major part of its book of business to achieve greater operational Excellence Budwah group initially adopted insurance suite self managed but before deploying.
Elected to upgrade to Guidewire cloud.
Santa Lucia S. A a tier two insurer in Spain selected insurance suite on Guidewire cloud platform for their largest line of business funeral insurance and end of life support Santa Lucia decided to modernize policy claims and billing on Gw's CPE because of.
Our market, leading presence combined with our platform adaptability and flexibility.
This is our first insurance suite cloud customer in Spain, and we're excited about the future potential in this market.
Builders are mid sized mutual insurers specializing in workers' compensation and construction operating in 22 States selected full insurance suite on Guidewire cloud platform to replace their legacy mainframe based system and to establish a new technology framework that improves their customers' experience increase.
<unk> productivity and supports future growth.
Finally, RVO S farm mutual insurance based in Texas adopted insurance now for its functionality configuration upgrade ability and self service capabilities.
In addition to these cloud decisions. We also saw three insurers, including one in Japan, and one in South Africa.
Up to begin a modernization with guidewire on Prem.
While the vast majority of sales activity over the past few years has been cloud, we do see cases, where an insurer decides it makes sense to begin on prem.
Our technical approach facilitates this path and our perspective is that as long as the customers understand the strategic direction. We are following and acknowledged that an eventual transition to cloud will come we can support this approach.
And one of the deals and existing tier one on Prem claim center customers selected policy center for a new modernization projects to support specialty lines.
And another the selection was based on the native integration of data and analytics into claim center, which will enable the creation of a better claims experience through real time modeling and targeted straight through processing.
This example supports our strategy to deliver a fully modernized score platform with data and analytics embedded throughout the insurance lifecycle.
We also saw hazard hub continues to accelerate in the quarter.
This was highlighted by a meaningful deal at frontline insurance company or <unk>.
Large home and commercial property insurer operating in Florida, Alabama, Georgia, and the Carolinas.
Frontline will use hazard hubs granular risk, scoring for their direct to consumer business open house to inform customer acquisition and core underwriting strategies.
We are very pleased with the continued success of this product as it offers us a new faster sales cycle and a more flow based business that might in the future complement our core system sales dynamic.
Turning to operations.
At Analyst day, we talked about our focus on driving improved platform efficiency as we expand breadth and adoption in the first quarter. This translated into progress in subscription and support gross margins. This is an area. We will continue to stay focused on and expect to improve steadily as we deploy more customers in the cloud rollout new self.
Service capabilities and generally improve the efficiency of our cloud platform.
While at the same time always continuing to ensure that our customer implementations our resources managed to ensure that the greatest possible degree of success.
In the first quarter, we executed a number of new insurance suite production deployments on Guidewire cloud platform, including definitive insurance a tier two insurer in Canada known for industry, leading innovation a two time winner of Guidewire Innovation Award migrated to Guidewire cloud platform with over two 5 billion.
In personal lines and production.
Already it is seeing 40% faster consumer transactions, 12% faster broker transactions and an 8% increase in quote volume.
We also saw a tier two insurer with over 90 years of history offering auto homeowners and other personal lines to members in 23 States go live with claim center on Guidewire cloud platform.
Appointment lays a strong foundation to build on as this customer embarks on further transformation and.
In addition, a large farm mutual insurer in Texas went live with insurance suite on Guidewire cloud platform.
This is a company with over 100 years in operation in Guidewire cloud platform will help them maximize operational efficiency as they pursue further growth.
And finally, let me just close by discussing our partner community and ecosystem.
Our system integrator community has been and will remain critical to our differentiation and long term success.
<unk> are currently involved in over 60, Guidewire cloud projects and growing this total will remain a strategic focus focus for us.
The number of Guidewire consultants that systems integrators grew to over 20000 at the end of Q1 up by 28% year over year.
We also continue to see cloud momentum build in this community with the number of cloud certified consultants sustaining growth of over 100% year over year and passing 5800 at the end of Q1.
It gives our customers a valuable bench of cloud trained professionals to drawn as they start down the path of modernization or embark on cloud upgrades.
We are also seeing momentum in our solution partner community.
In the first COVID-19, more solution partners joined guide wires marketplace, bringing the total to nearly 180 we.
We also announced a few important new strategic partnerships at connections with.
We partnered with wanting a digital payment solution for P&C insurers that offers comprehensive digital payments options and automated inbound and outbound payments our collaboration will make it possible for our cloud customers to deploy these solutions significantly faster than they were able to in the past. We've also partnered with apt.
A leading workflow automation platform to enable our cloud customers to rapidly create and manage cloud based digital experiences and business process automation.
And we've partnered with earnings a leading dynamic pricing engine to accelerate insurers speed to market and defining updating and optimizing insurance insurance products that are already in market.
In summary, Q1 was a great quarter and a solid start to the fiscal year, we continue to expand our platform in critical areas. We continue to sell new modernization and cloud upgrades, we continue to expand our ecosystem and deliver successful production go lives and continue to make steady progress on cloud.
Operating efficiency all of these critical elements of our plan that reinforce each other and demonstrate steady progress towards strategic cloud leadership and our market.
With that I'll turn it over to Jeff.
Thanks, Mike.
First quarter Air or ended at 673 million ahead of our expectations.
Do you want is always our slowest quarter, but we're pleased to see some exciting cloud wins, most notably meaningful progress in EMEA.
Total revenue was $195 3 million just above the high end of our outlook.
Cloud strength continues to be visible on subscription revenue, which was $79 million up 38% year over year.
Subscription and support revenue was $99 1 million up 25% year over year.
License revenue was 41 million up 2% when compared to Q1 last year.
Services revenue was $55 3 million up 18%.
Services revenue benefited from ongoing increases in the number of cloud implementation programs.
Turning to profitability for the first quarter, which we will discuss on a non-GAAP basis gross profit was $83 million.
Overall gross margin was 42%.
All of our margin disclosure for the quarter and for the comparison periods reflect our updated allocation methodology for head count related costs for payroll and procurement.
As a reminder, and as we discussed on our Q4 earnings call in September we moved head count related costs of ITE payroll procurement G&A expense previously we allocated these head count costs out to other expense lines.
Subscription and support gross margin was 49% compared to 45% a year ago.
This was ahead of our expectations due to increased cloud infrastructure efficiency and slower than expected hiring.
And services gross margin was negative 9% compared to positive 10% a year ago.
As discussed in prior quarters, we are working through some complex early cloud projects and have been leveraging subcontractors at higher than normal levels.
We are making steady progress through these programs and expect services to return to positive margin in the second half of the fiscal year.
Operating loss was $35 9 million. This included $2 9 million of severance expense half of which impacted sales and marketing expense.
Also as previously mentioned G&A expenses were negatively impacted by the reallocation of adjustment.
This had an $11 3 million dollar impact on G&A expenses in the quarter.
Overall stock based compensation was $35 1 million up 9% from Q1 of last year, which is generally in line with our growth in overall compensation expense.
We ended the year with $868 5 million in cash cash equivalents and investments.
In Q1, our board authorized a $400 million share repurchase program and as part of that we initiated a $200 million accelerated share repurchase program that we expect to complete in Q3.
Turning to our outlook for the fiscal year of 2023, we are maintaining our outlook of $745 million to $760 million.
Per our usual approach or our outlook assumes foreign currency exchange rates as of the end of our last fiscal year.
We are adjusting our outlook for total return.
We now expect to be between 886 and $896 million.
The only changes, we now expect subscription revenue to be $342 million and adjustment of $2 million.
All other components of revenue are largely unchanged.
Turning to margins and profitability, which we will discuss on a non-GAAP basis, we expect subscription and support gross margins to be 49% for the year, an increase of three percentage points when compared to our outlook last quarter.
We now anticipate lower cloud infrastructure costs, and we redeployed some head count from Cogs to R&D as their work transitioned from supporting specific customers to building platform capabilities that will benefit all of our customers.
This adjustment reflects increasing confidence in our margin trajectory as we execute toward our mid and longer term margin targets.
We expect services margins in the mid single digits for the year with significantly better services margins in the second half of the year.
This improvement reflects the successful completion of ongoing arrangements with investments from Guidewire.
The ramp of new services hires, replacing subcontractors and the redeployment of some guidewire services resources from non billable to billable roles.
As a result, we now expect overall gross margins to be just under 52% for the full year.
With respect to operating income, we expect an operating loss of between 28 and $18 million for the fiscal year.
We now expect stock based compensation to be approximately $138 million, representing a 1% growth rate year over year.
We expect stock based compensation expense growth to slow as we temper overall hiring.
There is no change to our cash flow from operations expectations.
Turning to our outlook for Q2, we expect <unk> to finish between 695% and $700 million represent 16% growth at the midpoint on a constant currency basis.
We expect total revenue between 221 and $226 million.
We expect subscription revenue of approximately $83 million and services revenue of approximately $52 million.
We expect subscription and support.
Gross margins of approximately 50% and we expect services margins of approximately negative 2%.
We expect an operating income of between negative $4 million and breakeven in Q2.
Operator, you can now open the call for questions.
And at this time, we will be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
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And one moment, please while we poll for questions.
And our first question comes from the line of <unk> Becker with William Blair. Please proceed with your question.
Hey, guys. Thanks for taking the question, maybe Mike double clicking on the connections conference.
A month or so ago. The cloud messaging. There was it was very apparent and you you guys emphasized the plans of getting 100% of that customer base to the cloud over time, So I guess.
How has the initial feedback then from a customer perspective, following that event and how important are those conferences being in person as you think about building out that pipeline progression.
With some of those initial reference points.
Yeah, Hey, John Thanks for the question.
I would say let me let me take the second half of it first I think these are in person events are critical for us.
Just nothing that you can do to replace the <unk>.
The ability to connect with customers and the ability to connect customers with other customers to be able to hear firsthand their experience are the things to do the things not to do.
That is that that event is just are invaluable.
Both for us and the community.
When you add to that the opportunity to connect with the different partners different application partners, the new fresh innovation that you're seeing in the ecosystem.
It's just great to be able to get people back in person and we were real real excited to like I said on the.
The prepared remarks, a set a record in terms of in person attendance.
Attendance, so really really great to see.
I think.
I was pretty direct I guess in terms of our intention to get 100% of the customer base to the cloud I think you know at first people people saw that as a as a sort of more direct statement of that strategy, but I think as it as it sunk in over maybe a couple of hours or 24 hours.
And then certainly over the past few months as we've engaged with customers following the event.
I think everybody understands and appreciates why it's important for us to be so clear about where we're taking the company and where we intend to take 100% of our customers.
These implementations and these projects are.
You have to last for 2030 years, the decision timeframe that people have when they're thinking about how to approach. It is not measured in months. It's it's certainly measured in years and it's not to say that we're going to abandon anyone that's not the intention, but I thought it was necessary to be crystal clear that.
There's just so much more of the innovation that the the thrust of the creativity and the and the physical investment and the products going into cloud that I really wanted to make sure that every single one of our customers sees that and thinks about it and thinks about how they can take the appropriate steps right now.
To ensure that they are aligned with that eventual outcome and so you know.
The initial feedback was a bit of Wow that was interesting that you said that but I quickly got the follow up that yeah. Thank you very much we actually had one customer who you know as I said in the prepared remarks today, we do occasionally sell even today, even in this quarter and on Prem deal, but we had a customer.
<unk> had a long conversation they they had done an on Prem deal previously in the year and you know and they said after connections in my keynote in the sessions that they were able to.
Participate in.
They were sitting down to make a more concerted effort about making a plan to get to the cloud and so you know it was it was a <unk>.
They received on the whole very constructively.
Is this summary way to answer your question, so hopefully that helps and thanks for the question.
Yeah, Yeah, no absolutely.
To hear and maybe piggybacking off of that as well too I think there was a.
An important implementation.
In the quarter at Mercy, and maybe maybe one of the largest once you guys have done to date, particularly in Europe .
And somewhere you guys called out strength from an IRR perspective. So I'm just wondering first how important is that implementation relative to kind of a market validation perspective.
And then also driving kind of some nice initial margin leverage here, maybe how are you thinking about some learnings of moving that complex book of business and some of those other customers are kind of thinking about their own migration roadmaps.
Yes, so thanks for that thanks for the question about them.
One thing I would say is our attitude is.
Every single one of our customer implementations is just as important as every other.
I am.
100% committed to ensuring that we're doing everything we can to make sure that every single implementation is a success.
This was an important it's funny when I first was talking to the board and talking to Marcus about joining guidewire. This.
Was one of the most memorable parts of the way that they talked about the company.
Is that because of the nature of these projects, we have to make such a huge commitment to ensuring that they are successful and that sounds emotional but it's really strategic right. Because if you think about what do you want from a core system vendor you want somebody who is completely committed to ensuring that the project's success.
And for them and for US. If these implementations last 2030 years and this is kind of in the end be a you know sort of.
<unk> positive for both of us.
But we are committed to everybody being successful. So you know you talked about <unk>.
That project is going well, it's critical to us that we have a success in Europe at scale is critical to us that we have a success.
In the market in France and.
And so we are very focused on that just like we are many of our other customers. So I wouldn't call out anything specific there, but you know it is certainly one of the programs that we pay close attention to maybe not so much because we care about it being successful more but just because it's big and complicated and requires that lead.
A focus.
Got it Super helpful. Thanks, guys.
Thank you Brian .
Our next question comes from the line of Ken Wong with Oppenheimer <unk> Company. Please proceed with your question.
Great. Thanks, Thank you very much Mike I wanted to maybe just second with you on what Youre hearing from customers in terms of.
How they are thinking about macro last quarter obviously.
Neil composition, maybe changed a little bit.
Any any sense from your conversations with customers on any incremental caution or what were you hearing from them as far as how theyre thinking about core systems and it budgets.
I would say the answer to that question has not changed.
Over the past few quarters.
I'd say that the insurance industry.
Is a very stable industry relative to maybe the other I don't know buying behavior you see from other tech companies. They are more horizontally focused.
We consider that.
To be a sort of.
Lucky characteristic of Guidewire as focus that said.
There is still is the concerns associated with tracking inflation closely and making sure that the system. The rate changes the claims expense all those sorts of things are balanced.
No. There is a there is a deal that we're working on in the pipeline right now where there's some changes to the operating.
Model associated with inflation, that's having an impact on when exactly the guidewire deal will flow through the system, but I wouldnt characterize these things as macro headwinds, but more just normal course of business and selling core systems to the insurance industry.
So summary is it does it.
Doesn't seem to be helping things, but it isn't hurting things for us and I really feel like our destiny is in our own hands, if we execute effectively and we provide the value that we think we need to provide we're gonna be able to hit the targets and grow the company based on the forecast that we've laid out.
Got it fantastic. Thank you for the context, there and Jeff just one quick one for you really nice uptake on that subscription and support gross margin line. How much of that is kind of seasonal I think typically Q1 does see a kind of a bit of an uptick versus actually getting some solid progress on the efficiency front.
Okay.
Yeah, that's one of the highlights from my perspective on the quarter I wouldn't categorize it as seasonal there can be some quarterly fluctuations but that was.
A result of some real hard work that we've done over the last year and.
<unk> with the finance team the cloud operations team the product development team to drive a much more efficiencies through how we manage our cloud infrastructure, so a real positive.
Element there that we've been working on for some period of time and Theres still a lot of we're still learning a lot in terms of how customers consume our products and what.
What this will look like but some some some positive signs there that that we all felt really confident and as we look ahead, we were able to kind of adjust our target for subscription and support gross margins up a few percentage points, which was positive as well some of that benefit was a result of.
As we saw some of the efficiencies of the platform, we were able to repurpose some head count and move them back into product development.
Where they were doing more platform specific work rather than customer specific work and so that also was a benefit that's flowing through our guide as we look for the full year.
Okay fantastic great workout.
Thank you.
Our next question comes from the line of William Mcmorrow with BTG. Please proceed with your question.
Hi, Thank you for taking my question wanted to just follow up you mentioned hiring plans and how they had slowed down a bit just curious to know if there are certain areas you're aggressively trying to hire in to kind of fill potential like implementation needs things of that nature.
There's no specific area.
The pace of hiring has definitely slowed down and I think that there was a period of time.
Over maybe the last year, I'd say, maybe a little bit further out where we were.
Inserted about.
Attrition and so when you're concerned about attrition you're trying to make sure you've got all of the appropriate roles filled you're you're really focused on gearing up hiring and recruiting to make sure you can compensate for any attrition that you do see.
That didn't materialize as <unk>.
Significantly as we thought it might.
And at this point.
We're not really seeing any.
Gaps or strategic gaps or anything like that.
It's just sort of slow and steady approach to managing the company and ensuring that were making as Jeff and I have said steady improvement on the margins.
So nothing out of the ordinary.
Okay, great. Thank you.
Thank you.
And our next question comes from the line of Richie Deloria with RBC. Please proceed with your question.
Oh wonderful. Thanks, so much for taking my questions I wanted to maybe start out with you know coming out of a guidewire connections one of the piece of feedback we got from the partners is it's cloud demand is definitely.
Really strong and customers are very much interested migrate to the cloud, but one of the things that some partners told me that maybe holding them back.
Yes.
That they've built so much customization and custom apps on premise and that makes it harder to kind of migrate to the cloud version can you talk to what kind of steps you can take to make that migration path a little bit more painless and then I've got a follow up.
Super question so.
This is something we spend a lot of time thinking about obviously.
These things end up being a super Super complicated.
And so somewhat the answer to your question is our clouds and little details.
But I'll give you I'll give you. Some examples is number one I think when we started the journey, we had a sort of view for the types of customization types of configurations characteristics of the implementation that we thought were acceptable and not acceptable when the.
When those implementations landed on our cloud platform as we've gained experience we've been able to hone those requirements and so you know maybe a lot more of those things that we thought at first were.
Inappropriate or not something we could support that maybe there could be things that we could support her support them in certain ways and sort of that experience enables us to really hone what the requirements are for things like integrations or customization that are running on the platform.
The other thing that we can do.
Is.
And facilitate the conversion of those customization.
Two something that'll work more effectively on cloud.
An example here is.
We haven't we have something called advanced product designer, which is sort of a new way to build out an insurance product on our on our platform and when you use advanced product designer to build out that product on our platform you just get a whole bunch of features for free right. We're able to build AP is the old integrate that Prada.
<unk> into <unk>.
Different applications, where we're able to make a digital interface for that product.
More efficiently, but for a customer that's already built their products in the in the on Prem version of Guidewire. They were looking at having to rebuild that product using advanced product designer. So we built something called a apd retrofit, which is a mechanism for us to take.
Most of the product definition that exists on prem and convert it efficiently to an apd base.
Product, which enables the customer to more smoothly transitioned to the cloud and take advantage more of the benefits of the cloud version of the product and so that's one example of that.
Is relatively important and strategic but do you want to think about lots and lots of these things that relates to the various components of an implementation and those things will just build and build and build over time.
As we get more and more experienced and we do more and more of these migration projects. So hopefully that helps give you a little bit of color, but tier.
To the what the partners are telling you is real.
There is a difference between the on Prem implementations and what we really want to see and what the customers wanted to want to get out of the cloud implementation.
And that.
I would say is just something that needs to be accounted for in the planning through each one of these migrations.
Got it that's super helpful. I appreciate that met the example, and then Jeff just a quick follow up to.
Continue on on the margin question. So continued improvement on the on the subscription gross margin side right. If we do the kind of back now bought back about 40% for the first time in a while.
Anything just one time to call out I know you just said not seasonality, but accounting or anything like that or is there any reason, we can't kind of straight line the sort of margin improvement we've been seeing for the past couple of quarters and kind of get it from that glide path from 40% to call it 60% over the next several years.
Yes, nothing really onetime in nature, sometimes it can take a little bit longer forward.
Q4 is our largest deal those customers to get provisioned up and running and start using some of the cloud infrastructure resources. So as you look at our guide for the year. Our guide for the year is consistent with what we delivered in Q1.
And but in terms of kind of onetime in nature nothing in particular to call out. This has just been.
A lot of progress that we've made over the last 12 months you may remember it was about a year ago. When we in Q1 last year, we had a little bit surprised in some of our our cloud infrastructure costs and we've done a lot of work to get that in a much healthier place. So so yeah in general as you look over the longer term you know if you and if you look at our long term model.
<unk>. It is implied that there will be steady progression as we track towards those targets.
Awesome really helpful. Thank you so much guys.
Thank you.
Our next question comes from the line of Parker Lane with Stifel. Please proceed with your question.
Yeah, Hi, guys. Thanks for taking the question.
Mike I was hoping you could dive in a little bit more on the decision to use guidewire on private is a stepping stone to the cloud I think it was three insurers that opted for that during the quarter why is that the right approach today and then two when they talk about the modernization side of it and the eventual migration to cloud.
When a customer has made that decision today are they still thinking about this as maybe multiple years down the road or does it accelerate the timeline.
You know to perhaps the next 12 months to 18 months.
Yes, thanks for the question so.
First of all I want to make sure everybody understands that I think that this is a.
A positive attribute of the choices, we've made about the technical architecture, obviously in a perfect World you would want everybody to go straight to cloud.
But every every single customer.
Customer is different and the circumstances around their overall enterprise environment are.
All very very unique and theres a lot of different variables.
That are at play in terms of a customer, making this sort of decision and now.
In one case.
You could say like a customer has just got the rest of the enterprise all on Prem guide wires on Prem and they want to add a a core component of the insurance suite to that implementation and that just makes sense for them to do that.
Modernization on a on a guidewire core, but without making the overall leaps to cloud and that may be driven by the overall strategy that cloud overall cloud strategy at that customer.
No other circumstances, there's can be some regional differences.
Round People's Proclivity to accept cloud is a safe.
And secure place and we're constantly working on that and we are constantly making progress.
But like I've said, a couple of times I mean, these decisions are 2030 year decisions and if we can get ourselves established and we can make sure that the customers are crystal clear about that.
The real strategic direction of the company and acknowledged clearly that eventually these implementations will move to our cloud.
It is a positive characteristic.
I'll also refer to you to but one that we called out in the prepared remarks. You know this is a customer that made a decision to go on Prem and in the process of that implementation made the decision to move to cloud and so this happens and so even though we are.
Doing these deals and it probably seems even to me sometimes seems like.
That's a bit of a head scratcher there is real logic behind this and I do think that it's a positive characteristic of the architecture.
And the strategy of our company, especially as you think about Guidewire.
No it's tough sometimes but if you think about guidewire over a 10 or a 20 year time horizon. This makes a lot of sense.
Got it very helpful feedback thanks again.
Thank you.
Our next question comes from the line of Michael <unk> with Wells Fargo Securities.
Proceed with your question.
Hey, Thanks for taking the question.
Just in terms of capital allocation I mean.
<unk> the buyback you've clearly been active around can you just provide us with an update on how you're assessing the trade offs and uses of cash in the current environment and then just the second part I'll ask upfront on the free cash flow side.
Negative for Q1, but you're holding on to the cash flow from operations guide for the fiscal year can you just remind us anything we should be mindful of and updating models around seasonality on the free cash flow side. Thank you.
Yeah, Yeah, yeah. So on the capital allocation side, we're obviously executing on our $200 million accelerated repurchase program. Once we complete that which we expect to complete in Q3, we will revisit the authorization for the other $200 million.
We continue to think that we're guidewire is trading today that there is.
No greater use of our cash at this point in time than buying back some of our shares.
But it's important for us to maintain flexibility to allow for inorganic activities should those arise in this environment. So we think that.
The $400 million share repurchase program that we have authorized allows us to kind of walk that line and do both so we feel we feel that that's the right posture for us with respect to cash flow.
Obviously guide on an annual basis, there can be a lot of movements on a quarter to quarter basis.
The results in Q1 were very much in line with our internal expectations and how we thought this year would play out.
And in fact, some of the we slightly adjusted our operating income expectations and that has an impact on cash flow. So slightly more confident into the range. There can be a lot of movements in terms of <unk>.
Collections at the end of the year that causes us to provide a somewhat wide range, there, but but no adjustments how do we think about the full year.
And our next question. Our next question comes from the line of Joe.
Julien with Baird. Please proceed with your question.
Hi, great.
Going back to the subscription gross margin topic.
Given the updated guidance for the year and again the backlog back of the envelope math just on the subscription line I think it implies an incremental margin pretty close to 60% last year was also pretty close to 60%.
Obviously, if you just.
That's been proven over time, but I also think.
The mid term framework implies reaching.
Next tier level, what are some of the elements that are going to do that and flex that up or is it not even necessarily discrete elements, but maybe just more a function of how your business evolves over time.
And then some of the installed base and kind of vintage dynamics you highlighted at the Investor day.
Yeah, I'm not sure I, followed completely your analysis not sure that I've looked at it the exact same way, but in terms of the key levers that were focused on.
You've heard us talk repeatedly about.
Building, our cloud operations team in advance of the demand to ensure that every one of these early cloud programs are ultimately successful. This is critical for our long term strategy.
And as we think about the build out of that particular function.
We've indicated at analyst day that largely we built out the team to support $1 billion of air are and now we need to grow into that profile without necessarily expanding significantly the existing cloud operations team. We saw in this quarter towards the end of this quarter.
We were able to.
Repurpose or reallocate heads and employees that were working on customer specific things and so impacting cost of goods sold and now they are focused where they should've, where they were originally focused on building more platform capabilities that will.
Address all of our customers. There is other things like that that we can do specifically as we continue to March through migrating the customers that went live on Guidewire cloud classic to Gw's U T and recognizing the efficiency uplift associated with that so so those are the things we're focused on.
And we think we have all the levers in place to execute to the margin targets that we set forth at analyst day.
Okay, great. Thank you.
And our next question comes from the line of Michael Funk with Bank of America. Please proceed with your question.
Yeah. Thank you.
Alright.
So I appreciate the color on your comments about the resiliency of your customer base in terms of spending in the earlier comments about the efficiencies that.
And your customers see when they adopt your platform, maybe just stepping back and trying to quantify the value proposition that you sell to your clients and you know.
How you quantify that for them in terms of payback and maybe where there are differences in that conversation when talking about new.
New deployments versus some of the customers are electing to remain on prem because they have substantial investment in the legacy.
Spoke system that that'd be helpful. If you could walk us through that math, how you talk to customers about the payback and the value proposition.
Sure thing.
I don't know whether or not I'm going to give you the math behind it I will give you the subjective explanation.
Maybe we could connect later to talk about the math of this in a micro sense.
When we when we do a new deal.
You heard me describe a deal where we're replacing a mainframe system.
The value proposition associated with that has a lot to do with the risks that the company faces an operating system that in some cases like greater than 30 years old and has a very small number of people who are able to confer.
Configure it and support it and so when you talk to these companies, there's not really a math behind that as much as just an overall.
Risk.
Calculation that they that they think about in terms of the ongoing operations of their company.
Certainly there is a a a lot of value that insurance company can gain from just simply being able to create engaging digital experiences on top of core systems for doing things like quoting policies.
With agents with consumers, if it's personal lines or commercial lines, it's like being able to connect with.
Buyers.
With convenient digital.
Hi.
Processing flows.
Is basically necessary in order to be able to compete in the modern insurance market and we see this all the time and so you can basically do the math of saying, we're going to be able to implement guidewire create a digital experience and grow this much but you can also do the negative math to say that if we don't get off the mainframe system, we don't do.
Digital experience, we don't create an API to connected to that broker system, we're not going to get any more business at all and so you just have to do something.
In order to connect in a modern way.
To these new channels on the claim side being able to create a efficient claims operation to be able to manage claims efficiently just had a direct benefit to operating expenses at an insurance company trading it's probably one of the best examples in our customer base and maybe.
The industry of the kinds of impacts that you can gain from.
Really effectively automating claims experience as you know these are real structural cost for insurance companies and you cannot do that on these legacy systems and so that's sort of the the category of net new business. That's great now you talk about the Guidewire installed base.
The guidewire installed base, it's challenging for them to run Guidewire right any everybody in the world really is looking at data center expense IC operations expense, it's just complicated to manage and run the systems to keep them updated all of this kind of expense.
Expense and effort it doesn't contribute to the strategic thrust of an organization and so by moving some things to cloud by transferring the burden of it of the servers of the database of the updates if you transfer all of that is Guidewire. There's an economy of scale that we can deliver to our customer base in <unk>.
<unk> all of that forum and there is a value proposition there.
And then there are.
<unk> number of Guidewire customers that are doing this super super efficiently and so for us with that cohort of customer, we're really talking about what's the incremental benefits that we're able to add to the application and the platform beyond these are things that we just can't do in an on Prem modality, but we can do as a cloud service and so those.
Characteristics.
Create value both in terms of agility, but also operating efficiency for that carrier.
So anyway without giving you all the numbers of that because it probably changes for each insurance company in each line of business and each each sort of segment of the core systems, that's how we judge.
Generally think about.
The overall value proposition for Guidewire cloud.
I.
I don't know sorry does that help you.
I think that's a good overview with thinking about the kind of consistency of the transmission of the growth and the drivers relative to other other.
All the other software companies and one more quickly if I could as we think about growth this year versus the last couple of years. If you have it top of pad how.
How should we think about the contribution from <unk>.
<unk> versus net new are you seeing any shift there.
Yes, I mean, I'd say, we've over time built up a pipeline.
Pipeline of <unk> that flows in from what we call our backlog from ramped deals and so that's that's a pretty meaningful part we are starting to see some a bit more new.
You know rfps or new modernization programs for a little while that was sitting on the sidelines because those folks were making the decision to kick the can down the road, while they sat on the sidelines and waited for a bit more cloud maturity. So we're starting to see that come back to market, which is exciting for us but.
No material shift in terms of the overall model I mean, I think we're still going to get a lot coming from our installed base and our customers.
Significant a significant amount coming from deals that we sold in prior periods as those ramps flow through the model.
And then we're always very focused on new modernization.
Okay. Thanks, Thank you for the time I appreciate it.
Thank you.
And our next question comes from the line of.
Google News with J P. Morgan. Please proceed with your question.
Hello, everyone I have a quick question on cyber security.
<unk>.
Multi tenant nature of Guidewire cloud to allow you to invest.
More into securities compared to some of your peers.
And I was wondering if you disclose any of those investments.
Yes, I think the way we think about this is that the centralization of the management of a system.
Facilitate a greater degree of security for that system and Thats simply because we can patch.
<unk> wire and the various implementations that are running on guidewire cloud more efficiently than we are able to patch and maintained.
The systems that are each of our customers are individually running.
Your comment about multi tenancy is sort of exactly right. It's like the changes that we can make once can be applied.
To many customers and so therefore that the effort that we put in to securing that system can.
Can be sort of leveraged by a greater number of customers a greater number of tenants and so the system overall.
Can be more secure than what any of the individual customers are able to achieve on their own.
There has been.
A few.
Conditions that have come up and examples of this where we know we were able to ensure that the guidewire cloud implementations where quickly.
Patch for vulnerabilities in a way that was just a lot more cumbersome for us to get those patches those updates pushed out to all of the on Prem customers that were impacted by this and I think in the end you see this throughout our enterprise software is that these centralized systems just get this benefit of.
Central focus on security assertive idea of a limited number of code lines in order to patch and secure.
And you just you know over time, you you create something thats.
A lot more secure than the variability that exists within all of the individual implementations. This is certainly something that we talk about with our customers as a benefit of the cloud model and they understand that I think that there's also a degree of risk that they are thinking about in terms of making sure that we.
As at least as secure in our approach to managing the system as they are with with their individual implementations and so depending on the size and scope of the customer that we're talking about that conversation will either be quick and easy for a small insurance.
Company, where what we can apply with the resources of Guidewire far out strips with they're able to do on their own but we are we have some of the largest most sophisticated customers in the world from an enterprise software perspective, and so those conversations are pretty in depth.
And we work very very closely with those customers to ensure we're creating a more secure reliable services, we possibly can.
So I hope that I hope that gives you a flavor for how we think about this and why I think it's <unk>.
Certainly a benefit of the model here at Guidewire.
It does thank you.
Okay, great. Thanks, a lot.
And we have reached the end of our question and answer session and I'll now turn the call back over to Mike Rosenbaum for closing remarks.
I just wanted to say thanks, everybody for participating on the call today.
We're thrilled with the continued momentum in the cloud in new and existing customers.
We see that as a great validation of the strategy and it's giving us increasing confidence in the long term opportunity at Guidewire and look forward to catching up with everybody throughout the quarter. So thanks very much.
And this concludes today's conference and you may disconnect your lines at this time.
You for your participation.
Yeah.
Right on right on an hour.
Uh huh.
Okay.
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Okay.
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Okay.
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