Q3 2023 Guidewire Software Inc Earnings Call
Greetings and welcome to the Guidewire third quarter fiscal 2023 financial results conference call.
At this time all participants are in a listen only mode.
A brief 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.
As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Alex Hughes.
This president of Investor Relations. Thank you Mr. Hughes you may begin.
Thanks, Kim I'm, Alex Hughes, Vice President of Investor Relations with me today is Mike Rosenbaum, Chief Executive Officer, and Jeff Cooper, Chief Financial Officer.
Quick 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 the Investor Relations section of our website.
Today's call is being recorded and a replay will be available following the conclusion of the call.
Statements made on this call include forward looking thoughts regarding our financial results product customer demand operations impact of local national geopolitical impacts on our business and other matters. These statements are subject to risks uncertainties and assumptions and are based on management's current expectations as of today and should not be relied upon as representing our views.
Is it any subsequent date.
Please refer to the press release and the risk factors and documents, we file with the SEC clean our most recent annual report on Form 10-K, and our quarterly reports on Form 10-Q filed and 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 will also refer to certain non-GAAP financial measures to provide additional information to investors all commentary on margins profitability and expenses on a non-GAAP basis unless stated otherwise.
Reconciliation of non-GAAP to GAAP measures is provided in our press release reconciliations and additional data are also posted in the supplemental on our IR website with that I'll now turn the call over to Mike.
Thank you Alex good afternoon, and thanks for joining us today.
We had a strong third quarter highlighted by sustained demand for insurance suite cloud and E. R. R and profitability both exceeding guidance. We were pleased with overall software revenue led by 34% subscription revenue growth.
However services revenue was below expectations, primarily due to the timing of revenue from a few complex engagements, which we will address later in the call. We were thrilled to see continued improvement in subscription and support gross margins, which more than offset the services shortfall.
Our cloud gross margin trajectory drove operating income outperformance and gives us confidence to raise our full year outlook for operating income.
A few highlights of the quarter relating to our main corporate objectives.
And we closed eight cloud deals and sales momentum remained solid ahead of our seasonally strong fourth quarter.
<unk> deployments were also strong with eight go lives in the corner across both commercial and personal lines.
And we continued to drive improved cloud efficiency with subscription and support gross margins, finishing five points above expectations.
Before I go into more detail.
Let me just make a couple of comments about the P&C insurance industry.
The service industry and the core system used case, well requires a platform that reliably and securely addresses and insurers complex business requirements, while also providing for greater agility and innovation.
Sales cycles and deployment projects are lengthy complex and sometimes arduous, but when we win a customer and we successfully deploy a customer in production, we establish a durable relationship with significant lifetime value.
I believe our hard work demonstrated execution with Guidewire cloud platform and the growth of our ecosystem have clearly established us as the cloud leader in our market and have positioned us well to serve the top insurance carriers in the world.
From this position, we will continue to expand the breadth and depth of our solutions and ecosystem to help insurers drive innovation and improve decisions at scale.
The second point I would like to make is about the macroeconomic environment and its impact on our P&C customers.
The industry is generally resilient to economic cycles, but it is not immune the inflation driven increase in claims expense has had an impact on the profitability of many insurance companies and is causing scrutiny on near term investments and budgets.
Given this backdrop, we are pleased to see our momentum on strategic deals and projects continue to progress and we remain confident in our sales outlook.
Our industry is adept at managing market cycles, and this cycle has the undercurrent of the ever increasing need for innovation and agility in the market.
Which strengthens our strategic positioning with customers.
The value of being on our platform is increasingly clear as carriers navigate the current cycle.
So while I'd say, we are navigating through this environment well it is appropriate to acknowledge that expense pressures are present.
With that said, let me turn to discussing our Q3 results in a little more detail before handing it over to Jeff to cover the financials.
As I said earlier it was a strong quarter with eight cloud deals seven of which were for insurance suite.
In addition to insurers seeking to modernize legacy mainframe systems, we are starting to see an increased interest in replacing previously modernized on Prem systems, which is a very positive market development for us and a great validation of the investment we've made in the Guidewire cloud.
For them.
Deal volume in Q3 was well balanced with three new logos three migrations and two expansions.
First let me walk through our new customer wins.
Texas Farm Bureau, a tier two insurer headquartered in Waco, Texas selected fall insurance suite cloud to modernize their existing portfolio of legacy on Prem core systems, we look forward to helping them achieve improve system performance and operational excellence staying current on functional and technical capabilities.
Be a guidewire cloud taking.
Taking advantage of Guidewire has extensive marketplace offerings and improving agent and customer experiences.
We were also fortunate to welcome a rapidly up and coming tier three carrier to the Guidewire community. This commercial insurer selected guidewire as their long term partner and will use insurance suite cloud to retire legacy systems and transform core operations across policy billing claims digital and data.
Predictive analytics was a key differentiator in this hard fought competitive deal and it represents a key mid market win for us as this progressive carrier has substantial growth aspirations.
And the insurance company of Prince Edward Island, a growing Canadian property and casualty carrier selected Guidewire cloud platform to expand their product line and streamline operations. So that they can efficiently and effectively support growth in commercial markets across Canada.
Turning to cloud migrations, we saw country mutual a tier two carrier focused on personal and commercial lines across 19 states elected to upgrade their on Prem claim center system to the cloud.
And they also expanded their guidewire footprint selecting policy center cloud for its commercial and agricultural lines of business.
Tier two provider of reinsurance and insurance will migrate to policy center on Guidewire cloud platform and expand to additional lines advanced product designer capability within policy Center cloud was a key differentiator to increase agility and support their growth strategy.
And in the homebuilding compensation fund a provider of safety net insurance for homeowners in Australia, who are faced with incomplete or defective building work will migrate to insurance suite cloud.
Finally, looking at expansions CNA, a top 12 commercial lines carrier based in Chicago expanded their investment in claim center cloud to support additional commercial lines and a tier four insurer expanded their insurance now investment to include additional lives.
This brings the total number of wins for the Guidewire cloud platform through 'twenty four the year over 70% of this total was with tier one and two insurers, which I think really validates the approach we have taken to ensure we can support the most demanding customers in the world as well as provide a system soon.
Due to the success of the tier three through five customers that make up a significant proportion of our customer base.
The improving maturity of our platform is also reflected in the increased cadence of cloud production go lives in Q3, we added another eight cloud deployment, bringing the total number of customers live on Guidewire cloud platforms in nearly 40 with healthy activity in both personal and commercial lines.
In personal lines. Some of the deployments included auto club of Southern California, The largest member of the AAA Federation with 16 million members and a guidewire customer since 2004 went live with insurance suite on Guidewire cloud platform. In addition, a large insurer with over 2 million customers across the.
In Nordics and performing 90000 claims per year and 4300, new policies per day went live with policy Center claim center and billing center and GW UCP.
With respect to commercial lines. Some of the deployments included a commercial trucking and specialty insurer based in South Carolina deployed policy Center on Gw's EEP to drive scale operational efficiencies and innovation for agents and customers.
Provider of commercial lines to multiple industries across 20 States went live with claim center on Guidewire cloud platform to further reduce claims processing times, and automate claims adjustments and costs and.
And an insurer of over $1 5 million, Texas workers deploy policy Center claim center and billing center on Gw's EEP to further improve operational excellence and customer satisfaction.
All of these deployments represent incredible work by our customers project teams, our guide wire service teams and our ecosystem partners as.
As I mentioned earlier. This is a community that is increasingly leading cloud deployments and I'm pleased to see it continue to expand.
<unk> now have over 22000, Guidewire consultants consultants as of the end of April up 27% year over year Mauro.
Moreover, the number of cloud certified consultants increased 67% year over year to approximately 7300.
These are important stats, because a healthy partner ecosystem helps to drive customer success, but also because it is critical to providing ever increasing predictability and cost efficiency to our customers and prospects. We are committed to enabling <unk> to serve increasingly as the prime integrator.
Cloud projects.
This will inevitably lead to Guidewire services revenue growth slowing relative to the growth of the total services ecosystem and allows us to focus on a more scaled services model that drives expert services in coordination with the size and retains the scale required for delivery of new.
Products and strategically important projects this approach.
Each will provide us with a more durable and profitable service model the.
The services revenue shortfall, we saw in the quarter speaks to the importance of this earlier in our cloud journey, we took on complex fixed fee arrangements, where we leveraged our sides as subcontractors. This was both to actually deliver the work, but also to fuel the Si cloud ecosystem for the past year and <unk>.
<unk> forward, we are limiting sub contracting in fixed fee arrangements and we are seeing the S side step into the prime role on most cloud projects.
As this portfolio of early projects are completed and the services margin burden associated with these early cloud customers will lessen.
Turning to our solution partner ecosystem. We also continued to grow the number of partners on the Guidewire marketplace. This collection of integrated applications amplifies. The total platform innovation for our customers and serves as a powerful differentiator for US. We now have 180 solution partners in our marketplace and.
We have added six new solution partners in areas, such as providing more granular inaccurate property data for better risk, scoring and enabling greater workflow automation and speed.
We are building a powerful cloud platform, where greater innovation will layer on over time, and where customers can accept this innovation more easily and with less integration friction and.
An example of a recent strategic partnership showing good momentum on our platform is one with one Inc. Where we are seeing strong interest from insurers to incorporate its technology to enable a more frictionless payment experience for their customers.
I would also like to briefly discuss generative AI and large language models and their exciting potential for guidewire and the insurance industry.
First and I think the most important consideration as it relates to Guidewire is that insurers begin to look at their systems and processes to evaluate if they are equipped to take advantage of this technology shift they will realize that modernization is a key first step.
We believe that insurers, who have already modernize their core systems will be dramatically better positioned to take advantage of the potential of this technology provides those who are still relying on legacy systems will be held back and will be reconsidering that approach and I believe this could support efforts to justify.
<unk> initiatives second Gen.
Generative AI has the potential to make developers more productive, which in turn will drive more efficient implementation projects and improved product innovation.
I think it's likely that in the course of 12 to 18 months, most developers internally and in our services organization and in our Si ecosystem will be able to leverage large language models to support software development and project execution.
Third like a lot of software companies and many of the companies in our solution partner ecosystem. We are working on incorporating large language model driven product enhancements into our cloud products suite that will enhance the value of the products, we offer to our customers broad based productivity gains should be a logical outcome of embracing.
Generative AI and we expect that our cloud based product suite will be an enabler of this overall generative AI has tremendous potential to have a positive impact on our mission and we look forward to taking a leadership position in how the industry adopts generative AI in the months and years to come.
Finally, let me spend a minute on leadership in the organization.
Happy to announce the addition of Michael House in the Guidewire team as Chief product Officer.
Michael is a longtime veteran as the insurance technology industry, having led product at applied systems for over a decade.
He will lead the product strategy and product marketing here at Guidewire. We are now in a position to build on the tremendous progress do you ever Diwali and the engineering team have made in establishing our cloud platform and insurance suite product releases.
Michael will help us increase and optimize our focus on product innovation and the alignment of our data and analytics solutions with our core.
While Diego continues to lead platform growth performance and scale, which is all foundational to everything else we do.
With that I'll turn it over to Jeff to discuss the financials.
Thanks, Mike.
Highlight a few topics as I walk through the financial results in the quarter.
First as Mike noted sales momentum continues to be strong and notably we are seeing more new customer wins and new modernization programs.
We are also seeing some insurers looking to replace core systems put in place over the last decade or two as they evaluate their cloud strategies and want to ensure they have a partner that is investing to grow and innovate with them.
This is an exciting development for us.
At the same time, we are seeing steeper ramps than last year, which means the initial <unk>.
Impact of new sales activity is lower in the first year, but fully ramp there are preserved.
This combined with the macro backdrop are the primary reasons healthy sales activity is not translating into a higher a or our outlook for the year.
Second continued sales momentum combined with better than planned execution on cost controls and efficiency initiatives are driving cloud margins ahead of our FY2023 expectations.
Our subscription and support gross margin trajectory gives us increased confidence in the long term earnings power of our operating model.
Third in the services portion of our business. We are working through a number of very complex core system modernization programs.
A handful of these are fixed bid arrangements where changes in the project plan can impact the timing of services revenue.
A couple of programs had it in but it had an adverse impact on services revenue in the quarter. This via our forecast by approximately $4 million.
Finally, turning to cash flow, we are seeing slower collections than we expected in our model accounts receivable grew by $43 million over Q3 last year and over 60% of that incremental a R is coming from payments outstanding for over 30 days.
In the quarter, we also shifted our operating bank account from Silicon Valley Bank to Bank of America, which did have a brief disruption to our collections cadence, but this is now resolved.
Given the slower collections combined with the fact that we have approximately $150 million in collections. During the last five days of our fiscal year, we've adjusted our cash flow expectations for the year.
This adjustment to timing of collections has no impact on the long term cash generation assumptions, we have discussed with you all at our analyst day.
Now turning to our results for the quarter.
Third quarter <unk> ended at 722 million ahead of our expectations. This represents 17% year over year growth on a constant currency basis.
Total revenue was $207 5 million. This finished below our outlook due to services revenue results.
Okay.
All product components of revenue, where either better than or in line with our expectations.
Cloud strength continues to be visible with subscription revenue within subscription revenue, which grew 34% year over year to $89 1 million subscription.
Subscription and support revenue was $107 5 million up 24% year over year.
License revenue was $50 5 million down 6% year over year.
Services revenue was $49 4 million down 13% year over year.
As I mentioned previously we had two Guidewire led programs where project replanting resulted in the adjustment to the timelines and as a result in adjustment to the revenue recognition timing.
This was down approximately $4 million impact when compared with our outlook last quarter.
Additionally, there has been increased scrutiny on services statements of work that has caused some streamlining of scope.
We're pushing more services work to lower cost partners, which resulted in lower than expected billings in the quarter and this accounted for approximately $2 million to $3 million.
Turning to profitability for the quarter, which we will discuss on a non-GAAP basis gross profit was $107 7 million overall gross margin was 52%.
Subscription and support gross margin was 55% compared to 47% a year ago.
We are thrilled with the progress, we're making on subscription and support gross margin, which continues to track ahead of our expectations.
<unk> gross margin finished at negative, 2% compared with positive 4% a year ago.
We had been expecting positive margin in Q3, but revenue headwinds impacted margins in the quarter.
We continue to be confident in our services strategy to return to profitability in the fourth quarter and beyond.
Operating loss was $12 2 million better than our expectations due to strong subscription and support gross profit and lower than expected operating costs.
These factors more than offset the impact of the services margin shortfall in the quarter.
Overall stock based compensation was $35 million.
Stock based compensation expense was up 6% year over year in Q3.
And up 3% year over year through the first three quarters of 2023.
We ended the quarter with $807 million in cash cash equivalents and investments.
As of the end of Q3, the accelerated share repurchase program was settled in full with the delivery of an additional 648000 shares of common stock, which resulted in total repurchases under the ASR a $3 2 million shares at an average purchase price of $61 93 per share.
So in Q3, we repurchased an additional 207000 shares at an average price of $77 19 per share.
Turning to our outlook for the full fiscal year 2023, we are adjusting our outlook to.
$745 million to $755 million.
As I previously mentioned, we are seeing healthy sales activity and expect this to continue in Q4, but we are seeing steeper ramps this year.
This results in less <unk> in the first year of new sales arrangements.
However, we are still preserving attractive fully ramped <unk> terms in these arrangements.
So while our growth this year is expected to be approximately 13% at the midpoint I expect fully ramp there are to grow at 14, 15%.
We will also provide more detail on fully ramped <unk> at year end as this is a metric we discuss on an annual basis.
As a reminder, I E. R. R E R. Our outlook assumes foreign currency exchange rates as of the end of the last fiscal year and then we update exchange rates at year end last year. The year end exchange rate adjustments to IRR or negative $19 million if exchange rates stay the same as current rates.
We would expect a negative $5 million adjustment at year end, largely driven by the dollar strengthening versus the Canadian dollar.
With respect to revenue, we are increasing our expectations for subscription subscription and support and license revenue. We are adjusting subscription revenue to approximately 349 million a positive adjustment of $1 million.
We're adjusting subscription and support revenue to approximately $426 million a positive adjustment of $1 million and we are adjusting license revenue to approximately $261 million a positive adjustment of approximately $5 million to $6 million.
We are lowering our services revenue expectations by $10 million to $12 million.
As a result, our outlook for total revenue is 890 to 900 million a 4 million dollar adjustment at the midpoint.
Turning to margins and profitability, which we will discuss on a non-GAAP basis, we expect subscription and support gross margins to be between 54 and 55% for the year.
An increase of three percentage points, when compared to our outlook last quarter and 8% to nine percentage points from the Q4 call.
We expect services gross margins to be around breakeven for the year.
This implies a Q4 improvement that assumes the successful completion of ongoing fixed bid arrangements.
As a result, we now expect overall gross margins of approximately 54% for the year.
With respect to operating income, we expect between a $4 million operating loss and a $6 million operating profit for the fiscal year.
We expect stock based compensation to be approximately $140 million, representing 2% growth year over year.
Given this combined with the impact of our accelerated share repurchase program and our active repurchase program. We expect fully diluted shares declined by approximately 1 million shares this fiscal year.
As mentioned above we are adjusting our cash flow from operations expectations to between $10 million and $40 million.
Finally, as we look ahead to fiscal year 2024, we feel it is prudent to wait until after our fourth quarter before discussing our growth expectations with respect to profitability. We are committed to demonstrate non-GAAP operating margins of 6% or higher and GAAP operating margins of negative 10% or better.
<unk>.
We will continue to monitor both GAAP and non-GAAP operating income metrics, but we expect to ultimately measure our success in hitting targets that capture the real cost of Guidewire and our shareholders associated with stock based compensation.
With that let's open the call for questions.
Yeah.
Thank you we will now be conducting a question and answer session.
If you would like to ask a question. Please press star one on your telephone keypad.
Confirmation tone will indicate that your line is in the question queue.
Press Star two if you would like to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key.
One moment, please while we poll for questions.
Thank you. Our first question comes from Dylan Becker with William Blair. Please proceed with your question.
Hey, gentlemen, I appreciate the question and suddenly get the product versus services side here, maybe maybe Mike for you I think.
You noted.
Some of those existing on Prem customers seeing accelerated migration activity I wonder.
How much of that is a function.
The updated garmisch release here and that the shift to I think three product releases annually versus two maybe widening the functional gap.
Crime capabilities versus the cloud and from a go live perspective, now maybe having more of those customers that are that can validate that update versus upgrade and that type of framework you guys have talked about.
Thanks for the question Bill.
I appreciate the insight it certainly helps I would say in addition to those.
It's just our experience and our track record running these programs at scale going live over the holiday Special go live weekend repeatedly now something that we're getting better and better at and so just building the overall confidence.
In the in the.
Ecosystem and the community of P&C customers I think it is helping us the shifts to three releases a year I think it's also a it's.
Its great and it helps.
I think the most important thing is what you should read into that as more and more confidence that we have and that we can execute these updates seamlessly.
We're still working through that with our cloud customer base and with the new customers. This is a different approach that.
This whole P&C.
Ecosystem on the entirety of the way that this all operates throughout the world is.
He is changing and we are changing it.
But I think customers, especially those that have that have been on the journey with us for a couple of years now and are seeing it in our experience in it are very excited about the potential that it offers just personally I know I commented a little bit on generative AI I am very much looking forward to the idea that.
We have production cloud customers, where we can put these changes into updates and then get them shipped out to customers seamlessly and they can.
Hopefully just literally turn them on and it's just a very very different operating model than guide, where it's been operating under and the industry has been operating under for the last 20 years.
It is that is helping us drive the continued sales activity that we're seeing so thanks for the question.
Yes.
Makes total sense and then I think you made a comment as well around kind of obviously some of the carrier pressures around elevated claims would think again core modernization can can help address this and theres a lot of optionality on the data side.
Wondering what kind of role like maybe digital twins could play in the future evolution of insurance and real time data and connectivity to help carriers predict with a more holistic view that maybe risk analysis, and then maybe even preventative risk mitigation.
Yes.
Deep strategic question and I think it is top of mind.
Carriers think about modernization and getting to a core platform that provides sort of an agile ability to roll out new innovative products.
Take advantage of some of the connectivity and Iot like Karen.
Iot enabled characteristics that youre describing.
I'm not sure I'd go so far as to say those things would have prevented the cycle that we're in right now I think inflation.
Jumped up in court lots of industries.
By surprise and has this impact that just has to be worked through.
Sort of that sort of a normal cycle.
I guess normal in the sense that if there is inflation there will be a disconnect between your feeling that you're feeling the impact of that inflation and claims versus being able to adjust premiums and readjust the policies that support.
That support to support the risk actually in the replacement costs, but certainly there is a lot of excitement in the overall industry about modernization in general and the ability for it to reposition insurance company somewhat around providing risk mitigation services and actually just can.
Trolling, the risk as opposed to sort of paying for things that break actually using the industry and their relationship to prevent that risk prevent that breakage reduce the expense.
Of mishaps in parallel and so that is an exciting part of what we do and I think tied to this just this general idea of bringing agility to the core system equation to the data and analytics equation, which makes these models more possible. So hey, I love the question and its definitely part of the story and what we're selling to what we're selling to customers.
Got it thanks, Mike appreciate it.
Yes.
Thank you.
Next question is from Peter Heckmann with D. A Davidson. Please proceed with your question.
Good afternoon. Thanks for the question with the with the eight go lives this quarter can.
Can you talk about how many lives.
Modules, you have and what percentage of <unk> now either either live or committed to migrate to the cloud.
Say again, the last clause in your sentence I missed it sure sure. So just.
I'm just trying to think about it what percentage of IRR is now either live or committed to migrate to the cloud so big in the range of 50% to 55%.
Oh, Okay. So let me let me okay.
Yeah, Let me, let me put it to Jeff in a second I just wanted to say like Theres couple of things that are very that are included in our statistics, we talk about the number of customers that are alive within each customer there sometimes have one instance, but oftentimes what many instances.
So when you dig into the actual number of instances of say claim center our policy Center, our policy Center for a particular line of business there might be an often is multiple instances that are live in production and then each of those depending on whether or not it's an established line of business or a new line of business for that carrier will.
Carry with it a certain amount of DWP alright, so very.
The biggest the biggest go lives for us in terms of scale or when you have like a fully deployed claim center our policy Center billing center implementation on Prem and we moved that to our cloud and then immediately you have all that DWP operating on the cloud instance on the cloud on the production instance, if there's a factor Jeff can give you.
<unk> of this.
Claudia RR is now larger than not.
Non cloudy RR at Guidewire and that has to do with the price point.
As much as it is the momentum in the accounts.
But certainly the predominance of the or the majority of the IRR at the company now is associated with cloud.
And Pete.
The way we measure cloud <unk> is is that once the customer commits to go into that path, we count them in our cloud are our calculations. So as of the end of last year, we were just over 50% of <unk>.
<unk> was west coast from coming from cloud IRR and our expectation that we said at analyst day is that we'd be in the 58% to 62% range of totally or are coming from cloud this fiscal year.
I think that's still in line with our with our overall expectations, but we'll update on that particular metric that you're in.
Yeah, and I would just I would just.
No. This we obviously track this very closely internally like the percentage of that <unk> that is live or is still in a project to go live right.
That's not in my script or in my head because it's not something we talk about publicly but it's obviously something that we pay very very close attention to and look the culture at the company and we have a very very good track record of this is that 100% of that will successfully get to production. That's the commitment we make and I think as part of the brand.
<unk> promised studies guidewire. Despite these projects been complicated and hard.
We are standing shoulder to shoulder with these customers and partners and making sure 100% of that is eventually live in production.
Sometimes it takes longer than a year because of the pricing is a complicated but it all does or at least the intention is and the commitment is culturally that we will get it all lives.
Alright that makes sense and then to your point on the on.
Under any losses nationwide for insurance carriers, something like a $30 billion of underwriting losses. The last two years, but would that lead them to further price increases for premium that could potentially lead to higher growth in DWP over the next couple of years.
Yes, that's the expectation.
It should you know the system went in balances equal on both sides of that equation.
The overall system can operate profitably.
And over time based on the variety of ways, we contract for our core systems that DWP will flow into guidewire in a complicated growth bands and barriers sitting thresholds that need to be crossed in order to trigger those increases but generally yes.
Like I said this is a.
This is a bit of a.
<unk>, let's say.
Or maybe you know issue for us in the short term working through this and causing like I said in the script a little bit of scrutiny.
Around short term expenditures, but in the long run the industry's equipped to deal with this and I think guidewire as a system, providing innovation and agility facilitates carriers being better able to absorb this.
And one of the reasons why we think sales activity continues to be solid heading into the fourth quarter.
Helpful. Thank you.
Thank you. Our next question is from Kevin Kumar with Goldman Sachs. Please proceed with your question.
Hi, Thanks for taking my question.
I wanted to double click on the ramped deal activity, Jeff can you help us frame the types of multiyear ramped deal structures Youre closing and maybe how that compares to prior years and how much of a headwind is it in the initial year or years and kind of how steep that ramp compared to kind of maybe historical levels.
Yeah. It's a good question and it's interesting because last Q4.
We saw a little bit less ramp activity and a bit more kind of smaller starts that would grow in a more organic fashion.
So a little bit surprised this year to see a bit higher ramp activity and interestingly. We are also seeing our deal portfolio skew a bit more than we expected towards new modernization programs and new customer wins versus migrations and migration has always had fairly kind of steep ramp elements attached to them.
Because we counted booking as the incremental IRR, that's being added to guidewire and sometimes they're already paying a or are in a term license fee in it it takes a little while to get up and running alive in the cloud and so oftentimes, there's not a big uplift associated with <unk> associated with migration, so so seeing higher ramp.
This year is both.
A little bit of an interesting fact pattern, but a positive fact pattern. It means that customers and prospects are willing to make big multiyear commitments.
To guidewire in this path with Guidewire.
So we are seeing a little bit we use the phrase steeper ramps, which means kind of the starting point to the endpoints are that the growth is bigger and those committed ramps and what we saw.
The prior year and the prior year was notably a little bit shallower in terms of the overall all ramp activity as we saw some smaller starts rather than than big commitments. So it's a mix. It's I was a little bit surprised to see that but in general we are pleased to see especially new customer wins.
And even some competitive displacements, which is very exciting for us to see.
And we're seeing healthy healthy fully ramped are our events, but I do think some of the near term.
Cost conscious pressures that are existing in the insurer install base.
Adding a little bit of impact on kind of their appetite to sign up for a new spend over the first year or two.
But we're certainly capturing unattractive fully ramped a R. R.
Yeah.
That's helpful context.
And then maybe just on the subscription and support gross margin obviously.
A nice outperformance there higher it's higher than that the guide you gave.
Is that just a function of kind of continued cost discipline anything else you'd call out there and then how are you feeling about cloud and infrastructure investments and the ability it reached 1 billion in IRR.
Minimal incremental costs. Thank you.
Yeah. So we're very pleased with the efficiency gains we're seeing in the platform. The engineering team has done a lot of work.
To help us manage our overall cloud infrastructure costs, and so that is continuing to exceed our expectations, which is a which is a big positive another area of our cloud Cogs at this point in the cloud journey is cloud updates and upgrade costs.
And we did see a little bit of those cost push out so when I think about the outperformance in the quarter.
If you think about five percentage points about two five percentage points was related to just core efficiency gains vis vis our expectations in.
And the other was a little bit of this work getting pushed out we tend to model. This worked very conservatively. So we're not.
Surprised by a lot of work coming into a quarter that was on forecasted, but but that was the primary drivers of the outperformance in the quarter.
That's helpful. Thanks.
Thank you. Our next question is from Ken Wong with Oppenheimer. Please proceed with your question.
Thank you for the question.
First one for Mike just in terms of the scrutiny of it budgets.
I guess, how how does that materialize for guidewire versus just broad IP spend pullback.
And if that has hit.
Conversation.
Is that more on the edges of your products or is that actually impacting core systems would love to get a sense for kind of how that may or may not materialize.
Okay. Thanks for the question I would say that I would say.
My sense is guidewire is more immune to this than most okay. I think people think about guidewire investment in the Guidewire projects very strategically.
Five year duration 10 year duration is a very legitimate conversation.
One of which I had this quarter that company is not thinking about as much the day to day quarter to quarter cash flow as they are thinking about what are we doing for the next 10 years. So in general Guidewire is more immune to this than probably most of it spend.
It does exist right and so you bring it up I bring it up because it's like the ability for us to manufacture DLC ability for us to accelerate things in a climate, where as a general mindset is concern conservatism as it relates to budget. It just makes it a little bit harder you know the things that were already in flight.
And the plans that were already in place are continuing to progress and it does give us confidence in the outlook we provided for Q4.
But it is a bit of a headwind and it is coming up much more.
In the last few months than it has in the past and you know so.
So I thought it was worth mentioning.
That said I do want to stress in this was you know we touched on this in one of the earlier answers to one of the earlier questions. This is a cycle.
There there is an adjustment period that we believe the industry will process through.
And then I think things will get a bit back to normal and it'll it'll open up then.
The budget to loosen a bit and we will be able to create a bit more acceleration.
Even beyond what we've got right now so hopefully that helps you give you a sense of things yes.
Super helpful. I really appreciate all the thoughtful color there.
And then Jeff.
Just wanted to maybe dig into the cash flow reduction.
How much of that is maybe a byproduct of the lower top line kind of trimming the air a little bit on the services side versus what was just pushed out because the timing collection things of that nature, which hopefully you guys can recapture in future quarters.
Yes, the majority of it was just.
Given the environment that we're seeing in some of the some of the dynamics that Mike just talked to.
Putting a bit more conservatism into our collections assumptions vis vis what's what's gonna be billed and invoiced in Q4. So that's that that is the big part of it we have the services. The overall services billing also had an impact.
But if you think about you know that's probably a pretty small percentage of the adjustment to cash flow and most of it is just the timing of collections and making sure. We build some more conservatism we are seeing.
You know a bit more process and bureaucracy that insurers are putting in place before they make large vendor payments and we're having to jump through those hoops and certainly the shifts in our operating bank account in the quarter didn't help us we had to kind of go through a lot of re validation to.
To make sure that everything was in order. So so that created a bit more process, that's behind us mouse, but as we look ahead. We just felt it was prudent sales more conservatism into our collections forecast.
Got it okay perfect. Thank you very much.
Okay.
Yes.
Thank you. Our next question is from Rishi Galeria with RBC. Please proceed with your question.
Wonderful. Thanks, so much for taking my questions. Mike I wanted to go back to the generative AI theme I'm really glad to hear kind of like the way you're talking about it in some of the transformational extra guidewire I wanted to think about the impact on the industry itself right not not only does it for some of our feet Draggers too.
Modernizing kind of catch up and migrate to the cloud, but what's the potential for in P&C insurers to actually change the way that they do their business and maybe even more importantly, the way that they interact with customers and what sort of impact do you think that can have on the overall spending environment as it pertains to that budget forgotten more than I've got a quick follow up.
Yeah. Thanks, Thanks for the question so.
I spoke recently at a guidewire event and kind of talked about how you know you can you can think of these things on a spectrum sort of near term to long term and you can get a little bit wrapped up in how dramatically impactful. It can be two systems like insurance in the long run.
I think you are making a bit of a mistake. If you do that and missing out on the potential for us to just generally improve process efficiency and operational efficiency and all the little things that we do everyday and I think there is.
It's not just guidewire thinking that there is plenty of industry analysts who are looking at this and looking at the insurance industry and you just see some potential or maybe a lot of potential.
<unk> two.
Better.
Operationalize these models and use them with human beings in the loop not not to replace human beings, but to augment human beings didn't make people more productive and.
Managing sales processes, managing customer service managing claims, making sure all of those processes.
There are more and more efficient in how it's like hundreds and hundreds of little tiny details that can be managed more effectively through systems like Guidewire I think that there is a very.
An important story to be told and granted this stuff needs to be built and flashed out and rolled out improving but it's exciting to see something with this much potential.
And very accessible.
The other thing I was saying to the audience there was that.
One of the things I really really like about these gen. Janet generative AI and large language model solutions is they don't necessitate a replacement of a system like Guidewire you can just augment what youre already using guidewire for now.
Think if youre running a legacy mainframe system it will be much more difficult for you to augment that system in that workflow with generative AI and I think that that might drive these transformations, but it's just something like guidewire with a cloud API.
You can call out you can grab some information call out to a model and get an answer back and that helps the person who's on the phone with the agents or our customer and it makes the process more efficient so.
I'm very excited about this I think a lot of people in the industry are very excited about it.
We're excited over the next few months start to roll this out and start to think about how do we product size. It and I just talked for five minutes, maybe and I haven't even touched on the implementation side of it.
I said I think that the developer productivity component of this technology is very very exciting and I also expect it will improve.
Not yet at the point, where we can give you estimates for objective measures of productivity improvements.
But there's a lot of engineers, who are super excited about this and so.
Hopefully that gives you a little bit of color about where we are how we're thinking about it and how we think it will have an impact on the industry.
Okay.
Yeah got it. Thanks, that's really helpful. I appreciate all the thoughts there.
And then I wanted to go back to some of the dynamics around ramped IRR.
And maybe you know.
I know you talked about this kind of a little bit of a surprise seeing that versus the smaller lands with potential upside that we saw last year, but you know what's driving in your opinion that change in behavior.
And maybe as we see some of those shallower lands or whatever you want to call. It the small lands from last year.
Just kind of come up for renewal.
Should that be kind of a driver as he put it to think about our models that might lead to a little bit of an.
And I was taking the IRR and potential air acceleration. Thanks.
Yes, I mean.
<unk>.
Yes, as I said I think it is exciting pattern that the insurers in this environment are you know tackling large strategic programs and making big commitments and investments with Guidewire and we're seeing that in the total contract values that support these ramped agreements.
In terms of the shift over last year.
It was a bit interesting last year, we saw a bit slower starts kind of dipping their toe in the water type of dynamic and there was a thought that maybe that would persist and that would that could have a pretty big impact on how we think about our model. If that was the way that the industry chose to adopt and by.
It's a positive fact pattern that we're seeing some of these bigger commitments.
This fiscal year, but.
It is driving that.
We were just to give you a glimpse into how we think about this is so we might we measure of booking a booking for guidewire as the average IRR that's delivered over a five year period, and then we have certain metrics that we look at internally such as what is the ratio between the year when a RR to that average.
Over a five year period and that ratio our model is quite sensitive to that ratio.
And so if you see that ratio go down a little bit. It means that there is in the bookings levels are the same it means youre, adding really attractive fully ramp there are but the year one dynamics that are a little bit lower than what we had modeled so it's just one of these multiple levers that we have to manage through and we try to provide some insights into that.
For a period of time I thought fully ramped they are our may fade into the background of relevant metrics, because if insurers are buying in a bit smaller and growing in a more organic fashion, then that metric would just be a little bit less relevant.
But as we're executing through this year.
Seeing that that metric outpace.
Our growth once again, which is gives us.
Confidence as we think about the long term, but it does create some some dynamics that we have to manage through a civil too helpful for patients.
What was the second was there another part of the question.
Not that that you you you've covered everything I really appreciate it guys. Thank you so much.
Thank you.
Thank you. Our next question is from Matt Vanvliet with B P. I G. Please proceed with your question.
Our fully ramp deals how should we I guess think about that over the next couple of years of.
From both a backlog perspective on the implementation side and then related to that overall staffing needs for the services group, especially as you push more to <unk>.
<unk> in general.
Yeah, and I think what I don't want to do is make this out to be a bigger deal than it is I mean, we saw ramped activity look more akin to what we saw two years ago and coming out of last year, we adjusted our models a little bit.
To make those ramps a little bit shallower. So I don't want to overplay. This but it is a dynamic that we wanted to call out in the business.
Yes.
How it relates to the the services engagements as pretty detached right. So.
Hmm.
And what we're seeing in the services part of our business is as a part of our longer term strategy to shift more and more of this work to the partner community and we had to go through a cycle of.
Certifying and enabling the partners to lead these programs.
And Thats, what we are starting to see more and more of today, which will allow us to build more scale.
Scaled and durable services organization in support of the broader ecosystem, who will take the lead in managing these programs.
And I, just want to say and I'm sorry.
I don't expect the manpower in our services organization to go down I, just think as the overall economy of Guidewire implementations to grow more of that growth will flow to the Si partners that won't flow to Guidewire I think there is a very important role that our team plays in with respect to this these X.
<unk> services that we can provide especially around new product introductions and strategic projects and theres just going to be some percentage of the.
The prospect base the potential customers that want to have guidewire take a role in the implementation and it's important for us to maintain that that manpower. So.
I wouldn't be thinking that this is going to contract.
That it will grow more slowly than the overall ecosystem as we shift to this more durable.
More leveraged model.
Yes makes sense.
Then I guess on a few of the answers you talked about a number of customers wanting to lean more into.
Data and really the analytics behind a lot of that.
And it sounds like more projects or maybe going live with those implemented originally but curious on how that that overall demand cycle is impacting kind of the up sell cross sell motion.
Versus now just being included from the start because of the value perceived by the customers.
Yes, it's a great question I think we're doing a much better job.
Sort of designing the product to be to work together to be integrated from the beginning to be to be purchased and sold and packaged and marketed and then the sales process described as one unified solution that.
That can solve a core system modernization problem, but also deliver business benefits through predictive analytics and.
That can solve a core system modernization problem, but also deliver business benefits through predictive analytics and.
So it's exciting to see you know very often the economic justification for the modernization is attached to efficiency gains that can be either significantly or partially produced with predictive analytics.
A lot of excitement for.
Not just the predictive analytics, but also the sort of operational machinery for.
But I'd say deploying the prediction into a user experience that actually causes end users to change their behaviors and I think the industry in general and this is not just insurance, but sort of the industry overall the world of it.
Pretty good at making analytics and pretty good at making analytics predictions and not as good at activating those predictions and causing a business change and so a part of what we're producing here and what customers are excited about is that we will be able to take these algorithms and turn them into and how.
Practical useful predictions and users will be able to use either.
Better decisions about underwriting risks or make better decisions about processing claims and that's exciting and it's a bigger and bigger part of the story and the reason that a customer makes the decision to go now with a Guidewire project. So that's exciting to C&I hope it will continue to improve.
And we will see but my expectation is generative AI large language model supported capabilities augment that.
Right into the same store I, just told you about our predictive analytics capabilities.
Alright, Thank you very helpful.
But.
Our next question is from Jonesboro, Inc. With Robert W. Baird. Please proceed with your question.
Great.
Thanks for squeezing me in.
A little bit on the last topic since you brought up analytics, but.
Just on that new logo win with the tier three carrier.
The mid market does seem a bit more competitive of late what are you finding to be the differentiator for guidewire when youre winning in that.
Segments are tier three through five outside of tier one tier two or.
Something like analytics catching on or would you maybe point to some broader themes there.
Yeah, Great question, So I'll give you the themes.
Thank you.
Number one is it's important that there is valuable that we bring.
A complete solution that is consistent across claims policy billing right. So I think the larger carriers, probably have more horsepower, maybe more capacity to be able to tolerate different systems for different use cases, but with the smaller companies more limited it organizations are consistent.
Platform with one approach to integration data analytics configuration, one vendor.
Our whole stack the full suite the whole insurance business process operating.
Cleanly that's important.
I think that one vendor being responsible for the predictive analytics and that part of the equation is also very valuable to these customers.
The other thing that's coming up is just like I kind of touched on this before it's just track record of success.
We've got.
40, some end customers in production, we've got multiple years now of track record and experience running this we've got a vision for this three releases a year and I think that customers.
See that momentum and I think that that does factor into the decision making process in a significant way and helps us.
And I wanted to say something because a surprise actually nobody asked this question, yet, Jeff and I touched on this.
In this quarter, we're seeing conversations.
Conversations about competitive displacement that I have not seen.
And my four years at Guidewire is like we mentally think of these systems as being the mainframe spend replace and this package has been deployed and we started to think of it as like.
That Tam is removed, but now it's coming back up you know in the systems that are now at this point, maybe more than a decade old.
These companies are talking to us about whats our potential for replacing them and that's a very very exciting.
<unk>, it's a great conversation to have and I think the reasoning behind that interest has a lot to do with all the reasons I. Just gave you about why that tier of the market interested in guidewire.
I think it all plays to our it all plays to our strengths right now.
And I'll just quickly follow up on that last point that I think in the past you said like 20% to 25% global DWP tier you manage that of what remains half of that remainder is on a mainframe system.
Youre really talking about like that half is maybe just unbounded at this point I mean, it's all up for grabs.
Yeah, I think if you play it out if you play that concept out.
Yes, you could say all of that is now up for grabs now it obviously depends on which vendor youre talking about and when the implementation was done and what are the unique circumstances associated with that implementation.
It's probably two exaggerated to say that it is completely all up for grabs but part of that segment of the market is up for grabs and in that like I said Thats, a very exciting thing to see.
And I think it has unlocked a bit just based on time, but also based on the momentum and the innovation that we've established and are proving through.
Through our execution.
Great. Thank you very much.
Thank you. Our next question is from Michael <unk> with Wells Fargo. Please proceed with your question.
Hey, there. Thanks for squeezing me in just one for me.
Going back to just some of the other the other comments so the <unk> key.
Came in ahead of the prior guide fiscal Q4 compared to the full year is more of a tightening of the range. I. Appreciate you not wanting to turn this into a Colorado ramp deals, but its the second half impact you're characterizing last quarter. There. The difference between what was previously expected and is that more what's driving the decision to wait for Q4 before framing the prelim.
Growth outlook as you.
Historically have or is some of that also just macro fiscal Q4 being important and that's what's driving the decision process. There any any further context is helpful.
I think youre thinking about it right.
That's exactly our thought process I mean, I also think of that.
In prior years, when we assess the analyst models and looked at what was out there. If there is something that we felt it was critical to getting in front of that we had visibility into we would try to do that but given.
Given kind of where we are and how critical Q4 is for establishing the right framework for the next fiscal year. We felt like it was prudent to kind of wait until that is completed.
Yeah.
Thank you.
Okay. Thanks.
Thank you. Our next question is from Parker Lane with Stifel. Please proceed with your question.
Yeah, Hi, guys. Thanks for taking the question I'll just ask one in the interest of time.
I was wondering if you could talk about the share migrations that carry expansion as part of the project and the general appetite you see for customers that are embarking on the cloud journey to either hit the ground running and just make sure. They are successful cloud migration or widened the scope of what they are trying to achieve.
Super question.
This is a dynamic which we also have noticed.
And very often.
Is.
It is let's call it the modernization projects to modernize something that causes the conversation about let's do the cloud upgrade entity existing implementation as well, sometimes it's the other way around where we're talking about a cloud upgrade or a version upgrade and that causes the conversation about new lines.
Business or modernization around another <unk>.
Component of the core system.
Got that.
What would trigger these things are.
Deals like this they need triggers they need compelling events they need business.
Related objectives that can drive the.
The projects in the deal for us and so.
Like I said a lot of times. This is hey, we've got an initiative too.
To X y Z in our business, we need a modern system to do that okay that that we have guidewire for claims already and we're happy and so let's talk about policy and then and what we're gonna do policy on cloud how should we think about claims to remove that to cloud also and thats the way that the conversation goes and evolves and it results in.
Our migration and an upgrade.
There's just a variety of different ways that those conversations can happen, but those compelling events.
Are created and driven by these business objectives.
And so.
That's the dynamic that we're absolutely seeing.
Right now and are excited about just continuing it and so it's like there. The fact like it kind of relates also to this idea that we are a very good solution for a full suite offering.
He can do everything in a very consistent way one vendor one approach to configuration, one approach to data and analytics and integration on approach to the marketplace partners and having a.
And consistency across these core systems claims policy and billing really just facilitate some better end to end insurance process and it's a big part.
The value prop that we provided.
And even it's not that's.
Not competitors, but just the guidewire is pretty unique in the landscape for P&C core systems and that from the insurance suite perspective.
All of these all of these products have been built organically at Guidewire and they haven't been acquired or kind of bolted together through acquisition. It's like this has been built and crafted by great engineers, great teams at Guidewire over the course of many many years and hundreds of implementations and that's a big part of our.
Our success. So I appreciate the insight and the question and it's definitely one of the things driving a lot of these <unk>.
Deals right now.
I appreciate the feedback thanks again.
Hey, Thanks for the question.
Thank you there are no further questions at this time I would like to turn the floor back over to CEO , Mike Rosenbaum for closing comments.
Thanks, very much so I just wanted to thank everybody for participating in our call. Today, We're obviously thrilled with the continued cloud momentum across new and existing customers tier one and tier two insurers, while also driving margin improvement.
I was particularly happy to see the continued improvement in margins.
And a huge effort here at the company to make that happen and this was a great validation of that hard work.
And so we're very excited about the future very excited to have a great Q4, and we look forward to talking to everybody.
Again at the end of our fourth quarter.
At our next call. So thanks very much.
Thank you. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.
Goodbye.
[music].
Hum.
[music].
Hmm.
Mhm.
Hum.
Mhm mhm.
Hum.
Hum.
Hum.
[music].
Yes.
Uh-huh.
Mhm.
Oh.
Hum.
Hum.
Oh.
[music].
Oh, Oh Oh.
[music].
Hum.
Okay.
Yeah.
Yeah.
Hum.
Yeah.
Hum.