Q1 2024 Guidewire Software Inc Earnings Call

Greetings and welcome to the Guidewire first quarter fiscal 2024 financial results Conference call. At this time, all participants are in a listen only mode.

Question and answer session will follow this woman presentation.

If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.

Please note. This conference is being recorded I will now.

Turn the conference over to your host Alex Hughes, Vice President of Investor Relations you may begin.

Thank you operator, I'm, Alex Hughes, Vice President of Investor Relations and with me today is Mike Rosenbaum, Chief Executive Officer, and Jeff Cooper, Chief Financial Officer.

Complete disclosure of our results can be found in our press release issued today as well as in our related form 8-K furnished to the SEC both of which are available on the Investor Relations section of our website today's call today's call is being reported and a replay will be available. Following the conclusion of the call statements made on this call include forward looking ones regarding our financial results products.

Customer demand operations, the impact of local national and geopolitical events 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 as of any subsequent date. Please refer to the press release and the risk factors and.

Since we filed with the SEC, including our most recent annual report on Form 10-K, and our prior and forthcoming 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 also will refer to certain non-GAAP financial measures to provide additional information to investors all commentary on margins profitability and expenses are on a non-GAAP basis, unless stated otherwise our reconciliation of non-GAAP to GAAP measures is provided in our press release.

Reconciliations and additional data are also posted in the supplement on our IR website with that I'll now turn the call over to Mike. Thank.

Thank you Alex good afternoon, and thanks, everyone for joining today, we're off to a strong start to the year and it's great to see this momentum continue following a record Q4, where we had especially high close rates I characterize this quarter as one of continued solid execution. We are seeing good progress on the deal front.

As well as in operations and also had a tremendous customer conference at connections last month, we had record attendance with about 3000 in person attendees, the enthusiasm and support for our strategic direction and cloud platform was noticeable in the event provided great validation of our progress and the tangible.

The business impacts we are providing to our customers. We are steadily building a franchise that will have a lasting and positive impact on the P&C insurance industry and that will produce the durable profitable long term growth that is commensurate with a vertical market leader.

Since we had a chance to speak at analyst day last month I'll keep today's remarks fairly brief and share my key takeaways on the business.

First Guidewire cloud platform continues to advance steadily and consistently with each new release and <unk>.

Since release of Guidewire cloud platform Innsbruck was made available December 1st and builds on the automation orchestration integration and monitoring capabilities and Hawk about.

And we will deliver greater functionality in digital analytics data straight through processing and pricing each release brings greater and greater benefits to customers, which helps to grow interest in our platform.

We continue to see this interest manifest and sustained sales momentum we closed another seven cloud deals in the first quarter, including six for insurance suite cloud.

This despite Q1 typically being a seasonally light quarter for us.

We closed four insurance suite migrations in the quarter, including the first Japan based insurer to commit to the full suite in the cloud and also closed three net new deals, including another competitive takeaway.

Insurers are responding to the greater agility efficiency and innovation that Guidewire cloud platform offers and increasingly view it as aligned with their technology and strategic Roadmaps.

Third is data and analytics.

Which is something I'm excited about as a longer term opportunity and that's something our cloud success positions us well for as a core systems provider, we have a unique opportunity to layer on data and analytics offerings to core workflows to drive greater real time analysis and decision, making around policy underwriting and claims.

I was pleased to see hazard hub adopted by a Florida based property insurer just a few months after it adopted our insurance now a core solution hazard hub was chosen first proprietary hazard risk, scoring in its seamless integration with insurance now.

Fourth we continue to nurture and grow an ecosystem of partners, including sides and solution providers, which helps to drive sustained go live activity and greater value from the platform in the quarter. We had nine more go lives and leading ESI as cap Gemini cognizant, Deloitte and Pwc.

I'll now have achieved cloud migration certifications.

As I mentioned previously connections was a tremendous success and highlighted for me the advantages guidewire and our ecosystem deliver for our customers. The stories that were shared drove home the impact of the improved agility speed and innovation of our platform delivers.

Affinity insurance, a leading Canadian insurer with 150 year history adopted Guidewire cloud platform in 2021 to achieve greater scale resilience agility and innovation.

We have now already seen deployment times improved 63% quote response times improved 30% downtime reduced by 75% and platform setup times improve tenex.

The speed Guidewire cloud platform delivers was best illustrated by GM, Onstar, who spoke about successfully creating and launching an embedded insurance product from start to go live in only nine months.

And I thought CNA insurance, one of the largest commercial and specialty insurers in the United States really have illustrated the complexity that large insurers have to manage through when moving to the cloud and how guidewire cloud platforms continuous release cycle supports much greater agility for these insurers while also providing.

Strategic optionality, they need to stay current with the market.

As we continue to sell innovate and expand the community around our platform and additional key objective has been to drive greater and greater platform and company efficiency Jeff.

Jeff will talk more about this but we were all pleased to see continuing margin expansion in the quarter, even above our objectives and forecast.

The work we are doing to manage all of this while also improving efficiency through our organization is critical and not always the most glamorous part of the job.

It has been exciting to see the results of these efforts continued to flow through to our financial outcomes. These past few quarters.

And finally, we also announced in today's release that Priscilla hung sabbatical as ending soon and we are all very excited to have her back while we do not plan for her to return to the same operating role. We're very pleased that she will continue to be an employee and an invaluable senior adviser at the company with that I'll turn it over to Jeff to discuss the fine.

<unk>.

Thanks, Mike.

We're off to a strong start in fiscal 2024, and it is great to see sustained momentum in the business from a financial perspective, we entered into this year very focused on one increasing IRR and a subscription mix of our business.

Two expanding overall gross margins, primarily led by subscription and support gross margin, but we're also prioritizing services margins.

And three driving greater cash flow from operations, but they all talk about how we're doing in each of these areas as I go through the details and we will finish with our updated outlook.

Our our finished just above the high end of our outlook at $770 million.

Total revenue was 207 million also above the high end of our outlook and this beat was primarily due to higher than expected subscription and support revenue and services revenue.

The other components of revenue are largely in line with our expectations.

Turning to profitability for the first quarter, which we will discuss on a non-GAAP basis gross profit was $121 million, representing 46% year over year growth overall.

Overall gross margin was 58% compared to 42% a year ago.

Subscription and support gross margin was 65% compared to 49% a year ago.

This was ahead of our expectations due to higher than expected revenue increased cloud infrastructure efficiency and the timing of some cloud services credits from our cloud infrastructure provider.

We're thrilled with this result, as it gives us confidence to raise our profitability targets for the year.

Services gross margin was positive, 10% compared to negative 9% a year ago.

This profitability turnaround as a result of many quarters of work that we have discussed in prior earnings calls.

And this start to this year to the year sets us up well to hit our annual target of $30 million in gross profit for services.

These results demonstrate the exciting progress and margin expansion on.

On a year over year basis subscription and support gross margins expanded 16 percentage points.

Services gross margin expanded 19 percentage points and total gross margins expanded 16 percentage points.

While we still have work to do to get to our long term margin targets I do want to recognize all the hard work by a number of teams at Guidewire, including the cloud operations team support team the product development teams the services organization and our fin ops team to help us unlock this potential.

This positive momentum on gross margins led to an operating profit of $4 1 million.

This is a strong result, when compared with our prior outlook of negative $22 5 million at the midpoint.

About $15 million of this became from the gross profit line and $11 million came from operating expenses.

On the operating expense side, we saw slower hiring and lower travel expenses than we expected, but approximately $5 million to $6 million of the $11 million is due to timing of certain expenses now expected later in the year.

Overall stock based compensation was $36 million up 3% from Q1 last year, which was generally in line with our expectations.

We ended the quarter with $854 million in cash cash equivalents and investments.

Operating cash flow ended the quarter at negative $72 million, which is a bit better than our internal expectations.

As a reminder, annual employee bonuses.

And commission expenses related to Q4 sales are paid out in Q1 and as a result, Q1 cash flow is always lower than the other quarters in the fiscal year.

Now let me go through our updated outlook for fiscal year 2024.

Starting with the top line, we are maintaining our outlook for IRR.

Or are they still the best way to measure overall sales momentum and we feel confident in our pipeline and our <unk>.

And are on track to hit our annual targets.

We're also maintaining our outlook for total revenue, we expect approximately $471 million of subscription revenue and 542 in subscription and support revenue. We now expect term license revenue to be a bit higher than prior expectations due to higher DWP true ups and we have tempered our expectations for services revenue to approximately 100.

<unk> $95 million.

Our services model is shifting away from lower margin subcontracted revenue a bit faster than we previously forecasted additional air partners are continuing to lead more and more of the implementation engagements which is great.

Turning to margins and profitability, which we will discuss on a non-GAAP basis, we now expect subscription and support gross margins to be 62% for the year, an increase of seven percentage points when compared to fiscal 2023.

This puts us ahead of schedule with respect to hitting our FY 'twenty five target of 63% to 65%.

It is clear that the product investments, we have made and the hard work of teams focused on efficiency are having the desired impact on scalability and product gross margins.

We continue to expect services gross margins of approximately 15%.

I mentioned last quarter, we will measure professional services success. This year by one our ability to deliver in conjunction with our partners excellent customer outcomes and to our ability to deliver $30 million in services gross profit and we are on track to hit these goals.

As a result, we now expect the overall gross margin to be approximately 62% for the full year.

This is already at the midpoint of our FY 'twenty five target. So we are tracking ahead of schedule with.

With respect to operating income we are raising our operating income outlook to between 82 and $92 million for the fiscal year. We're thrilled by this momentum as we work towards unlocking the profitability potential of the business.

We expect stock based compensation to be approximately $150 million, representing 5% year over year growth.

We are increasing our cash flow from operations expectation to between 115 and $135 million for the fiscal year.

Turning to our outlook for Q2, we expect <unk> to finish between $793 $798 million.

Our outlook for total revenue is between 237 and $243 million.

We expect subscription and support revenue of approximately $130 million and services revenue of approximately $43 million.

We expect subscription and support margins of approximately 63% services margins to be around breakeven and total gross margins to be between 61 and 62%.

We did conduct a small services re org in early Q2, which carried an approximately $2 $5 million one time charge.

Our outlook for operating income is between 15 and $20 million.

In summary, it was a strong start to the year and as we mentioned at Analyst day, we were at an exciting flexion point with respect to profitability and our ability to demonstrate margin expansion.

Operator, you can now open the call for questions.

At this time, we'll be conducting a question and answer session.

If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue.

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One moment please.

And our first question comes from the line of <unk> Becker with William Blair.

Please proceed with your question.

Hey, guys. Appreciate the questionnaire, maybe Mike starting with you you called out kind of the connections conference and a lot of discussion coming out of that around aligning kind of decisioning with tangible value towards business applicability versus kind of the infrastructure side I wonder how important is that conversation around business.

<unk> as we think about kind of championing change in the industry and maybe to what extent and youre seeing that evolution play through our flow through into your conversations and interactions with customers.

Hey, yes, great question and connections and a great.

Example of an opportunity for us to to talk about this in here from customers directly on the subject and I think if you think about the.

The history of the cloud transformation here at Guidewire, you know the story really began with.

You know it is.

Focused infrastructure operational value proposition reduce complexity support upgrades things like that.

But what's so exciting about the momentum we've achieved in the product organization with our ski resort releases.

First shifting to twice a year release schedule and then subsequently shifting to a three times a year release schedule.

And then really importantly, doing all the work necessary to facilitate customers receiving those updates all of that you could think of it as like all of that work engineering plumbing. So to speak of a cloud system gives us the ability to ship.

This value improvements consistently released over release over release and Thats increasingly the story really of Guidewire cloud, which is not just hey, we have a core system. It runs effectively but we have a core system that can help you differentiate in the market. We can help you make changes to your products more efficiently and.

Faster, we can help you to adjust your prices are set.

The risks associated with the insurance that Youre, writing, we can help you optimize your claims processes more effectively predict outcomes more efficiently and all of that all of those capabilities are delivered.

Legitimately more efficiently through these cloud releases and that is much much more part of the conversation.

And what the customers are excited about effectively buying when they buy into guidewire and our cloud story.

Oh for sure. This is this is a shift in the way that were taken.

The product in the company to market its being very very well received in a somewhat I feel like we're really just getting started honestly just as like this is really just starting to kick in in these updates are starting to take hold and you know.

That was we were talking today actually about our key takeaways from connections and the reality of the gist.

Just how fluid. These these update processes are going for our cloud customers was one of the big takeaways. So I. Appreciate the question I think it's absolutely part of the story and probably one of the things that is helping US continue to drive an improved sales momentum in the business.

No that's great. Thanks, Mike maybe switching over Jeff on the operating side a lot of healthy momentum here and outperformance from a margin perspective, I guess, maybe help us think through kind of some of the seasonality maybe any variable puts and takes on a quarterly basis and how we should think about some of the sustainability I know you called out some kind of reallocation there, but it is.

The ability of the outperformance here relative to even when we met 30 days ago, maybe maybe versus what was more onetime in nature if anything.

Yeah no. It's a good question, we're obviously very thrilled with the margins we saw in Q1 that caught my ear.

A little bit by surprise I wasn't expecting to be at 65% and there was the onetime elements in there.

We did benefit from a bit higher or higher revenue. Some of that revenue was what was tied to platform usage that was billed in arrears. So think about that as kind of a catch up revenue that was recognized in Q1 that flowed through.

The margins. Additionally, we did have a little bit higher credits from our infrastructure provider in Q1 than we're expecting in the back half of the year, but in general we've made really strong progress in how we think about the efficiency of the platform that we're delivering and that gives us a ton of confidence as we kind of start to march towards those longer term targets.

There was a little bit of a one time effect.

Couch it around.

Around two two to potentially three percentage points when you factor in the topline.

That was.

Some of that catch up revenue and you factor in some of the credits that may not recur throughout the end of the year, but in general just really healthy progress.

Great. Thanks, guys I appreciate it.

Thank you.

Our next question comes from the line of Kevin Kumar with Goldman Sachs. Please proceed with your question.

Hi, Thanks for taking the question I guess I'll start with the cloud deals I think seven in the quarter pretty impressive, particularly given it's a seasonally slow typically seasonally slow and I think that compares to four deals maybe last year or so so curious Mike how are you thinking about maybe carrier appetite for cloud modernization today.

Perhaps a year ago and maybe what are the key drivers that you would attribute to the stronger deal activity that we're seeing out of the gate.

Thanks for the question, Yeah, I would say.

Sure, it's probably two things number one.

Steadily building our confidence in the.

Just the stability of the operating conditions for insurance companies feeling more confident about the future enabling them to make make these decisions pull the trigger on these projects.

That's part of it but I think the bigger part of it is just growing confidence in our direction our capability to deliver success fall through and see the project's life, we've talked for years about sort of how conservative the the customer base is and how they want to see other people sort of paved the paved the road so to speak.

For them to drive down in the future and I think we're starting to see that that factored into the momentum in Q1.

And I think it's also helping us feel comfortable.

And confident about the pipeline over the next three quarters and the outlook for the rest of the fiscal year, we really just are seeing.

All the hard work and energy that we've put into the platform and the products.

The customer stories that are a positive customer stories and the business impacts that we've achieved with them helped improve the you know the propensity of these either migrations or net new deals to come to the platform. So it's all of those things I think adding up to result in a very positive start to the year for us.

That's great and then Mike you called out analytics and I I guess guide wire now is a fairly robust portfolio of analytics application. So I'm, just curious kind of which applications are seeing the most traction what where is there room to maybe improve attach rates and how do you think about the overall kind of add on strategy going forward.

So yes, we mentioned the deal that we did with hazard hub, which we're really excited about we think that there is a you know theres a.

Elution, maybe coming if I'm not exaggerating too much in the way that people approach property analytics, we talked a lot about that at our connections conference. We think that the approaches that most of the insurance industry is taking to measuring the risk associated with.

Properties can be vastly improved by taking a much more specific and much more local even address by address location by location approach and.

Hazard hub is our mechanism for driving that change in the industry. We think it will have broad applicability to multiple multiple different lines of business and theres a lot of excitement about driving traction and adoption of that product in.

In our customer base, but also throughout the industry.

There is an opportunity for us to maybe drive more attach is with our predict product.

I think that most insurance companies have.

Hello, Mike called predictive analytics machine learning projects up and running you know, they're there they're working hard with great teams of people to try to sort of predict outcomes and predict next steps and predict severity on an on risk and claims and things like this where they struggle is actually deploying it.

They struggled actually getting it into the core systems into the core system workflows in front of the people on the users at the points in the business workflow in the business processes, where you can really take action and have an impact on the business and thats, where predict really shines is making it possible.

For us to actually deploy effectively and efficiently and fast all of this work that the the data scientists.

Engineers have had.

They have done inside these insurance companies and so this is one of the areas, where we think that there'll be more attach going forward more joint selling and more just positioning and deploying insurance suite applications and insurance now applications. Alongside these are our predictive analytics models would predict so hopefully.

That gives you a sense of how excited we are about it.

No that's great. Thanks for taking my questions.

Thank you.

Our next question comes from the line of.

Richie Januvia with RBC. Please proceed with your question.

Oh wonderful. Thanks, so much for taking my questions nice to see continued momentum in our business, especially coming out of connections maybe starting with <unk>.

Connections right there was a lot of excitement with.

Partners and customers and talk to you at the conference around Jetro, maybe can you talk us now that the product if I'm not mistaken did come out of <unk>.

The beginning of this month, meaning what is early feedback from customers and partners then since.

Talking about at the conference analysis kind of going live in and how we should expect there.

Maybe help you competitively, but also really helps us build out a stronger and more robust ecosystem and I've got a follow up.

Okay. Yeah, Great question feedback was extremely positive.

You know the one of the one of the things we did that that was a little bit risky, but also a lot of fun was we worked on this project to sort of take us collection of business requirements and turn it into an insurance application that was exposed digitally.

On top of the platform and <unk> was one of the primary enabling mechanisms for us to be able to deliver something in 24 hours is really a game changer in terms of the way people think about deploying digital applications.

We're incredibly we are incredibly excited about it and the feedback so far from customers.

It is also very very positive.

So it's somewhat it's the you know the feedback from the customers who are seeing it and putting their hands on it and looking at the demos of connections, but it's also what we call. Our early access customers, who have been working with us over the past couple of releases to really use this build applications with it deploy those applications.

And to the public domains.

And ultimately it's about enabling them.

To create these consumer experiences in a much much faster way.

It's a it's a real change in the way that traditionally these agent.

<unk> facing or consumer facing applications are developed deployed maintained.

It's going to provide a significant boost to the development teams. The teams the business teams, who are responsible for a rolling these things out and ultimately, making insurance just easier to consume and making the whole process more efficient, but also more convenient and more friendly so very very <unk>.

Happy that you noticed that and very positive feedback from initial customers and in the and the customers. We showed it to a connections.

Wonderful really helpful. And then in your prepared remarks, you talked about you're.

Continuing to grow the partner that you certified for cloud migration can you maybe talk a little bit about you know how.

How you might be able to number one accelerate the number of partners that can do that and you'll continue to offload some of that services and maybe number two tiny generative AI into all of this right and to what extent can partners utilize whether it's AI or actually generative AI to accelerate the pace of those migrations and maybe.

Even speed up the time to being certified for that thanks.

Well so yeah. It's great question, we've been working very very hard to ensure that.

The consultants in our ecosystem.

Our certified on each cloud release that was number one most important thing right because we're changing the approach more.

Quickly the pace of innovation from Guidewire has increased and so it's very important that we ensure that.

Everybody, that's selling themselves or deployed on a live project is knows the latest and greatest and knows how to do the implementation. The way that you should do it based on the latest release that's number one.

Number two is we recognize that there's a particular skill set in sort of assessing the current state of a guidewire on prem implementation and optimizing the approach to moving that over to a cloud implementation. So that obviously you need to understand you know you need to be cloud certified but you also there is a.

Theres, just a whole bunch of things that we've learned now from about 100 projects that we can help disseminate more effectively into the broader ecosystem and that's so that's what's behind that effort to cloud create those migration certifications.

Certainly we're looking to add additional horsepower to that program you know and we're very open about the approach to recruiting partners and training consultants because you know in our opinion.

We're creating a lot of demand.

For that Guidewire expertise and the more capacity there is to do these sorts of projects I think the more demand honestly will be able to create so our certification approach is very open and we're constantly trying to recruit more and more consultants to be experts on the projects.

I really think this is one of the best things.

Sort of a consultant can learn if they wanted to ensure that theyre going to have that theyre going to be able to find billable projects for probably the next decade Guidewire is an incredible.

An incredible scale, an incredible asset for consultants to have if they want to make sure that theyre going to see a demand for that expertise over the next 10 years.

So that's number one now the question you asked about generative AI I think is very interesting one it's certainly something that we're looking at very carefully is like if you. If you can see a path towards developer productivity improving with these tools can we also see a path towards migration velocity, increasing it's definitely something that we're looking.

And there's a number of partners who have projects in place to sort of assess this.

Tried to test it and trying to validate that it's going to work and accelerate.

There is definitely upside there I think it's probably a little bit too early for us to sort of call a sort of put a number on that.

Acceleration potential, but it's definitely something we're looking at and also partners that are looking at around.

Not just not just migrations, but also just implementation of functionality on the platform.

That concept is not.

It has been brought up a number of times and it's something we're looking at and have a lot of a lot of hope for let's say so that potential is definitely there.

Really helpful. Thank you.

Okay. Thank you.

And our next question comes from the line of Peter Heckmann with D. A Davidson. Please proceed with your question.

Hey, good afternoon. Thanks for taking my question you spoke about it a little bit on the Investor Day made some recent progress with migrating clients on on classic platform.

Remind me I believe you have for laughs, but.

Two does that imply that there were two that migrated over the last 12 months or so and how are you thinking about the timetable on those remaining four.

Yeah. Thanks for the question, Yes, we have had success in moving it moving a couple of those customers over from classic from our classic approach to our GW CP approach.

We're in active conversations and planning with each one of those.

For customers.

You know these things are somewhat complicated and often have a lot to do with their internal priorities and other projects that they're executing as part of their overall it landscape and project portfolio and other business ambitions like building out new product lines are optimizing.

As this processes or digital implementations and so factoring in that that shift is something we're working closely with them and so my my expectation is that this isn't something that's going to be transitioned to all in one year and it might stretch out to or maybe even three but.

We're pretty comfortable right now with the dialogue that we have with these customers in the planning and approach that we're taking.

We're also doing a lot of work to continue to optimize the implementations that support them on the classic approach to Guidewire cloud. So we feel comfortable about that you know, we're always working to make sure that it goes well but.

From an investor perspective, I don't think it's something that really.

Factors as much as it did into the overall picture at Guidewire as it did maybe a year and a half ago I feel really good about this approach Peter I was going to say the same thing I mean, I think if you look back to the analyst day, two years ago or a year a little over a cycle over a year ago, two analyst days ago.

The impact of the classic customers had as a drag on the overall margin was quite significant as we've migrated.

A group of those over to GW CPE as we've improved our overall efficiency in managing the classic customers.

And just as we've grown our business that's going to be a smaller and smaller piece of the overall pie. So it will be less.

We also are the margins going forward, but it's something we're still working hard on.

Well, that's that's good to hear and then in terms of just the.

This second quarter guidance.

Just looking at a little bit at and I want to make sure I'm interpreting this correctly, but it looks like it should be a fairly.

A relatively more solid term license quarter.

A little bit lighter growth in subscription and then and then another kind of down high teens typing services.

And so is it on the services side should this be the last quarter, where we see that type of decline and then and then we start to see year over year growth again in the back half.

Yes, so on the services side.

As we noted in the prepared remarks, we've been doing a lot of work to remove away from lower margin sub contracted revenue and pushing more and more business through our partners.

That's that's impacting topline, but bringing in a much higher quality revenue stream that is that the.

Margin profile. So that that is playing out Q2 is also the holidays and so it's not uncommon for Q2 to be a little bit slower than Q1 with respect to overall services.

And then we have capacity in and we have a fair amount of work to do in the.

Back half of the year and so are expecting revenue growth in the back half of the year vis vis the first half.

And have structured our cost basis in a way that we can do that at a nice margin. So that's how we're thinking about the servicing side of the business term license as you know.

It kind of bounces around with when the renewal activity happens and so Q1 is always light from a term license perspective Q2 will be.

Seasonally higher which is pretty consistent for us and then on the overall subscription side. The only thing I would call out is is that we did have a little bit of.

What I would call more one time revenue that impacted subscription in Q1.

In general we feel very good about the start to the year in terms of how we march towards our longer term targets and our annual target for this year, but some of that did impact the sequential growth rate from Q1 and Q2.

Okay that helps thank you.

Yeah.

Our next question comes from the line of Matt Vanvliet with BTG. Please proceed with your question.

Hey, good afternoon, thanks for taking the question.

I wanted to circle back on some of the commentary you made around hazard hub.

Some of the other analytics products that you're adding in there and I guess as we as we look at those on a go forward basis.

How much should we think about those being additive to air or on a specific contract or for customers in general.

Versus being sort of a more of a carrot to get customers to move to Gw's C. P and really start to unlock all of the value of being in the cloud.

And using some of those more advanced features.

Yes, it's a good question.

I'd say, primarily our expectation my expectation is that this year.

Develops into a.

And I don't want to say independent, but linked and incremental source of IRR for the company.

We can certainly use them as carrots to drive cloud adoption, but.

More and more comfortable that the core cloud value proposition and the value proposition of.

Insurance suite with the cloud services that we have built to support at Cree.

Creates enough support or.

Direct core sales and then the analytics sales of these products or predict in hazard hub can be incremental are they can be linked sometimes and we certainly work hard to tell.

To link them and sell them both at the same time, but over time, our ambition is absolutely to create an incremental analytics business.

That you know.

Like I said is linked to but.

<unk> accelerates the overall growth of the company.

Okay very helpful and then.

Great to see the Japanese carrier moving to a full gw's CPE deployment do you think this is sort of the breaking of the dam of some of the international clients being ready to make that full switch and really embracing the cloud maybe as partners are more prevalent and more trained or.

There's still a little bit of a.

Each carrier needs to make their own decision theres not necessarily there's a bigger group wave from country to country like we've seen here in the U S.

Yeah, I don't think we're ready to call it and I don't know if we'll ever really see it.

Sort of a metaphor like breaking the dam or anything like that its certainly helpful is an incredibly positive cigna.

Signal.

We had another Japanese customer.

Go to the cloud.

This is our second one is that full suite implementation. It's certainly helpful. It helps us validate the model it helps us exercise all the particular things we need to do to make sure that the system works and can go lives successfully so it's all very very helpful that kind of approach played out across each of the countries we operate in.

Certainly helps.

But I wouldn't I don't I don't have a vision and we don't have a financial plan that sort of imagine something like future flood you know its going to just be steady improvement increased propensity to trust us and to trust the model and that all just builds country over country quarter over quarter. That's more of the approach we're going to take.

Alright, it's a modeling the business and really it's also our expectation and I think kind of relates to what you just said, which is there is this overriding factor of what are their priorities what are their objectives, what are their timelines and how those factors have a big.

Those things factor into in a large way the timing of those deals for them. So this is certainly helpful and the progress we've made internationally over the past couple of years certainly points to the eventual success, but I don't see it coming all at once.

At all.

Okay very helpful. Thank you.

Our next question comes from the line of Parker Lane with Stifel. Please proceed with your question.

Hi, This is Matthew on for Parker. Thanks for taking my questions. So youre on your non cloud cloud release, now and have a strong amount of go lives. How would you compare your effectiveness and speed and those cloud implementations at this time compared to at the beginning of your cloud push.

Okay.

Yeah, that's a great question I.

I shouldn't admit it but it is night and day I mean, we are just so much more confident now around.

What it takes to run needs successfully than we were when we first got started we we we did a good job you know when we got those first cloud deals done and we got those cloud customers live.

But.

I don't want to put it into a measure but.

Many many orders of magnitude more confident just having done an experienced all of these different circumstances that can arise in one of these projects and having built really a world class organization in terms of understanding.

Assessing what we learned from each one documenting it super effectively building and into better operational processes to enable that we're more prepared now that we're sort of.

Making sure that the gotchas that hold up other projects don't occur again.

Incredibly proud of the work that our teams and our partners have done to ensure that these programs go live more and more effectively with each cycle that same concept also by the way applies to the updates alright. So its not just the initial go live but it's also the subsequent update and making sure that customers are.

Thinking about that and planning for that and testing for that so that those things can operate more smoothly now.

It's incredible how much progress we have made over the past few years around this topic and by the way I don't think we're done.

I think you're right. We're at nine and so you know how many letters are there the alphabet right well, we'll run out eventually and have to come up with a new marketing approach, but when we get to 18.

We're going to be even better.

Things are going to be going even more smoothly and we have established the improvement function inside of Guidewire around these projects and are really really doing a much better job than we were initially.

And that experience is that positive experience for customers.

As shared and does help us sell more effectively and helps us feel confident in the progress and the momentum in the business. So appreciate the question. Unfortunately makes me admit that we were had a lot to learn when we first got started but very very proud of the progress that we've made so far.

Okay.

Awesome, that's great to hear and then at the end of your prepared remarks, you mentioned you did a $2 5 million services reorder.

Earlier in the second quarter could you provide some more detail around the changes that you made there and what was the thought that went into that now.

It was it was really are around just doing some right sizing we have seen that org, we've seen our partners take on.

More and more.

The burden that is a great outcome for us as that improves our overall scalability as we address this very large opportunity in front of us and so.

It was a relatively small small action, but it does kind of play into the services margins in Q2. So we wanted to call that number out for you, but that's all that would call out on that particular topics.

Okay.

Okay terrific. Thank you very much.

Thank you.

Our next question comes from the line of Ken Wong with Oppenheimer and company. Please proceed with your question.

Great Fantastic.

I wanted to circle back to your upbeat analytics commentary.

How might reforms the risk modeling I think in California, specifically, allowing forward looking data spark demand for analytics and it might just have any kind of pull through for for cloud interests.

Yes, Great question I'm glad you pointed that out we're excited about the changes that the state of California is working with the industry to make Theres, obviously, a lot of turbulence in the insurance market in California, which.

Many of US personally feel having the a lot of the employees that guide where work and live here.

So we think we see it as very positive.

A very positive update to the approach and we expect that <unk>.

Solutions, specifically hazard hub can play a very positive role for the industry and taking advantage of these changes and just better understanding.

Number one the real risk profile associated with these properties and with these locations.

But also things that.

Insurance companies and also homeowners and businesses can do to mitigate that risk. We think that's all part of the equation when it when it comes to operating a more effective and efficient insurance market in so Cal.

California is making some changes, but we also think that hazard hub then.

Property analytics in general can can can really significantly improve the approach that carriers take to managing risk and pricing risk and operating the the industry overall more and more effectively.

We expect intend we're excited about playing in driving rolling that I'd also say that this extends not just to you know our products and hazard hub, but also our partners.

Theres a number of analytics partners that plug directly into guidewire and can be deployed super easily on our platform that are going to facilitate this sort of new modern approach to risk management, our risk selection managing disasters, if they occur more effectively.

Very exciting climates insure tech.

<unk> to the industry and we're excited to be a part of it.

That that California change, it's like it's sort of for me kind of makes all the work we do here real because if you talk to people that live in California, Theres not any of us who either have an experienced or no somebody who's experienced a change in their insurance provider because of the because of the risks.

Associated with the weather changes and the risks profile in California, So that makes it all kind of personal for us.

It makes it pretty exciting.

You know whether or not it helps us sell cloud I certainly hope so I think I think overall the.

<unk> is the word I like to use I think if you live in a world where risk is changing faster than the more agility you have the more pace around which you can operate your insurance company to more effectively youre going to be able to manage those those changes manage that risk more effectively update your operations and update your comes.

Any more effectively and so guidewire cloud and modern solutions provided by insurance suite applications in insurance now it delivers that agility and enables the industry to operate more efficiently. So we're very positive on that change and look forward to seeing helping drive honestly, just a better more efficient <unk>.

Industry.

So anyway, hopefully that helps.

No that's very helpful and I appreciate all the all the thoughtful details there and then just a quick one for you Jeff.

Not sure if you know from quarter to quarter, we see too many changes, but just wondering if theres any update in terms of what kind of the deal ramp dynamics might look like in Q1.

Yeah Yeah.

No major change Q1, if you look at Q1 generally as a portfolio tends to have a little bit of a shallower ramp than the rest of the year, just because it's a smaller and a lot of the activity is kind of more of a true up in renewal compared to the overall bookings profile, but it was very consistent with Q1 last year, so kind of steady steady as we go.

So no change to ramp assumptions at this point.

Okay perfect. Thanks, a lot guys.

Thank you.

Our next question comes from the line of Michael <unk> with Wells Fargo. Please proceed with your question.

Hey, great. Thanks. This is David on for Mike will turn Tonight, So similar to Kent.

Question. He just asked so now we've been picking up a bunch of tidbits that youre positioning and the competitive environment has improved within the last year, especially.

You mentioned you have high close rates. So I'm wondering how this all translates into deal dynamics as you sign your cloud deals.

Yeah interesting question so.

First of all you got to understand for these for these big cloud deals.

Very often very long sales cycles very involved.

You know very very involved often pretty significant proof of concept phases, even pilots we work with these.

These these decisions are not taken lightly and we're involved in them for many many months of sometimes off sometimes over a year on a particular deal.

Close rates over the past.

Couple of years, and especially through the cloud transition have remained stable we provided some detail around this at the analyst day and the you'll find this in the slides we prepared in the talk track that we went through around competitive.

Win rates close rates.

Very.

I'm pleased I'd say, maybe I shouldn't say that maybe I should say I'm never pleased until we get to 100 rates competitive market, but we have remained steady throughout the transition and continue to feel more and more confident about our position competitively. The reason I call out. These these competitive deals over the past few quarters is just simply that it's almost like we.

Consider it almost a bit of an expansion to our total addressable market and that once a carrier modernizes.

To our system, we sort of expect that its not going to come back up for grabs for maybe five to 10 years and to see a few of these deals and now multiple quarters in a row, where we see these customers coming back to market and looking for us to make that shift from a sort of modernize.

System or a modernized system decision to Guidewire, we just see that as a very positive trend.

And something that we think are just as points in our favor in terms of being able to support our growth projections bookings projections and ability to address the overall insurance market.

Yes, the only thing I would add is you know.

Just like the value of the stock right the more risk associated with a company that has an impact on the <unk> stock price. So as we negotiate these deals the more proof points. We have the more we can derisk the path from going to where they are today to our cloud that helps us as we think about building a business case and making the making the.

The case to the insurer that now is the time to go and that these price points are reasonable.

It is clear that some of the early early adopters got preferential pricing because they were taking a bigger risk and as we think about future engagements. We are gonna be firmer and firmer in how we think about discounting. This was part of the strategy all along so.

I think we're starting to see that these deals are still heavily negotiated as Mike said.

Never want to lose one of these because when you lose one do you feel like it goes away for 10 15 years. So we fight tooth and nail to make sure that we're well positioned and when but it is our expectation that we can do better on discounting as we look ahead.

I really appreciate all that detail guys.

A little more high level.

A higher level here. So I know, it's early but is there a way to think about.

The insurance industry's budget commitment trends as we look forward into next year.

Software spend versus the prior year and their appetite to convert to the cloud. Thank you.

Yeah, It's a great question and I think we've talked over the past few quarters about the shocks that the industry has dealt with in terms of inflation whether related risk and loss.

And the the cycles that they have to follow in terms of getting rate increases approved by regulators and how that all flows through the system. So as we get through a cycle of that and hopefully you know we have a stable inflation environment, we have a stable interest rate environment.

Knock on wood or hopefully, we get stable climate related weather related risk environment, that's harder to control. Obviously those things are work to our favor in terms of creating the type of stability that enables them to feel comfortable making a big project decision around a core system modern.

<unk>, so certainly that is improving.

We watched it very closely and hopefully that stability continues and it will help increase the propensity for these for these deals to be green lighted, which results in our bookings events for us.

Thank you very much.

Thank you.

Our next question comes from the line of Tyler Radke with Citi. Please proceed with your question.

Yeah. Thanks for taking the question and apologies. If this was covered earlier hopping around a couple earnings calls Tonight, but.

Jeff I was hoping just on the if we look at the guidance obviously, if you will.

At the high end by 5 million here.

Q1.

But if I look at Q2 it came in I think a little bit below where consensus is modeling and overall it looks like the first half from a net new perspective is down.

A year ago, and that's expected to improve in the second half can you I know, there's ramp and timing factors that are at play but can you just help us understand that a bit more than you know was there any change in the ramp.

Contracts youre expecting to kind of layer in this year.

Yeah, No I mean like.

Our Q2 outlook is very consistent with our expectation as we went into the year. We obviously have a lot more visibility than you all in terms of when the ramps it and that has that's a big variable in to how we model out quarter by quarter.

So Q1 got us off to a good start we're very pleased with it we always kind of think about our business on an annual cadence.

I think we're off to a very good start of Q2 is <unk>.

The ramps are falling the way, we expected them to fall the <unk>.

Tricia and profile in the business is still very very small and kind of falling the way we expected it to fall. So there's real no change to our internal expectations. We understand that that you all have to make your best guess on your quarterly estimates but.

But very consistent with how we thought about it as we started the year.

Yeah, that's helpful and Mike you talked about.

The number of deals will be closed in the quarter was better than you expected was there any timing.

Doctors, they're pulling stuff in and if you could just talk about kind of the composition of those deals just in terms of the size and where they are.

On the right.

Waller side of things just given the seasonality of your business.

Any additional color there would be great. Thank you.

No.

Was there anything.

Special about pulling in deals or anything it's just continued positive momentum in the business.

And like I said, especially coming out of a strong Q4 typically you get you end up with a strong Q4 by pulling deals and from Q1, and so then we use that as sort of an explanation for a light Q1, but we followed up a strong Q4 with a very solid Q1 and I.

I think that that speaks volumes about the momentum that we have in the business.

Deal Count was also it was great to see you know we had four migrations, which I was very very happy to see.

So it's not all net new where it's not all migrations, it's a good spread.

And like I said, we.

This deal in Japan is just a phenomenal it's a phenomenal milestone for us.

When you think about the long term and the potential that we have internationally and especially in Japan I was very very excited to see that deal close.

And like we said like we we work for a lot of years building relationships and making sure. They understand the strategy in the story and building confidence and getting a deal like that in Japan out Cross line. In Q1 was was great. So I wouldn't read anything special.

Intuit.

In terms of deal size pretty normal kind of where we expect it to be and like I said really strong start to the year, yes. The only thing I'd add is how he's like look I had obviously modeled a little bit lower bookings activity in Q1, as we went into the quarter or so.

Some of that was just a reflection of the strength of Q4. So we were pleased to see the activity in Q1, it was a little bit higher than what we'd model.

But it was not I wouldn't say there was any sort of unnatural pull and it's just we look at this on an annual cadence and we Havent, we got off to a good start.

Thanks, a lot.

Yes. Thank you.

Our next question comes from the line of Mike Funk with Bank of America. Please go.

With your question.

Hi, Great. Yes. This is this is Matt on for Mike. Thanks for the question you.

You mentioned, especially high close rates in the prepared remarks can you provide any incremental color on how deals are moving through different stages of the pipeline relative to prior to us. Thanks.

Yeah.

Yes, I, just I wouldn't say that we've seen an acceleration.

In deals moving through.

I'm trying to think about.

Sometimes you see these things just push.

Yes, if we don't see them pushing we see them close then I guess, that's sort of like an acceleration relative to the average.

I wouldn't say that the the expectations, we have for how long an evaluation will take have changed.

We just feel more comfortable about the outcome of the evaluation and the outcome of the deal process being positive as we gain comp as you know I guess as we gain confidence as the market gains confidence in in the solution and our ability to deliver success and as the references and other other cut.

<unk>, who have already deployed and gone live.

On the service validate that and so it's just you know.

I wouldn't describe it as a cycle acceleration and as much as it is just more confidence in the.

On the deal to actually close and be decided in our favor.

Super helpful. Thank you.

Yes. Thank you.

Yeah.

Our next question comes from the line of Erin.

<unk> with JMP Securities. Please proceed with your question.

Great. Thanks for the question you announced a partnership with Swiss re Nexen has talked about it a little bit at the analyst day can you comment on early progress there and your appetite for more potential partnerships with reinsurance going forward.

Yes. This was a very exciting relationship.

I guess, it's been in the works for a while talking to them about what we might be able to do together and I think that the.

The obviously the connections event precipitated the opportunity to announce this and talk to start six talked about talk about it with customers and talk about it publicly.

<unk>.

I would say our momentum in the cloud.

<unk> facilitates a much deeper understanding and relationship with our insurance customers.

Each creates the potential for us to play.

A far more interesting role in terms of what I guess I would say is like orchestrating.

You know the relationship between insurance companies and reinsurance entities, a significant amount of data sharing that goes along with providing reinsurance in assessing risk.

Is there a back and forth between these entities and Guidewire can facilitate that relationship we can make that more efficient.

There's a lot of exciting things that we can do with companies like Swiss re.

To the extent that they have analytics models that they're having.

We have developed or.

I would like to see there.

Their insurance partners utilize to manage risk more effectively if guidewire can be a facilitator for that.

For the for this sort of activation and operationally managing that model.

Such that the insurance companies are making better decisions. They are aligned with the expectations that their reinsurance partners have that's a big big benefit and I think that what we're seeing is a lot of excitement about this new model for a centralized cloud service supporting the entire industry can real.

Play a different sort of role.

And overall risk management up and down the value chain. So I. Appreciate you, bringing this up I mean, we've got a lot more work to do with Swiss re we're incredibly excited about where this might go.

And we're excited to be working with them and have the opportunity to talk about that work in public.

Great. Thank you.

Yes. Thank you.

And we have reached the end of the question and answer session I'll now turn the call back over to CEO, Mike Rosenbaum for closing remarks.

Hey, I just wanted to say thanks, everybody for participating in the call. We're incredibly pleased with the start to the year and we feel great about how things are progressing on the platform with customers and with partner program and overall momentum in the business. So we look forward to catching up with everybody throughout the quarter and if we don't I guess, we will see at the end of this.

At the end of the next quarter. So thanks very much.

And this concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.

Yeah.

Yes.

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Okay.

Okay.

Okay.

Goodbye.

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