Q1 2023 Duck Creek Technologies Inc Earnings Call
Yeah.
Thank you for standing by and welcome to Duck Creek technologies first quarter fiscal year 'twenty 'twenty three earnings call. At this time, all participants are in a listen only mode.
The speaker presentation, there will be a question and answer session to ask a question.
During the session you will need to press star one one on your telephone.
I would now like to hand, the call over to Brian <unk> from ICR. Please go ahead.
Good afternoon, and welcome to Duck Creek <unk> earnings Conference call for the first quarter of fiscal year 2023, which ended on November 30th.
With me today is Mike Schakowsky Duck Creek, Chief Executive Officer, Kevin Rhodes, Dr. Craig <unk>, Chief Financial Officer.
A 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 for 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.
Just on management's current expectations as of today and may not be updated in the future.
Therefore, these statements should not be relied upon as representing our views as of any subsequent date.
Should not rely on forward looking statements as predictions of future events.
Actual results or events may differ from any forward looking statements that management may 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 enforced 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.
Conciliation of non-GAAP to GAAP measures is provided in our press release with the primary differences being stock based compensation expenses amortization.
Amortization of intangibles the change in fair value of contingent earn out liability and the related tax effects of these adjustments.
Let me turn the call over to Mike.
Thank you, Brian and good afternoon, everyone. Let me first start by wishing all of you and your families. A very happy new year I am pleased to report the Duck Creek is off to a strong start in fiscal year 2023, as we exceeded all of our key operating metrics in the first quarter.
We continued our business momentum from the fourth quarter and signed a number of transactions with new and existing customers for Duck Creek on demand core products as well as our expanded portfolio of strategic insurance solutions like distribution management and reinsurance manager.
As expected P&C insurers are successfully adapting to the changing macro environment and we believe that insurance continues to be one of the better positioned industries in uncertain times.
This together with strong execution and focus from the Duck Creek team helped drive the quarter's positive results. Overall, we are encouraged with our recent performance and the opportunity ahead of us for the remainder of fiscal 2023.
We're certainly mindful of how fluid and uncertain macro environment is but we are confident in <unk> ability to drive continued profitable growth with our products that are critical for the insurance industry.
Migrate away from legacy applications and adopt modern cloud solutions.
On today's call I'll provide some color on what we're seeing in the market highlights some key wins in the quarter update you on progress towards some of our key priorities. This year and highlight an important and strategic acquisition that we signed this week.
Let me start with a quick overview of our financial results for the first quarter, which exceeded our guidance on both the top and bottom line for the quarter. We reported total revenue of $86 million up 10% year over year and this was underpinned by subscription revenue, which is our revenue derived from SaaS or $43 8 million.
Up 23% year over year.
Our annual recurring revenue or <unk> was $186 million, which resulted in 24% growth over the prior year.
And we are also profitable in the quarter with adjusted EBITDA of $3 2 million or.
Our 16th consecutive quarter of profitability.
We believe our best in class SaaS platform continues to address many of the most pressing business challenges facing P&C insurers.
Modernizing their core systems enables insurers to respond to market changes.
With innovative new solutions more quickly and provide a better customer experience more efficiently and cost effectively than legacy solutions can duck.
Duck Creek on demands ability to positively impact our carriers top and Bottomline ensures that we remain a strategic investment priority even in challenging economic conditions.
As we've discussed on recent earnings calls, we have been confident that the various headwinds facing the economy, including inflation geopolitical uncertainty and supply chain delays would largely be transitory issues for the P&C industry.
Our confidence was driven in large part because the mandatory nature of insurance in many facets of life in most cases insurance as a requirement to operate a business owner car or carrier mortgage making it a non discretionary expense for most businesses and households.
When you combine this with the ability of carriers to take rate increases to offset cost pressures in their business. We believe their willingness to invest in new technology solutions would improve.
So while the economy remains uncertain and new spending continues to receive additional scrutiny. We believe our improved performance over the past few quarters has proven our thesis to be correct.
In the first quarter, we signed nine SaaS deals for a variety of our core and strategic insurance solutions with new and existing customers of all sizes.
This includes a strong start closing reinsurance management deals following the acquisition of episodic.
We are pleased with the pace and the mix of business in the quarter, which was an important demonstration of the success of our land and expand go to market model.
Here are some highlights which reflect the breadth of our success.
We made important progress on our objective to migrate on premise customers to the cloud signing hub International a global top five insurance brokerage to migrate policy billing and insights to Duck Creek on demand.
A customer since 2011 hub chose to move to the cloud to further optimize customer service and maximize operational efficiencies, while removing administrative overhead by automating workflows on the Duck Creek platform.
This is a great example of the types of migrations, we can look to.
It highlights a growing interest among on premise customers in deploying cloud solutions. We are pleased with the progress we have made with migrations and expect this to be an important growth driver for Duck Creek in the coming years.
We had an another exciting win with a prominent tier one insurer, who selected Duck Creek policy billing and insights to modernize one of their strategic commercial line portfolios our.
Our ability to move with speed and agility, along with our demonstrable depth and their use cases may Duck Creek standout technology provider. This tier one insurer was impressed with our software service and hands on support and they chose Duck Creek because of our specialization in the commercial and specialty segments.
We had a particularly strong quarter with our distribution management and reinsurance management solutions.
We signed three new distribution management or DM deals in Q1, including a significant DM agreement with one of the world's largest tier one P&C insurance companies.
This global carrier is one of the largest network the producer relationships in the industry and will leverage Duck Creek distribution management solution to bring even greater value to their channel partnerships.
The ability to more effectively manage and communicate with agents has become increasingly important to many carriers given the pace of change in the industry.
Duck Creek is leading this category as our largest competitors and many other P&C insurer tax do not have an offering in this space.
As I mentioned earlier, we had a great quarter in reinsurance management or RM as well, we signed two reinsurance management deals in the quarter. Our first deal was a cross sell win with core specialty insurance and existing full suite Duck Creek on demand customer. We also had an RM deal that added a significant tier one <unk>.
Nancy U S insurer as a new Duck Creek SaaS customer.
This is a great example of how reinsurance management can provide a new entry point into a new customer and provides us an opportunity to expand our relationship in the future.
Both of these reinsurance wins are notable for the speed of which we signed them as they were originated and completed in less than six months. Following the closing of the <unk> acquisition. We remain very excited about the opportunity in reinsurance and we continue to receive strong customer feedback on the breadth and depth of our solution in the market.
These distribution management reinsurance management wins with existing customers are also a great example of the sizable cross sell and up sell opportunity, we have with our more than 100 existing SaaS customers.
Another Great example, where duck Creek is adding value to our existing customers is with hollered insurance, a leading international insurer, who expanded their duck Creek on demand deployment in Australia to include our global policyholder solution.
Our policyholder solution will enable holler to improve real time service to their premium paying customers through a modern digital channel.
We also continue to enable customer success by quickly bringing customers live on the Duck Creek on demand platform with eight new implementations going live in Q1.
Two notable go lives in the quarter were novo and exciting new innovative insure Tech auto insurer, who went live with policy billing and insights as part of their launch Novo has a mission to redefine re imagine and reinvent the insurance industry by shifting the power dynamic back to the consumer a key part.
Their decision to deploy Duck Creek is a reusable and scalable deployment framework and architecture, which will enable them to deliver on their multistate rollout plans as quickly as possible.
S CCI, a leading commercial and casualty insurer went live with our distribution management solution.
When fully implemented will make it dramatically faster and easier to onboard and manage the agent appointment process.
We now have nearly 75 customers live on one of Duck Creek core or strategic insurance SaaS solutions, which is roughly 75% of our Duck Creek on demand customer base, our ability to get customers into production quickly offered in only a few months is a key competitive differentiator and a significant value driver for insurers.
On the product front, we continue to deliver leading insurance capabilities to our customers as part of executing on our roadmap. Our teams also remain focused on delivering core technology enhancements that will better enabled and smoothed the on prem to on demand transition.
Automation is a key focus across our platform and our product and engineering teams continue to improve end to end suite wide connections to bring operational ease and efficiency to Duck Creek on demand customers in.
In addition, we released several product enhancements in the quarter. The following three will help further our goal of expanding our strategic insurance solutions and expand internationally.
We expanded our leading reinsurance management solution to provide more functionality for international insurers, including the improved management of claims incurred but not reported or <unk> enhancements to our enduring update calculations and supporting international rate accommodations. We also launched a new line of business offering that will.
Insurers capture market share of the fast growing pet insurance opportunity in the U K, which is expected to exceed $1 5 billion pounds of gross written premium by 2025.
The pet insurance market is still in its early stages of customer awareness. So we have developed an easy to use solution that combines relevant content, including four standard pet insurance plans prebuilt partner integrations to enrich pet related data and out of the box mobile first digital journeys for sales service and <unk>.
James.
We also launched our policyholder on demand product internationally as mentioned earlier policyholder will be deployed at hollered insurance charter customer in Australia.
I am very excited to announce that we further expanded our product footprint with the acquisition of Swiss based inverse and exciting technology startup who is connecting insurance to the global payments ecosystem with a modern digital payment gateway platform.
Through this acquisition Duck Creek will simplify the payment process for insurers by providing technology that easily integrates into multiple psp's and digital payment options.
Providing greater choice and flexibility to customers.
In versus out of the box offering.
Allows insurers to go to market faster at lower cost with a broad range of payment provider choices.
This is a natural extension of our product vision to create solutions that solve critical business challenges facing insurers and their policyholders.
<unk> offers a cloud native platform that is purpose built for the insurance industry and we are confident that it will fit seamlessly into our land and expand go to market strategy.
Our plan is to integrate the inverse SaaS payment gateway platform into our Duck Creek on demand offerings.
<unk> enable the use cases for premium payments claim payments agent and broker commissions reinsurance fees and ensured policyholder payments. This will unlock substantial value to our customers and it's also a fantastic growth opportunity for Duck Creek.
Overall, it was a terrific first quarter and we've gotten off to a strong start in fiscal 2023.
While we remain mindful of the macro environment and recognize that market conditions continue to create cautious buying behavior. We are executing well and we believe that we are well positioned to deliver on our key financial and operational objectives for the year.
We are encouraged by the continued growth of our pipeline and customer interest in core systems modernization. We remain confident that this will continue to be a top investment priority in the P&C industry for many years to come and will support strong durable and profitable growth for Duck Creek.
We are excited about the opportunity in front of us and our focus on delivering significant value for our customers and shareholders.
I'd like to finish by thanking all of our employees partners and customers for everything they do to make Duck Creek successful with that let me turn the call over to Kevin to walk you through the numbers Kevin over to you.
Thanks, Mike.
I'll review, our first quarter fiscal 2023 results in detail and provide guidance for the second quarter and full year of fiscal 2023.
First I'll briefly comment on our pending acquisition of <unk>.
We are really excited to have the <unk> team joined Duck Creek.
Another strategic acquisition that we believe will position us well for the future.
As we integrate this technology with our core offerings.
Now, let's cover Dr. <unk> strong first quarter results.
Annual recurring revenue or SaaS.
At the end of the first quarter was $186 million up 24% year over year.
$11 3 million or 7% sequentially.
The strong performance in SaaS or <unk>.
Merrily reflects a strong start to the year for our business as well as approximately $1 8 million.
From contracts that were signed in the last two weeks of the first quarter that would not have been normally reflected in SaaS. They are under our prior calculation.
As a reminder, starting this quarter, we have updated the calculation for SaaS to be the annual value of all active contracts in force at the end of the quarter.
And the calculation is not dependent upon a full month of revenue recognition in the quarter.
Believe it better represents our future expected revenue and will eliminate the timing impact of deals that are signed at quarter end.
We also think that this is a more transparent metrics.
Total revenue in the first quarter was $80 6 million.
Up 10% from the prior year period.
Within total revenue subscription revenue, which is comprised solely of our subscriptions to our SaaS products was $43 8 million up.
Up 23% year over year.
In the first quarter subscriptions represented 83% of our software revenue.
Revenues from on premise software licenses was $1 8 million.
And maintenance was $7 2 million.
This represented 11% of total revenue and was in line with our expectations.
We expect these line items to continue to decrease as a percentage of revenue given the strong growth in our subscription revenue and the growing interest in our cloud migrations among.
Among the existing on premise customers.
Services revenue was $27 9 million down 6% year over year the.
The year over year revenue reduction reflects our ongoing efforts to have our systems integration partners manage an increasing portion of our implementations, while we focus our services teams on delivery assurance and the higher value added components of our projects.
We've undertaken a conscious effort to make this a reality.
SaaS net dollar retention in the quarter was 107% and in line with our expectations.
Thus net dollar retention is likely to continue to be below some of the historic 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 it is expected to increase going forward as it did in Q1.
Now, let's review the income statement in more detail this.
These metrics are on a non-GAAP basis, unless otherwise noted.
And we provided a reconciliation of GAAP to non-GAAP financials in our press release.
First on a GAAP basis, our gross profit for the quarter was $43 4 million and we had a loss from operations of $6 6 million.
We had a net loss in the quarter of $5 2 million or <unk> <unk> per share based on a weighted average basic shares outstanding of $132 7 million.
And our financial tables, you'll notice a $645000 expense related to severance.
This was related to a modest workforce reduction we undertook at the end of November we expect annualized cost savings from this action will be several million dollars.
Turning to our non-GAAP results gross profit in the quarter with $46 5 million or a gross margin of 57, 7%.
Paired to 61% in the first quarter of fiscal 2022.
Subscription margin in the quarter with 65, 3% compared to 63, 3% in the first quarter of fiscal 2022.
As a reminder, there can be quarterly variation due to the timing of when revenue recognition begins for certain contracts and the timing of expenses at the early stage of new deployments.
We believe our subscription margins are an important demonstration of the scalability ease of use and performance of our SaaS platform.
Professional services margins were 35, 8% in the quarter in line with our expectations and our long term target of the mid to high 30% range.
We continue to balance sustainable utilization rates and our ongoing efforts to increasingly leverage our systems implementation partners.
Turning to profitability adjusted EBITDA in the first quarter was $3 2 million.
Which was ahead of our guidance, primarily due to better than expected timing of revenue in the quarter and our ongoing discipline around expense management.
This represents our 16th quarter of adjusted EBITDA profitability, and an important indication of our ability to profitably generate high levels of subscription revenue growth.
non-GAAP net income per share for the quarter was $2 6 million.
Or <unk> <unk> per share based on approximately $137 4 million.
Fully diluted weighted average shares outstanding.
Turning to our balance sheet and cash flow.
We ended the quarter with $254 million in cash cash equivalents and short term investments and we remain debt free.
Free cash flow in the first quarter with negative $7 4 million.
With a meaningful improvement from negative $25 5 million in the first quarter of fiscal 2022 due.
Due to improved cash collections and overall working capital benefits.
I would now like to finish with guidance, but first let me add some color on the acquisition of members.
In terms of timing, we anticipate closing the transaction within the next 30 days.
We are excited about this acquisition from a product and technology perspective.
It will add to our lineup of modular strategic products that are integrated with our core platform.
From a contribution perspective, and Bruce has been operating at the startup.
We anticipate it will contribute several hundred thousand dollars of subscription revenue and will negatively impact EBITDA by approximately $3 million, which is being included in our guidance today.
We do expect <unk> to be EBITDA positive in fiscal 2024, as we launch it as a standalone product to the U S and have integrated into our core suite.
Inclusive of the inverse we expect our second quarter.
<unk> to be as follows.
Total revenue of $79 5 million to.
To $81 $5 million.
Subscription revenue of $43 5 million to $44 5 million.
This equates to about 16% to 18% subscription revenue growth after taking into consideration approximately $2 million of one time subscription revenue and.
In the second quarter of fiscal 2022 related to a contract buyout.
We expect adjusted EBITDA of $4 million to $5 million as we had some expenses deferred from the first quarter and into the second quarter and we will pick up some of the incremental expenses from the <unk> acquisition.
That said, we're looking to for acceleration of EBITDA in the second half of the year.
And lastly, our non-GAAP net income is expected to be in a range of $3 million to $4 million.
Or two to three.
Per fully diluted share.
For the full year fiscal 2023, we are raising our guidance as follows.
Revenue of $331 million.
To $338 million.
Subscription revenue of $177 million.
To $181 million.
Adjusted gross margins are projected to be at 60%.
We expect adjusted EBITDA of $26 million to $28 million.
An increase from our previous guidance and lastly, our non-GAAP net income is expected to be in a range of $17 million to $19 million or 13% to 14.
For.
Our fully diluted share.
We continue to take a prudent approach to forecasting deal close rates.
While our go to market team did a great job in the fourth quarter and now again in the first quarter, we are continuing to adapt to the increasing scrutiny on all transactions.
And while we are encouraged by our performance the macro environment remains fluid and we believe it's too early to assume further improvements.
To wrap up we're pleased with how we performed in the first quarter and are positioned heading into the remainder of the year.
We're at the early stages of our global.
Growth opportunity and believe that we are well positioned to build upon our results in fiscal 2023 and beyond.
And with that we would now like to open the call up to questions operator.
As a reminder to ask a question you will need to press star one on your telephone again Thats Star one on your telephone to ask a question. Please standby, while we compile the Q&A roster.
Our first question comes from the line of Dylan Becker of William Blair. Please go ahead.
Hey, guys.
Thank you for taking the questions here, maybe on the macro starting off Mike maybe some of the puts and takes you guys are seeing and hearing from customers. You are starting to maybe see rates go up for the first time in maybe seeing some of that inflationary pressure ease slightly relative to used autos and some others, where we're clearly not out of the woods, yet, but how should we think about that landscape evolving.
Over the next I don't know 612 months and unlocking some of that willingness for modernization is maybe that had been somewhat of a gating factor that led to some of the elongation as we saw in the last couple of quarters.
Yes, thanks for the question Dylan.
Yes, we are.
As we've communicated all along we've seen we've continued to see strong demand in the environment and interest from insurers to invest in their technology, but we are seeing as you indicated that they are adapting to changes in the market conditions and.
Really this comes down to their ability to recapture.
Their loss cost pressure by taking more rates in the industry. Now we are seeing the carriers on the commercial side of the business are getting some rate more quickly.
We saw the earlier half of the year carriers were able to get more rates in on the personal lines, our consumer lines. It takes a little bit longer just because of the regulatory environment. There is a little bit more challenges getting rates through there.
Overall, what I would say is insurance companies typically have just a long term long term horizon and they look at investing over the long term and I think they are getting more comfortable.
But with that they're keeping top of mind transformations cloud deals.
We think that the environment has improved a bit from a year ago, but we also recognize there is still a challenging environment in deal cycles do remain elongated today, but we do feel better about it and we feel like we're operating very well under the current conditions right now.
Got it.
That's evident in the results, but it's good to hear as well.
Maybe switching over to you to the <unk> acquisition to could you dig into again, obviously insurance is a complex landscape, but the complexity of payments and this ecosystem relative to maybe other verticals and how it can can unlock I think there was a lot of information on their website around things like parametric insurance thinks it can be unlocked with kind of some of that real.
Time payments capability can we dig into that a little bit.
You bet and when insurers really look at how they have to work with payments technology. There's a couple of things that they are really looking at theyre looking at.
How do they plug into various PSP or payment service providers and what are the best ways to connect the second thing. They look at is the overall workflows.
Half of the premium paying customer whether they are paying their premium or receiving a claim payment or with their distribution channel and then finally, what they look at also is overall reporting and balancing and reconciliation of those payments.
And so inverse what they do is give us a nice way to plug into those PSP.
Manage that overall insurance processes and those workflows.
Well it is all the reconciliation and reporting.
This is certainly an issue that carriers are always dealing with and having these capabilities pre plumbed into our back plane, where in our SaaS solutions, we can manage the processes of policyholder payments and claim payments and even managing commission payments back to the agent. We think this is a real.
Strong opportunity for Duck Creek.
It's great to hear thanks, guys I appreciate it.
Thank you. Our next question comes from the line.
<unk>.
Barclays. Please go ahead.
Okay, Great Hey, guys happy new year, Thanks for taking my questions here.
Okay.
Hey, guys, Mike maybe just to start with you.
It sounds like some good traction with those strategic products that you mentioned distribution management and reinsurance management.
I was wondering if you could just dig into those products a little bit for us remind us how those products are priced.
Maybe a little bit about the competitive landscape.
And also if tactically those tools can also work with your competitor core solutions a.
A lot there does that does that makes sense. It does jacket and I'll be thrilled to talk about it.
<unk> talked about.
Our strategy is a land and expand strategy.
And beyond just the core solutions, we have been looking for opportunities to expand in strategic solutions for carriers, where they have a complex business problem to solve.
And it's still a very sticky asset it can run stand alone, but it also works by being highly integrated to the core so that we can have a strong attach rate.
And.
In the case of distribution management. What this does is help insurers manage their overall distribution channel.
How to market to and identify new agents and brokers, how they will appoint them and onboard them how to do the contracting with them and then once you get them on boarded and doing the contracting with them Theres also an appointment process through the regulatory bodies that will go manage as well, but once that theyre contracted we also.
Have to manage your commission payments and then also you have to have this ongoing management and looking at their performance and data behind how your channel is performing so it's really an asset that helps carriers really take one of their most strategic assets and the channel partners and manage it effectively and then on the reinsurance side. This is.
An asset that we sought out.
Because we know that reinsurance just given the fact that insurers are trying to manage risk more effectively trying to manage capital more effectively so we're seeing a growing need of more complex reinsurance contracts.
They are trying to manage their risks and.
Somebody in the industry. Once told me insurance runs on reinsurance so we sought.
The asset out over from episodic and it was a great acquisition for us and we can see the momentum already because insurers have a lot of manual processes and managing their reinsurance and we're.
We're seeing some really nice take up and I'm thrilled with the wins that we had in the quarter.
Got it got us it makes a lot of these stack and then final question on integrating with our competitors. That's what we love is these assets.
They stand alone and they are engineered to stand alone now.
Integrating them tightly with Duck Creek, but we're also finding because many of our competitors don't have these assets.
Great way for us to land in their build a relationship now.
A part of the carriers fabric, where in the halls, and then we have a better opportunity to expand other assets as well. So we think it's a nice way to penetrate into the accounts, where some of our competitors already exist.
Got it got it that makes a lot of sense.
Kevin maybe for my follow up for you.
I was wondering if you can just talk about how much maintenance to SaaS conversions contributed this quarter to net new <unk> and either qualitatively or quantitatively, maybe how you think about the pipeline.
Of those conversion opportunities through this year.
Second half two let me cover the pipeline first and then I'll go back to the quarter.
First we are seeing tremendous energy and interest from our on Prem customers as we talk to them about our roadmap as we talk about.
The opportunity to go into the cloud.
There is a lot of excitement about that so that's good in the quarter, we had what I call a couple of meaningful ones. One that we didn't talk about one that we did talk about I don't want to breakdown exactly the announcement I would just say that they were meaningful in the quarter.
And you can see that a little bit what the net dollar retention, where I'll just remind everybody that migrations typically are not net dollar retention, but they are an IRR and so when we look at that.
Obviously includes everything.
All deals done and that was that was an exciting part of.
Of our quarter.
It's getting a couple of these migrations and so we're still continuing to see strong.
There and we're tracking with our expectations.
Got it and Kevin I'm, So sorry, if I could just slip in one just based on the comments just on I'm not being included in the MTR.
Generally speaking not just for the quarter, but generally speaking what's sort of the.
The multiplier right on a SaaS contract versus maintenance that maybe you've seen historically.
Sure.
It depends on each customer and remember there are some of these customers that are on term based licenses.
I'm, saying for the original license and somewhere on maintenance contracts, where they paid for a perpetual license you historically, but let me just say on average across the board roughly about two and a half to three times is what we're seeing a customer.
Uptick if you will on a gross basis, meaning.
How much we have already a maintenance, let's say, it's $1 billion would be two and a half to three times that on the on the new deal.
Got it very helpful. Thanks, guys.
Alright, you're welcome.
Happy new year.
Thank you.
Our next question comes from the line of Parker Lane of Stifel. Your question. Please.
Yeah, Hi, guys. Thanks for taking the question and congrats on the quarter.
Mike I noticed that the insights product.
Part of your prepared remarks around two new deals and one of the.
Go lives during the quarter can you just talk a little bit about why that product in particular is resonating right now.
And then more broadly if you look at the base what are the attach rates look like on that today is that something that you.
You feel pretty optimistic about going into 2023 here that you can permeate more within that existing customer base. Thanks.
Yes Parker.
<unk> is a very important product for us and for our customers.
What insights really as you think about an enterprise wide data warehouse for an insurance carrier, where they can see all of the data how they're performing.
The amount of products that they are selling their loss ratios.
Even distribution and how their agency channel is performing.
So anytime a carrier buys a core system from us policy billing or claims typically they're also asking the questions of how can they have better views of their data and how can they look at that data.
More holistically across the organization.
So insights doesn't just source of data from Duck Creek carriers quite often land data from other systems, even legacy systems into our insights platform and it really just gives them more of a 360 view from a data perspective of their overall business and then quite often and serves as a conduit.
Carriers will integrate with downstream systems and there's a lot of complexity in how they have to do it in terms of extending the financials down.
To their back office systems, and general Ledger, and those types of things and it serves as a conduit for that as well and Thats why the attach rate of it is quite high.
Don't have the specific number in front of me, but I would suspect it's over 70% of our core solutions that bring insights along in terms of.
In terms of.
The demand that we're seeing out there when we sell a new deal.
Got it understood and then Kevin quickly.
End of your prepared remarks, I believe you referenced modest workforce reduction done at the end of November could you maybe talk about what sort of rolls.
Or eliminated there who was most effective within the organization and if any of that was on the go to market front. Thanks.
Yeah sure. So no it was not on the go to market front I would say as we as we think about our business and we think about as we look across the organization and make sure that we are.
Making sure that we've got the right investments in the right places and we have the right prioritization across the board we were realizing that we had some misalignment across the board in certain areas. Some of it was related to <unk>. So we have a little bit of a benefit.
The SaaS ops side, and then the rest of it.
Non go to market I wont be very clear even in a really non innovation now and go to market.
And so it was it.
It was very small I would say it was relatively small, but well give us some growth.
In the back half of the year and I would note that some of our benefit that we get with EBITDA rates with the inverse kind of taking $3 million out of out of EBITDA. This year, but yet we raised by $1 million and so we've got a $4 million improvement in EBITDA. This year and that's a clear indication that we're taking that reduction in force to the <unk>.
Bottom line throughout the year.
It's the right thing for us to do in this environment.
Understood. Thanks, again for taking the questions.
Youre welcome.
Thank you our next question.
Comes from the line of Alex Zukin of Wolfe Research Your question. Please.
Alex.
Line is open.
Hey, this is strecker on for Alex. Thank you for taking our question.
Can you breakdown how much of your <unk> base is core versus noncore as well as the net new <unk> this quarter.
And then can you also help us parse out how much came from episodic this quarter.
Yes.
Yeah.
Little bit of granularity, you're asking for there between the core and the non core we actually don't break down our.
That way and the reason why I will say is that the oftentimes we bundle our products together. So it would be one price to the customer for a number of different bundled packages together, so it'd be very hard to unbundle that and come up with a separate standalone price for each one of those so for that.
Reason, but I would say broadly speaking the large majority of our with the just based on the pricing and how large.
The products would be would be hundreds of our IRR would come from core products.
And in terms of episodes.
We had a small contribution.
As expected in the quarter, but I guess like we said last quarter.
A smaller.
Company.
And we I think we had $5 million of IRR contribute last quarter.
And it will continue to be a good solid steady.
Improver of our <unk>, but it's one of many different products that we have but we're not breaking that out.
Going forward.
Okay. Thank you and then just one quick follow up with the new <unk> calculation should we expect any different seasonality.
Throughout the rest of three quarters of the year compared to what we've seen in the past. Thank you.
Sure.
Do not think so.
Just to be clear, what we are doing here and there.
Past, we used to basically the second half of the.
The final month of any given quarter, we found that those particular deals that we add in the second half because we had to the half month convention of how we're thinking about are coming in.
That we would not be recognizing revenue on that on those deals that came in in the second half some of its provisioning et cetera, and so at the end of the day, what we are doing now with changing our AAR definition any active contracts that we have signed by the end of the quarter, who will enable us to actually take a credit so it's more true.
<unk> parent to you in terms of the deals that we will have in a particular quarter and we feel like it's better meaningful representation of what our future revenue will be.
Thank you very much.
Youre welcome.
Thank you.
Our next question comes from the line of Peter Heckmann of D. A Davidson. Please go ahead.
Hey, good afternoon. Thanks for taking the question just to clarify Kevin on an inverse you said several hundred thousand dollars in revenue.
Yeah.
And the time period, you're speaking about was what is the remainder of this year.
Correct theater that yes, it's small and it's just getting started and they quite frankly had built out all of the technology, but not built out all of the go to market.
But we love the technology, and we think it's going to snap in really well to the company and snap into all of our core products and then we can really use our go to market engine to drive this company in the future and we're just Super excited we're really really happy with the technology purchase there, but Peter just to be clear it's Mike.
The revenue contribution and the EBITDA.
No.
Impact is for the fiscal year is the timeframe that we noted.
Got it Okay. That's helpful and then.
Just how are you thinking about.
Free cash flow for the year.
Versus your annual EBITDA guidance can you talk a little bit about how you're thinking about that.
Well I mean, we had a better quarter in Q1 versus the prior year I think $7 million. This this quarter of $25 million.
Negative cash flow quarter, and if you look at the last two quarters prior to that we are generating somewhere around 15, or so million dollars each quarter.
So we're not going to guide, we can't guide and we're not guiding on.
Free cash flow going to year, because you never know what.
Changes in working capital will what caused that change, but I am pretty pleased what's happened in Q1 and I.
I feel we will be positive for the year certainly from a free cash flow perspective for the full year I can probably give you that.
Alright Thats helpful. I appreciate it I'll get back in the queue.
Okay. Okay.
Thank you.
Our next question comes from the line of reshape Lauria of RBC. Your question. Please.
Wonderful thanks, so much.
My question.
First I wanted to drill a little bit on migrations.
It sounds like Youre getting some solid momentum there to what extent is that a function of you as a company focusing more on it versus maybe providing additional incentives versus just the market and customers being more ready for that and then I've got a follow up.
Rishi I would say, it's all of the above but.
There is no question that it was a re.
Really big event, when we had our formation event last year and we went through.
Our overall plans.
Our roadmaps, where we're investing in our products and I think our customers now really understand that.
All of the innovation that we're really driving is in our cloud product today, and we're being a lot more transparent on our roadmaps and we're walking through in terms of all of our plans in terms of the investments we are making in the products. So that's creating some energy.
At the same time.
I think most insurers know that they have to have <unk> of insurers know they have to have a cloud strategy of some sort.
Data centers are starting to age.
Servers are starting to age out and be need to be replaced and I think that's causing more interest as well.
And then finally when I just go look at the backdrop of our customer base and us talking with them and focusing in on some sales motions, where we're having.
Roadmap sessions with them actively selling to them and then talking about the merits of.
Making the upgrade go away and not spending all your resources on upgrading I think that's triggering more interest as we have the sales motion.
And then time to time, we will work with customers and make some investment in there in.
In the account if there's some technical data some inhibitor for them to do a contract.
But anything that we can do to kind of move a deal along and have a win win for both of US is what we're focused on.
Got it. Thanks, that's helpful and then when I just think about some of the momentum that you're seeing in distribution management reinsurance management at least preliminarily what does that.
Lift for ideal look like in other words, if you had a customer was that was maybe $5 million in SaaS IRR and then you were able to cross sell DM NRM to them what would that uplift look like thanks.
Yeah, when we look at those assets for a like for like carrier, obviously anytime we do a core deal we're typically talking about.
Low single digit millions of <unk> contribution, sometimes mid single digits in a single transaction somewhere in that neighborhood, when we're selling RM or DM. It's typically in the hundreds of thousands sometimes in the mid to high hundreds of thousands.
And we're getting some deals that are encroaching upon a six figure deal. So it depends on the size of the carrier the global scope of what they are looking at.
Sometimes we'll transact our way up to those amounts, but we are seeing some very meaningful.
<unk> deals.
That are out there, but broadly think of our core transactions of being millions of dollars or of our contributors RM.
<unk> independently.
High hundreds of thousands of dollars or mid hundreds of thousands of dollars contributors.
Alright, great. That's super helpful. Thank you so much.
Thank you again to ask a question. Please press star one one on your telephone again Thats Star one one on your telephone to ask a question.
Our next question comes from the line of Alex Sklar.
Raymond James Your question please.
Thanks, Mike I kind of wanted to go back to your macro commentary Tonight, especially kind of related to how it was last quarter. It sounds like youre still baking some caution in the outlook, but given Q1 is not really a seasonally big quarter. What do you. What do you think changed inter quarter that drove the higher AUR results and was there any pull forward of pipeline that you thought were.
Are going to close in the second quarter.
Yeah Alex.
We were pleased with our bookings and what we got done in Q4, and what we got done.
In Q1, right, so I won't say that.
I mean, we anticipated that we would do pretty well so thats not a surprise and we're pleased by it.
I'm not going to suggest that the environment has changed tremendously from last quarter I think we've adapted to the environment quite well and then we also have been working on some deals that are coming through the pipeline.
We see and gives us confidence for the remainder of the year, but I also think is.
We set out for even the full year with our overall plan, we adjusted for the current market conditions I think it is unfolding as we expected.
Are seeing carriers again take rates.
And.
They are doing deals now in the tier one side, we have seen the deal size. The initial deal size come down a little bit from what we historically saw call 24 months ago.
But I think so we could still see that the buying behaviors are a little bit different and there is a little bit of delay on the timeframe, but I think again, we've adjusted to it. So we haven't seen it deteriorate more at all and we think it's improved moderately so again, we're still a bit cautious.
And.
And we're watching it closely but it feels better today than it did 12 months ago that's for sure.
Okay, great color and Kevin on the subscription growth guidance for second quarter I know, there's less days in the quarter I think we usually see a bit more of a step up versus Q1 is there anything one time that was in the Q1, triptan number or that that might be reversing or any known churn or kind of renegotiations in second quarter to be aware of.
Yeah.
No I cant call anything that I would say.
What is different or seasonally changing.
From the first quarter into the second quarter.
The only thing I would say is the comparable from last year and I put this in my in my commentary so I want to make sure. We got it last year in the year ago quarter, we had that $2 million.
One time contract buyout, so the comparable year over year, it's going to be slightly more difficult in the second quarter of this year, but other than that yes thinking back a year ago. That's it.
I think one thing I would even I would also like to note is we did get some deals earlier in Q1 than we anticipated that contributed to Q1 revenue.
We knew that they were going to close but they came in earlier. So we kind of exited had an exit rate there was a little stronger and that's why we beat.
Beat our Q1 guide.
Got it okay, great context. Thanks.
Yes.
Thank you at this time I would like to turn the call back over to CEO , Mike Schakowsky for closing remarks, Sir.
Okay. Thank you everyone for participating in our Q1 fiscal year 'twenty three earnings call as I said, we're off to a great start to the year exceeding all of our key operating metrics and I feel we are well positioned to achieve our key financial and operating metrics for the year. We're also thrilled to announce the acquisition of inverse which positions Duck Creek to take advantage of the billions of.
A premium payments claim payments and agency commissions that we manage every year and inverse will also help assist in our ambition to continue to expand globally. We're positioned for the rest of the year with terrific momentum as we finished Q1 with the SaaS IRR of $186 million, which is up 24% year over year. So let.
Let me just wrap up again by emphasizing that we have an enormous enormous opportunity.
Opportunity in front of us as the industry continues to transition solutions to the cloud. So thank you and have a good evening.
This concludes today's conference call. Thank you for participating you may now disconnect.
The conference will begin shortly to raise your hand during Q&A you can dial one one.
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Okay.
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