Q2 2025 Guidewire Software Inc Earnings Call
Greetings and welcome to the Guidewire second quarter fiscal 2025 financial.
This conference call as a reminder, this call is being recorded and will be posted on our Investor Relations page later today.
Speaker Change: I would now like to turn the call over to Alex Hughes, Vice President of Investor Relations. Thank you Alex you may now begin.
Speaker Change: Hello, everyone with me today is Mike Rosenbaum, Chief Executive Officer, and Jeff Cooper, Chief Financial Officer, a complete disclosure of our results can be found in our press release issued today as well as in our related form 8-K furnished to the SEC both of which are available on the Investor Relations section of our website today's call is being recorded and a replay will be available following its conclusion.
Speaker Change: Statements today include forward looking ones regarding our financial results products customer demand operations and the impact of local national and geopolitical events on our business and other matters. These statements are subject to risks uncertainties and assumptions 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.
Speaker Change: And in the press release, and the risk factors and documents, we file with the SEC, including our most recent annual report on Form 10-K, and our 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.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: Finally, similar to last quarter Investor Relations is conducting this earnings call via zoom audio rather than a calibration. This means we will manage the Q&A portion of today's call internally without with Grace moderating, we just heard from and myself managing Q&A. Please be patient if we encounter any shortfalls in any of the handoffs during Q&A and with that I'll hand, it off to Mike. Thank you.
Alex Hughes: Alex Good afternoon, and thanks, everyone for joining us today.
Speaker Change: Want to start by extending my sympathy to those affected by the Los Angeles wildfires and the more recent floods in Kentucky in 2023, there were 28 events in the United States that each caused at least $1 billion of loss and in 2024, there were 27% and Europe flooding and convective storms caused 40.
Speaker Change: Billion, an insured losses in 2024 and the recent fires in our L. A are estimated to have caused an insured loss of $30 billion.
Speaker Change: The P&C industry acts as a financial backstop for families and businesses impacted by these catastrophes more than ever a well functioning P&C market is critical to providing consumers businesses and communities the peace of mind and the confidence they need to invest and live with the risks associated with catastrophic weather events.
Speaker Change: This critical function as one of the reasons why everyone at Guidewire is proud to play a role in the insurance industry. Our mission is to provide a technology platform that powers agility in the P&C industry, which helped support a more vibrant and effective insurance market, one that helps people businesses and governments understand risk and economic terms.
Speaker Change: And make rational decisions about these risks and how to prepare for mitigate and avoid them.
Speaker Change: As mentioned was established when Guidewire was founded it has since motivated us to build a market defining software category supporting insurance core systems and to ensure that through our cloud based evolution, we will play a critical role in the industry for decades to come.
Speaker Change: Turning to the second quarter and the current state of our business I could not be more pleased with our progress and the quality of engagement, we have with the market.
Speaker Change: This includes steady progression and engagement with some of our largest on prem customers. It is becoming more and more clear that the industry's transition to the cloud astellas is steadily accelerated.
Speaker Change: Regarding the detail of the second quarter, we produced solid sales activity with <unk>, finishing above the high end of our projected range.
Speaker Change: <unk> cloud deals. This included four for a full insurance suite deals one insurance now deal and the remainder for one or two core ex center applications. As a reminder, full insurance suite deals include all three applications or ex centers as we sometimes refer to them policy Center claim center and billings.
Speaker Change: Center.
Speaker Change: Since launching Guidewire cloud platform. Our thesis has been that we will see growing demand from new customers, replacing legacy systems as we prove out our cloud capability with our customer base in Q2, we welcomed five new customers, including one in Brazil, and one in Belgium, we.
Speaker Change: We had.
Speaker Change: A large global specialty insurer start their guidewire journey with billing center and look forward to the opportunity to expand to policy Center and claim center in the future finally with respect to new customers. We closed a full suite competitive takeaway at a tier three insurer that is a subsidiary of a larger entity, where we see meaningful future growth potential.
Speaker Change: We also closed six cloud migrations in the quarter, which is critical for our ongoing intention and commitment to migrate 100% of our on Prem customer base to our cloud platform.
Speaker Change: And two of the six included expansion into new business lines or new core modules.
Looking at our deals by geography. This quarter was led by North America, and Europe with about a third of the deals in Europe.
Speaker Change: Competing effectively outside the United States, often requires us to invest in country and market specific functionality and I was particularly pleased to see this investment translate into three tier one deals, including with two large London market insurers across.
Across the board our sales activity in Q2 was concentrated in tier one and tier two insurers where customer requirements are focused on the ability to handle significant complexity and scale with.
Speaker Change: With respect to the industry overall.
Speaker Change: I've been asked regularly about the potential short term impact of the California wildfires on Guidewire overall, I would say that the property and casualty insurance industry is incredibly resilient.
Speaker Change: And is designed to absorb these types of catastrophes. The one silver lining from these recent events is that they have increased awareness and the importance of maintaining a high functioning insurance market, where insurers are enabled to evaluate and price risks responsibly.
Speaker Change: Turning to operations, we are seeing strong growth in cloud deployments and customers are more efficiently taking updates keeping them current with recent innovations and functionality <unk>.
Speaker Change: Instrumental to our success driving adoption and deployments as our growing cloud ecosystem of partners. There are now 26000, guidewire focused practitioners across 38 system integrators and the number of Guidewire cloud certified professionals has past 10500, another dimension of our partner ecosystem that is equally important to our long term.
Speaker Change: <unk> vision is our technology partners as we've grown cloud we've accelerated the number of cloud apps from both Guidewire and our technology partners Jaguar marketplace now has over 500 applications, including over 270 from technology partners and there have been over 6000 app downloads in just the first half of this year.
Speaker Change: In summary, it was a great quarter with continued momentum across the business, we feel great about how the year shaping up and couldn't be happier with everyone. In the company, helping us to continue to deliver reliable <unk> and revenue growth while simultaneously improving margins. All of this is based on an unwavering commitment to the success.
Speaker Change: Of every single customer program, our company supports which is ultimately what positions us well for the future.
Speaker Change: I'll finish with a personal note about one of the customers, which really exemplifies our mission and the impact our platform can have in critical times during.
Speaker Change: During the fires, California casualty leverage guidewire to proactively identify and rapidly contact over 400 at risk policyholders, ensuring their safety and offering immediate aid included needed housing by overlaying fire map layers on address policies and guidewire.
Speaker Change: They were able to identify total lost homes, often preempting customer assessments. This swift action enabled them to provide over 90% of total lost homeowners with full coverage payments within two months, so customers could move forward with plans to rebuild or purchase a new home. We're proud to play our small role in this effort and industry and with that.
Speaker Change: I'll turn it over to Jeff to discuss the financials.
Jeff Cooper: Thanks, Mike we had a great Q2, and the full year is tracking ahead of our expectations are are finished at $918 million, which reflected strong sequential <unk> additions in the quarter.
Jeff Cooper: This was driven by healthy new sales activity and new <unk> sold from deals in prior periods with ramps, which we sometimes referred to as <unk> from a backlog.
As a result, we added $45 million of net new IRR, which is roughly what we added in Q4 last year, which is always our largest seasonal quarter. So it is exciting to see the model play out in this manner.
Jeff Cooper: Total revenue was $289 million or 20% year over year and above the high end of our outlook subscription and support revenue finished Q2 at $178 million, reflecting 35% year over year growth.
Jeff Cooper: And our continued insurance suite cloud momentum.
Jeff Cooper: Services revenue finished at 48 million, which was in line with our expectations now let me turn to profitability for the second quarter, which we will discuss on a non-GAAP basis.
Jeff Cooper: Most profit was $189 million, representing 20%, 25% year over year growth.
Jeff Cooper: Overall gross margin was 65%.
Jeff Cooper: Subscription and support gross margin was 69% compared to 65% a year ago and continues to track a bit ahead of our expectations.
Jeff Cooper: Services gross margin was 6% compared to a negative 11% a year ago.
Jeff Cooper: The services business finished the quarter in line with our expectations. As a reminder, Q2 services revenue is usually lower.
Jeff Cooper: As a result of the impact of the holidays on services deliveries.
Jeff Cooper: We finished Q2 with operating profit of $54 million. This finished ahead of our outlook as both gross profit was higher than expectations and operating expenses finished lower than expectations.
Jeff Cooper: We have been more measured in our hiring in the first half, but we do expect to see increased hiring in the back half of the year and this hiring will be focused on product development teams.
Jeff Cooper: We ended the quarter with $1 4 billion in cash cash equivalents and investments.
Jeff Cooper: Operating cash flow, we ended the quarter at $86 million, which was ahead of our expectations due to strong collections in the quarter.
Jeff Cooper: Before turning to our outlook I want to quickly touch on some actions we have taken related to our 2025 convertible notes, which are set to mature later this months in.
Jeff Cooper: In Q2, we retired an additional 100 million at face value of our 2025 convertible notes.
Jeff Cooper: The real cost associated with this was $153 million and this resulted in a $53 million charge to other income on a GAAP basis.
Jeff Cooper: We did this one our share prices between $170 $177 per share with the intent to limit share dilution risk associated with the converts that are coming due.
Jeff Cooper: We will repay the $179 million left outstanding in Q3, utilizing net share settlement.
Jeff Cooper: Based on our current share price levels and when you factor in the impact of the call spread that we purchased in conjunction with issuing the 2025 converts.
Jeff Cooper: We now expect share dilution of less than 10000 shares as we close things out. Although this number will be impacted by the share price over the next couple of weeks.
Jeff Cooper: Had we not bought back the converts that we've retired in the last couple of quarters.
Jeff Cooper: And then the share dilution would've been over 700000 shares. So I'm pleased that we got in front of us.
Jeff Cooper: Now let me go through our updated outlook for fiscal year 2025, starting with the top line given our performance in the first half and our strong visibility into the second half we are raising our outlook to $1 billion to 1.01 billion, which reflects growth of 16% to 17% year over year.
Jeff Cooper: Confidence in our outlook is informed by one strong growth in IRR from ramping deals in the back half with a notable jump in Q4.
Jeff Cooper: Two our view into the pipeline for the back half of the year and three our continued high win rates.
Jeff Cooper: I also want to comment quickly on our visibility in the quarterly seasonality dynamics as we expect higher seasonality in Q4 this year due to the timing of our ramps.
Jeff Cooper: The key dynamic of net new <unk>.
Jeff Cooper: Our additions in a period is the amount of air are coming from the backlog or from ramping deals sold in prior periods.
Jeff Cooper: And since these ramps are clearly outlined in customer contracts, we have clear visibility into these increases.
This year, we will see strong growth in new <unk> from ramps in the back half and this is due to the realization of ramps from strong sales activity, we experienced last year and in fiscal 2023.
Jeff Cooper: With respect to seasonality. This year, we expect nearly three times more IRR from backlog to come in Q4, when compared to Q3.
Jeff Cooper: This is a significantly larger quarter over quarter step up when compared to last year.
Jeff Cooper: To some extent this is just how the ramps are landing this year and these dynamics can shifted eight year to year, but we thought it would be helpful to call out this dynamic to help you all better understand the expected net new <unk> increase in Q4.
Jeff Cooper: As a reminder, our outlook assumes foreign currency exchange rates as of the end of our last fiscal year, and we update <unk> exchange rates at year end.
Jeff Cooper: If we update our today based on current exchange rates, then we would see at approximately $9 million negative adjustment.
Jeff Cooper: We'll certainly quantify this at year end and we will continue to monitor FX rates throughout the remainder of the fiscal year.
Jeff Cooper: For total revenue in fiscal 2025, we now expect between $1 164, and $1 174 billion.
Jeff Cooper: We expect approximately $653 million in subscription revenue and $718 million in subscription and support revenue.
Jeff Cooper: Given higher than expected services bookings in the first half of the year, we now expect services revenue to be approximately $210 million.
Jeff Cooper: Turning to margins and profitability, which we will discuss on a non-GAAP basis, we still expect subscription and support gross margins to be approximately 69% for the year.
Jeff Cooper: Our expectation for services margins and total gross margins also remained unchanged at 12% and 65% respectively.
Jeff Cooper: As a result of raising our revenue outlook in a bit slower hiring than we originally expected. We are lifting our outlook for operating income we expect GAAP operating income of between 10 and $20 million and non-GAAP operating income of between $175 million to $185 million for the fiscal year.
Jeff Cooper: We expect stock based compensation to be approximately $160 million, representing 9% growth year over year.
Jeff Cooper: We're also increasing our cash flow from operations for the year to be between 230 and $260 million.
Jeff Cooper: Turning to our outlook for Q3, we expect <unk> to finish between 942 and $947 million.
Jeff Cooper: Our outlook for total revenue is between 283 and $289 million.
Jeff Cooper: We expect subscription and support revenue of approximately $178 million.
Jeff Cooper: Subscription and support revenue was tracking around $2 million per day in Q3 has three fewer days in Q2, which explains the modest sequential growth.
Jeff Cooper: We expect services revenue of approximately $52 million in Q3, we expect subscription and support margins of between 68%, 69% services margins to be around 10% and total gross margins around 64%.
Jeff Cooper: Outlook for non-GAAP operating income is between 36% and $42 billion.
Alex Hughes: Alex you can now open the call for questions.
Alex Hughes: Raise your hand, if you are ready to ask question and we will get to you.
Alex Hughes: Hey.
Alex Hughes: Thanks, guys.
Alex Hughes: Maybe starting for you you called out and it's very clear the resiliency and date and gravity around some of the data cloud opportunity today, there's a lot of uncertainty in the world.
Alex Hughes: But carriers clearly need agility here I'm wondering on the Decisioning angle from carriers, how much adaptability and interoperability comes into play in those conversations and now that you have kind of that tipping point of 50% maybe.
Alex Hughes: How youre thinking about leading into some of those conversations with legacy on Prem customers around what that end of life journey looks like based on kind of prior comments around a 100% getting to the cloud over time.
Speaker Change: Yes, Thanks Sterling yes.
Speaker Change: Yes for sure I would say there is a growing recognition that operating.
Speaker Change: Core systems, both claims and policy slash underwriting rating and pricing systems on modern platforms with modern.
Speaker Change: Capabilities brings a level of agility to an operation an insurance operation that enables them to be more competitive.
Speaker Change: They need to be able to manage indemnity more effectively they need to be able to manage down cycle times, which increases their.
Speaker Change: Expense ratios and profitability they need to be able to set prices.
Speaker Change: And define our rates as effectively as they possibly can and they don't want to be burdened by these legacy systems either because the.
Speaker Change: The execution.
Speaker Change: <unk> expense, let's say for making changes as high or because they don't have access to the data they need to be able to make the decisions that they need and so all of that adds up to they they need modern systems and they've got to figure out a way to get there and that is absolutely, helping us kind of across the board.
Speaker Change: Every insurance company in the World is thinking about this now doing these programs as you are aware, it's pretty significant these are multi year programs that they've got it kind of slot them in into their plans over over the course of a decade and in some cases, that's just the unfortunate reality, but the pace around which we're having there.
Speaker Change: Conversations.
Speaker Change: It is really improving and the quality of the conversations is improving.
Speaker Change: You can just get a feel a sense of.
Speaker Change: I can't claim it to actually be inevitable, but it kind of feels that way is like we recognize that guidewire is distinguishing itself and it's probably the right place and so that's just that's just makes us that just gives us confidence in what we've built and how it's going to positively impact the market.
Speaker Change: I think that the.
Speaker Change: The end of the end of life conversations that we have about our ability to support our on Prem customer base, that's sometimes difficult, but I think we're taking a very mature and careful approach in talking to every single one of our customers about what they expect and need from us and what they can expect.
Speaker Change: From us and what we're prepared to do and trying to give everybody as much time to make these decisions as possible and so far we've been very.
Speaker Change: You know we received a lot of positive feedback actually about the approach that we're taking to giving them time to plan and working with them on what the approach is going to be so I don't know if you add all that up.
Guidewire it was a good quarter and that adds up into a lot of positive visibility for us into the second half and into next fiscal.
Speaker Change: That's great very helpful and very clear.
Jeff Cooper: Momentum that you guys are seeing maybe Jeff for you as a function of that.
Giving you a lot of kind of incremental levers.
Jeff Cooper: Play with across the model I would think of a nice to see kind of the upside flowing through you called out kind of the uptick in hiring in the second half, but how do you think about that balance of kind of margin outperformance with the opportunity to reinvest and kind of doubled down given this opportunity tends to be our seems to be kind of slightly accelerating here as well.
Jeff Cooper: We're thrilled with the opportunity to continue to sell into our installed base and add new customers that is our number one focus and.
Jeff Cooper: We're not going to <unk>.
Jeff Cooper: Focus we have a we have a strong focus on driving continued margin expansion, but we can do that while also continuing to grow into our market.
Jeff Cooper: We see some really interesting investment areas and that's part of the reason why we accelerated some R&D investment this year.
Jeff Cooper: It's taken us a little bit longer to get some of that hiring going but we have line of sight into some accelerated hiring in the back half of the year that will be targeted at some of these interesting investment areas that we're focused on so we think we're doing we've got a healthy balance there between making sure we're focusing on the growth opportunity in front of us.
Speaker Change: Great. Thanks, John Our next question comes from Ken Wong of Oppenheimer.
Jeff Cooper: Sure.
Ken Wong: Great. Thanks for taking my question, Mike you touched on kind of the California situation.
Ken Wong: And one of the kind of concerning issues kind of leading up to that was large insurers, leaving because of price caps I mean, it seems like maybe some of that is starting to shift back I saw Allstate is coming back after getting some price caps lifted would you characterize this as a as a tailwind for guidewire.
Ken Wong: Since you guys disproportionately skew higher tier versus the lower tier that might've backfill those large guys that left the state.
Ken Wong: Well I don't know whether overall, it's a headwind or a tailwind otherwise generally I would say there is recognition that.
Ken Wong: A lot of the.
Ken Wong: Insurance policies in the state of California, probably need to be repriced and the state of California is working through that with our insurance customers.
Ken Wong: And my point of view in a proactive way I think it's obviously catastrophic what happened in L. A and incredibly unfortunate, but you know everybody recognizes that because of that that insurance is very important for the state of California, and I think theres a lot of insurance companies, who are excited to five.
Ken Wong: A way to participate in that market and help provide that service to consumers like me honestly in the who live in the state of California.
Ken Wong: That that dynamic in general I would say is helpful is helpful for Guidewire I don't know its like were better suited our worst suited but it just well suited to what I'd say like bringing modern technology to the insurance industry. So that we can price risk effectively so that we can manage claims effectively that we can match.
Ken Wong: Catastrophes, when and if they occur as efficiently as possible and all of that tends to support our core value proposition. So that's how I would I would frame it.
Ken Wong: Got it very thoughtful I appreciate that Mike and then Jeff just subscription and support gross margin kind of ticked up again ticked higher than we anticipated I recall last quarter, you're kind of signaling.
Ken Wong: We shouldnt always assume things will kind of track up and I think kind of steered us down sequentially, how should we be thinking about it as we go into Q3 back half.
Ken Wong: Okay.
Yes, I mean look embedded in our guide is relatively modest margin.
Ken Wong: Expansion in the back half of the year off of the first half of the year or relatively remaining relative to sustain we really manage and measure our progress on this metric on an annual basis.
Ken Wong: Quarter to quarter, there may be some small fluctuations based on certain customer go live events, where usage patterns pickup or or one AWS credits get realized but we generally think about this on kind of how we manage to the full year and we're pleased with the amount of expansion, we're expecting to see this year and we expect to see that.
Ken Wong: <unk> continued to steadily March towards our near term midterm and longer term targets as we look out in the future.
Ken Wong: Thanks, a lot yes.
Ken Wong: Thanks, Ken.
Speaker Change: Okay, Great. Our next question comes from Alexia <unk> of JP Morgan.
Speaker Change: Right.
Speaker Change: Everyone. Mike initially we call you be skeptical about the application of AI.
Speaker Change: Are you seeing today that makes you feel that could be a game changer.
Speaker Change: Is it just about modernizing our core systems and streamline workflows.
Speaker Change: Do you think there is opportunity to leverage.
Speaker Change: To create value for your customers and is guidewire position well.
Speaker Change: The access rights to this.
Speaker Change: Peter.
Speaker Change: So customers to provide some competitive offering.
Speaker Change: Yes, thanks for the question so.
Speaker Change: First of all I would say the insurance industry. Our opinion is the insurance industry is generally well positioned to benefit a great deal from generative AI.
Speaker Change: There are a number of areas that we are working on right now in collaboration with customers.
Speaker Change: And prospects around the application of generative AI to insurance use cases. So I think you we are hopeful and excited about the potential to increase the productivity of development teams working with Guidewire.
Speaker Change: And that provides a boost to the industry and a benefit to our customers. We're excited about the application of generative AI to the claims adjusters and the work that they need to do interacting with claims files and documents and the interactions that they have with claimants and managing that very very complicated.
Speaker Change: Business process as effectively and efficiently as possible and we also think that there's a significant opportunity for generative AI and underwriting.
Speaker Change: And specifically around document management evaluation of submissions comparison of what the underwriters are kind of reading in the summarized documents versus the risk appetite carriers have and just generally improving the efficiency of the underwriting process. So those are three very high level of examples where I think it will be applied.
Speaker Change: And we're excited to play a part in that.
Speaker Change: I also would say there is we had an interesting conversation with a set of very senior.
Speaker Change: It executives in the industry and they said there's also a huge opportunity for us and what you might call classic AI or just straight forward machine learning associated with the shared data asset that we can collect and manage on behalf of all of our cloud customers and so regardless of large language models and generative AI theres an opportunity to apply our.
Speaker Change: Additional intelligence and machine learning to that use case and improve business efficiencies. So.
Speaker Change: Very very excited about all of this but I always remind everybody at guidewire that first and foremost our job is to make sure that every single core system projects that we do that we embark on with our customers is successful I want to maintain that perfect track record are as close to perfect as we possibly can.
Ken Wong: Ken and I wanted to invest in ensuring that we are winning.
Ken Wong: Every single core system worldwide that we compete in and making sure that those programs go successfully now we've created some space in the business model of Guidewire over the past couple of years is very positive and Jeff kind of referenced that in terms of our ability to hire and our ability to tackle these incremental use cases. So we're excited about that.
Ken Wong: It's not it's not the number one priority at Guidewire right now the number one priority by a guidewire right now like I said is make sure. These programs go well make sure. We continue to win in our core business. We're doing that Super effectively I think that strategy is working very well for us and I think we actually are incredibly well positioned to bring tangible.
Ken Wong: The real benefit based on generative AI to the P&C industry, but we're going to do that carefully.
Ken Wong: I would tell you that that's.
Ken Wong: Very excited and bullish in the long run, but I don't want anybody to get distracted about what the core objective of the company is.
Ken Wong: Alright.
Ken Wong: There is still there it was a long answer.
Speaker Change: Alright. Thank you next question is from <unk> <unk> from RBC.
Speaker Change: Go ahead rich.
Speaker Change: Alright wonderful. Thanks. Thanks, so much really nice to see continued progress in the quarter just two for me Mike.
Speaker Change: You talked about some of these platform deals that youre seeing with larger insurers, maybe can you walk us through.
Speaker Change: Where are there opportunities you see to consolidate budget within your existing base right I know, you've historically had a lot of customers that may use you for one line or use your referred to products and use a competitor for another line or for another set of product where do you see those consolidation opportunities and what kind of tools do you have in your Arsenal.
Speaker Change: To maybe use kind of the innovation that <unk> been bringing as a consolidation opportunity and then I've got a quick follow up.
Speaker Change: Yes, it's a great question and I'll answer it this way I think for a lot of our big on Prem customers.
Speaker Change: They are generally very <unk>.
Speaker Change: Successful and happy with their in their on premise implementations of Guidewire and so that has made it.
Speaker Change: Challenging, let's say for us to sell them the new thing in the cloud upgrade.
Speaker Change: When they are successful and they are operational and they are reaping the benefits of the investments that they've made in that implementation.
Speaker Change: For them to think about the next phase is sometimes challenged because they've got other priorities and so what we're always looking for and when I think you are kind of pointing to is whats the compelling events that they have that can align to a cloud upgrade on the guidewire side. So is there an incremental initiative around a new line of business or a <unk>.
Speaker Change: Solid Asian of claims operations across different lines of business.
Speaker Change: Create a logical program to do something significant with Guidewire that is logical then to attach to a cloud upgrade and I think that our patience in working with these customers about what their long term strategies are around their business objectives helps us get our cloud upgrade.
Speaker Change: Opportunities aligned to what makes sense for them and I think in each case, which I'm, obviously not going to go into the details of each one I can think of a compelling business event that is behind the uptick in the conversation that we're having with that customer and so as long as we can keep those things aligned I think it's just like I said, it's like slowly accelerating.
The confidence that we have in those ultimate cloud.
Speaker Change: Cloud upgrades.
Speaker Change: Awesome. Thanks, and then just kind of a quick follow up if we think about.
Speaker Change: Services and specifically the services gross margin I know, we've discussed the opportunity in the past.
Speaker Change: This app over time, maybe just how should we be thinking about the glide path to improve services gross margins improved utilization rates and maybe just tying in gen. AI into this is there an opportunity to bring that AI for some of the lower services use case again, just I know youre not trying to run it for profitability, but I imagine some sort of margin expansion on the service.
Speaker Change: <unk> would be would be great to see maybe just any puts and takes there would be helpful. Thanks.
Speaker Change: Sure I think the team has done a good job ensuring.
Speaker Change: That we're selling our services, but we're working very closely with the partner ecosystem in the Si community to figure out what the rules of engagement and how we kind of trade off.
Speaker Change: Worked together to tackle this massive opportunity.
Speaker Change: We've seen services revenue tick up this year.
Speaker Change: Highly strategic organization, we have capacity to deliver.
Speaker Change: As I've said previously a little over $200 million of services revenue, we are executing towards towards that number.
Speaker Change: And longer term, we expect to see those margins tick up a little bit but again. The primary focus of this organization is towards that mission that Mike highlighted to ensure that every single one of our customer programs are successful.
Speaker Change: The team is looking at how we use gen AI certainly in NII in implementation programs around developer productivity.
Speaker Change: We're also.
Speaker Change: For the first time doing a little bit more of an expansion of our services organization into the India office to to create some avenues for some lower cost delivery options for us that could also help long term on the margins, but again, our focus here will be kind of maintaining a very healthy services organization that is a highly strategic function for us.
Speaker Change: And getting it to an appropriate margin, but one that's their primary goal is making sure that the software implementations are successful.
Speaker Change: I just wanted to double down on what Jeff said, it's like our services organization is so strategically important to our company and our overall success and we've done a great job in the last few quarters kind of changing the business model and getting it more profitable, but that is not really the primary.
Speaker Change: <unk> like these guys.
Speaker Change: Done a great job there, but you know what I really look for is this like strategic asset that we can use in applied where and when we need. It. This was the secret behind our cloud success. In addition to creating a great platform, but they really helped us get through that phase, where we needed to be a very deeply connected to a lot of those.
Speaker Change: Grams in that May come in the future. So it's great to see the improvement in the business operation, but really it's about the strategy that organization is the primary goal.
Speaker Change: Great. Thank you.
Speaker Change: Our next question comes from Alex <unk> at Raymond James.
Speaker Change: Great. Thank you Mike I wanted to follow up on your answer to <unk> question on the cloud migration. There. So maybe not a new motion to push for kind of a concurrent cross sell at the time of migration, but any color on how much that customer willingness has increased over the last year or so is there any way to kind of quantify that.
Speaker Change: If you take another center at the time of of upgrading to the cloud and would only add like X percent of the cost at the time like how much of a benefit is it that the customer to take that extra cross sell at point of migration versus doing them separately.
Speaker Change: Yes, I wouldn't say that there's really an economic.
Speaker Change: Driver behind that.
Speaker Change: <unk>, let's say or that connection of the two things it's more it's more about getting familiar with the new operating model getting the teams trained up and comfortable with our cloud platform and a new approach to configuring the guidewire applications in the cloud that sort of just creates the logical.
Speaker Change: <unk> conclusion that we should do these kinds of programs not exactly simultaneously, but the decision should be made in conjunction with one another.
Speaker Change: And you know I don't.
Speaker Change: I don't think Theres any like one thing that I would point to that says this is causing us to be to just have a little bit more confidence in the future.
Speaker Change: Rates to these large companies, it's just more maturity of the platform.
Speaker Change: The track record of success, it's our confidence in our ability to distinguish ourselves in the market.
Speaker Change: Certainly vis vis the three or four years ago, but just steadily improving quarter. After quarter. It's just a continued track record of success that builds confidence.
Speaker Change: Not just with Austin, our customers, but also the systems integrators and the general ecosystem look like the risks associated with making that decision to go to Guidewire cloud or just lower and lower everyday and look I don't at all take that for granted everybody at Guidewire works incredibly hard to make sure that that remains true, but we've done.
Speaker Change: Well for the.
Past couple of years, and it's going to continue to have confidence you can continue to improve and I think that that is what's behind it.
Speaker Change: This slight uptick in the in the perspective of these customers.
Speaker Change: Okay, Great color I appreciate that and then Jeff maybe one for you I appreciate all the color on that.
Speaker Change: Outlook for the second half of the year.
We're sitting here a little over halfway through the full year any color on what premium growth coming across the platform. It looks like year to date, and what's kind of factored this year from that premium growth versus prior years.
Speaker Change: Yes, I mean, we obviously provided a fair amount of color into the IRR seasonality dynamics and what we're seeing coming off of the backlog and just how that creates a lot of visibility into the model.
Speaker Change: With respect to direct written premium true ups in that type of activity.
Speaker Change: Seeing a continuation of that being a somewhat modest tailwind to historical patterns. So.
Speaker Change: As insurers take some rate and that flows through into a model that is that is a bit of a tailwind.
Speaker Change: And then we are seeing some new customer wins, that's fro per watt for a couple of years ago. Those were somewhat on the sidelines. So we're starting to see that we talked about five new customer wins in the quarter.
Speaker Change: But to really move the needle on the premium on the new customer side, you need some some really large accounts that come across and so I would.
Speaker Change: It's not too different from historical patterns.
Speaker Change: And we will certainly call out some of the bigger guys that if we if we see some new large customer wins, but.
Speaker Change: I would expect that pattern to be pretty similar to recent years.
Speaker Change: Great. Thanks, a lot next question comes from Goldman Sachs Adam August.
Yeah.
Speaker Change: Okay.
Speaker Change: Yes.
Speaker Change: Great. Thanks, so much for taking the questions I guess Europe was a notable call out for you guys could you just bifurcate how the cloud conversation is evolving between the major geographical footprints and maybe any notable similarities or differences you're seeing in those conversations would be helpful.
Speaker Change: Yes, thanks very much. It's certainly if you think back over the past five years, there was a trend towards America, Canada, leading the charge, but in the last I don't know.
Speaker Change: Don't want to say six quarters or so we've really seen a step up all over the globe we have successfully.
Speaker Change: One and implemented cloud deals all over the World Asia Pacific, Japan, Europe <unk>.
Speaker Change: All countries in Europe, So generally I think that the business model the concepts the approach.
It's being it's well vetted, it's well accepted.
Speaker Change: Still concerns, but it is not so much about cloud.
Speaker Change: There's other things, it's not it's not like a.
Speaker Change: Philosophical difference in architecture, and the architecture sound in the architecture works and we've got customers that we can validate that it works.
Speaker Change: All of the world in every country that we operate in so whereas it was kind of led by America, followed by EMEA and APAC and certainly there's probably a difference just because of the lead times, but we are seeing strong support and momentum.
In each of the theaters, where we operate now.
Speaker Change: Okay got it that's super useful and then I just wanted to touch on the sort of non core insurance suite opportunity here anything anecdotal you are seeing in some of your more seasoned cloud cohorts and willingness to take on noncore products, just anything on that opportunity and how thats evolved would be helpful.
Speaker Change: Yes that part of our business remains healthy.
Speaker Change: <unk>.
Speaker Change: A collection of analytics products that are doing just fine in some ways. It's like the success of our core business somewhat like you surpass our focus on the on the add on business.
Speaker Change: Which is which is okay not okay. It's one of those things that maybe I should say I should try to get both things accelerating fast, but certainly the business in the future of the company. It's so dependent on the core success and when we can see that.
Speaker Change: We tend to put a lot of our energy behind those deals just because those relationships will last for decades.
The non core assets, specifically predict we've got hazard hub doing quite well, where we provide property risk analytics.
Speaker Change: At a geographic level, it's like those things are doing great.
Speaker Change: And we don't talk about them as much when we have great great quarters on the core systems side like I said because those are so much that is so strategic to the add on opportunity down the line but.
Speaker Change: But that part of the business is doing well too.
Speaker Change: Okay very helpful. Thanks, so much.
Speaker Change: Thanks, Adam next question comes from Parker Lane at Stifel.
Speaker Change: Hey, guys. Thanks for taking the questions here, Mike Nice to see the full suite momentum that you called out in the quarter. Just wondering when you look at the advantage of going full suite on cloud how would that compare to what customers have done on prem with full suite in the past and what is getting these customers that are going full suite across the goal line is it a procurement.
Speaker Change: Advantage is it a data advantage or are there other factors out there what do you what are you seeing today.
Speaker Change: I think the biggest thing.
Speaker Change: Biggest thing is.
Our proven track record of success. Okay. This is the most important thing.
Speaker Change: Whereas maybe if you're if you're hesitant about is this really going to work and is this the right model. Then you kind of kind of make a decision that's like what do we need what is the burning platform that we need to make a decision on right now and then delay that secondary decision into the future into some future period.
Speaker Change: Our confidence that we can create in the market based on our track record that ultimately this makes sense, there's more incentive for us and for the customer to sort of do that full suite deal all at once and I think that as the business dynamic that's really driving this is we are we are.
Speaker Change: It's very clear like we it's so it's kind of simple right. We have three applications I called them out right. What do you use for claims what are you used for your policy administration. What do you use for your billing platform that conversation you can imagine is going to happen every single time, we talk to a customer about any of those applications and so to the degree that there.
Speaker Change: There is confidence that ultimately we are going to go with you for the full suite. It's logical to then turn that into one deal.
Speaker Change: When theres anxieties about is that the right platform and is it really going to work and these are kind of like from a couple of years ago Theres, a theres a sense that like logical to delay that decision, but more and more.
Speaker Change: It's just a little bit more straightforward for us to be able to make a full suite argument right at that initial point of sale now it doesn't happen every time and some customers.
Speaker Change: Based on the complexity of their implementations in the lines of business that they that they run it doesn't make sense to do that so it certainly doesn't happen every time, but that conversation does certainly happen as part of the deal cycle for us.
Speaker Change: Got it and in a similar vein you also called out some expansions at the time of cloud migration. When you look at where we're at today versus the early days of cloud, maybe three or four or five years ago.
Speaker Change: How much more often or are you getting.
Speaker Change: Our foot in the door with these expansion conversations and what has made the platform I guess more ready for customers too.
Speaker Change: The expanded relationship not just make the pure transition to the cloud.
Speaker Change: Well those types of expansion has to do with additional lines of business.
Speaker Change: You know what.
Speaker Change: The picture that you have in your in your head for a typical guidewire legacy.
Speaker Change: Legacy customer running a mainframe it's not just one mainframe theres, usually multiple systems running covering multiple lines of business, it's very complicated and the track record we have for being able to support multiple different lines of businesses lots of complexity on the platform creates confidence that hey, let's make a decision to move all of.
Speaker Change: These current legacy workloads legacy applications to Guidewire that creates that extension and that growth in what you can do with guidewire and that creates the add on the additional DWP. The additional premium the additional IRR, it's just our <unk>.
Speaker Change: Fact that we've proven that we can do multiple things with the platform in the cloud and support different lines of business creates the opportunity to expand when we have those when we do those deals with customers.
Speaker Change: Understood I appreciate the feedback.
Speaker Change: Thank you.
Speaker Change: Next question comes from Eric Gibson at JMP.
Eric Gibson: Thanks for the questions first one how should we think about relationships with the state back property insurers such as fair plant in citizens plans. It seems like these are becoming a more important part of the P&C market and disaster prone states, which are also often densely populated and have high property values is there anything unique to call out about how these relationships work.
Eric Gibson: And do you anticipate will grow as a percentage of <unk> business over time.
Eric Gibson: I would say nothing particular to call out about that.
<unk> being unique they basically operate as insurance companies slightly different obviously, but there's a lot of different kinds of insurance companies that we serve all over the world and so we have a fair number of relationships with these types of entities and we're excited when they come to market.
Eric Gibson: To win those deals and win that business and serve that segment of the market as effectively as we can.
Eric Gibson: I don't know whether or not I would make a.
Eric Gibson: Projection as to the ratios that will ultimately land and these starches state backed.
Eric Gibson: Models versus the for profits and the Mutuals I think generally even when you talk to a lot of the executives that are operating these are these fair plans, they're not and they're not exactly <unk>.
Eric Gibson: Driving to grow these these entities they need to exist they need to fill these gaps that exist in the markets.
Eric Gibson: But they're not like aggressively trying to grow them.
Eric Gibson: So I would be surprised if they grow as a percentage, but it's hard to say exactly because of lots of things can change and certainly the environment that exists with respect to weather related risk and the increasing severity frequency and severity economic losses associated with these weather events.
Eric Gibson: And to push the more and more of the premium towards those entities.
Eric Gibson: But we're here to sort of serve everybody in the industry as best we can as efficiently as we can.
Eric Gibson: And from a platform perspective, where we're able to serve those companies as effectively as anyone and in my opinion better than anyone. So you know we're excited to support them as part of the customer base.
That's really helpful. And then second one I guess a lot higher level <unk> share of total DBO DWP has gone from about 14% in FY 2016 up until the low twenty's more recently, how big a slice of that pie do you. Ultimately think you can capture over time based on the product vision and what you're seeing competitively. Thank you.
Eric Gibson: I need to say 100.
Eric Gibson: Look.
Eric Gibson: Certainly.
Eric Gibson: It's hard to imagine that we'll get to a 100, but I think greater than 50 is not at all absurd to say.
Eric Gibson: We I believe we are creating very significant.
Eric Gibson: Scale benefits, we are bringing scale benefits to the industry and we are creating more and more network effect to the industry and that will help us serve the industry more and more effectively the greater the percentage of the DWP that we serve this is part of the strategy of our company. If you stretch all the way back to when I first.
Eric Gibson: Joining probably before I joined this is part of the strategy.
Eric Gibson: Relatively expensive to build a system that does this effectively it's an incredibly complicated system that we operate and we can do it because we have the scale. We can do it well because we have the scale to do it well and that's beneficial to the industry and that's going to create an opportunity for us to push north of 50%.
Eric Gibson: <unk> of the market, that's our intention thats our goal.
Eric Gibson: Do you think about share data on the platform that we can create more value for customers using the system. You think about the incredible ecosystem of partners and business applications that customers can benefit from by being part of the Guidewire community. Like these are things that are going to help us get more and more competitive and bring more.
Eric Gibson: And more value honestly to our customers as the whole ecosystem grows so thats absolutely division.
Eric Gibson: Is to keep pushing that percentage higher and higher and yes. My goal is a 100, but I don't think it's at all.
Eric Gibson: I don't think it's a stretch to say that we can push that above 50.
Joe: Thanks, Aaron next question comes from Joe <unk> at aired.
Speaker Change: Great. Thanks for that time Tonight.
Speaker Change: New logo tally was really impressive this quarter, what's the conversation like with a new logo opportunity at this point, particularly abroad, if where I would think you're going up against typically at some local vendors in the Max and the locals tend to have their own long standing relationships.
Speaker Change: Yes.
Speaker Change: Yes, it's a great question and I kind of pointed to this in the comments we made at the beginning of the call is when we're abroad. We typically have have a certain degree of investment that we need to make in what we call local content.
Speaker Change: And localizing the product to the particular business requirements and integration requirements that exist in a certain market and so when we're competing against those local vendors. They typically will have that part of the equation, maybe solved a little bit better than guidewire, but less functionality with respect to the core platform and the.
Speaker Change: Broader ecosystem capabilities that we can bring to bear and so that's kind of the competitive dynamic I mean.
Speaker Change: We.
Speaker Change: I would say very very successful, especially in the big multinationals, where they're making decisions not just in one specific country, but theyre thinking about a collection of.
Speaker Change: Entities that exist in multiple countries.
And very often sort of sense centre of excellence related to Guidewire enables them to share best practice across all of those entities and we can be very very successful and those sorts of environments.
Speaker Change: But our commitment part of that investment that I kind of when I was answering the question about generative AI like part of the investment where we're like prioritizing is making sure that we have this local content and making sure that we can compete and win in Germany, and then we can compete and win in France that we can compete and win in general insurance in the UK.
Speaker Change: K that we're successful in the London markets that were successful in Japan were successful in Australia, I'm, just like ticking down all the teams that we have a guidewire thinking about these markets.
Speaker Change: So I would say like the.
Speaker Change: The overall success of the company and momentum generally is helpful. And then also our ability to invest in these local requirements is helping us.
Speaker Change: Earn the trust, let's say of these local entities and winning business worldwide.
Speaker Change: Okay, that's great.
Speaker Change: Obviously thinking back to the connections there was a lot of focus on the fact that half the customer base has made some level of cloud commitments out nothing wrong with being in the 49 percentile just maybe avoid risks the first 50 firsthand FCA, but I wanted to ask.
Speaker Change: It does seem like that momentum is picking up so can you say at this point in time, whether the 49 percentile of customer is that still remain out there are they going to move much quicker to adopt cloud than the first half ended up taking so when I'm thinking of the overall.
Speaker Change: Timeline, we sit and take up until this point times too, it's going to be some factor shorter than that.
Speaker Change: I think it's fair that it should be some factors shorter I don't know I don't know that ive ever personally like specifically done that math give you a more objective answer but logically it should go faster I think the other characteristic of it is is that.
Speaker Change: We've had we've had to or we've decided to be more specific about how exactly support for the on Prem versions of Guidewire will work over time and that also will tends to shorten that time period.
Speaker Change: But ultimately I think what it is.
Speaker Change: You know kind of the most important thing is this is working and this is delivering real business benefits and the industry sees that and I think that's what's going to drive that's what's going to create or is creating is not going to create but is creating this steady acceleration in this and the move to cloud.
Speaker Change: From my perspective, Joe from a modeling perspective, as we looked at migration activity that we experienced in 23 and 24 it was pretty healthy.
Speaker Change: We've looked at kind of a pretty steady progression into how we migrate the rest of the installed base.
Speaker Change: Certainly a lot of scenarios, where that would be faster.
Speaker Change: Especially as we start having some meaningful conversations that Mike alluded to around what is the support schedule for on Prem looking forward.
Speaker Change: But we've tried to model a pretty conservative.
Speaker Change: Great. Thank you thank.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Richard Pollen at Wells Fargo.
Richard Pollen: Hi, Thanks for taking my question.
Richard Pollen: Just kind of wanted to talk a little bit about the Q4 seasonality dynamics this year.
Richard Pollen: I understand some of it's being driven by those ramp deals, but wanted to get a sense for if you can kind of ballpark for us how much.
Richard Pollen: Typical year might come from net new versus the backlog and anything to call out this year, that's kind of different from prior years.
Richard Pollen: Yes, I mean, the three primary components to the build for errors as bookings that we sell that translate into your <unk> right off the bat.
Richard Pollen: The IRR that comes off the backlog from ramps and then any <unk> attrition.
Richard Pollen: But we may or may not have in a given year.
Richard Pollen: We don't typically give a lot of disclosure.
Richard Pollen: A lot of detail around kind of how those components track or how they compare.
Richard Pollen: Just from a qualitative perspective. This year, we are seeing very healthy growth year over year, so kind of think faster growth than in any of the other segments and the IRR, that's coming off of the backlog and that's a function of.
Richard Pollen: Some of these ramping deals that we've talked about in cohort analyses at analyst day over the last couple of years.
Richard Pollen: You may remember in fiscal 'twenty, three coming out of fiscal 'twenty three the analyst day, we talked about the cohort that we sold in fiscal 'twenty, three and how they had pretty significant ramping events in the third year, which equates to our fiscal year 'twenty five so we're seeing the realization of that the other dynamic that we're seeing this year as we go through it.
Richard Pollen: In detail all of our renewal events is we're just we're seeing very healthy <unk> attrition. So I'm optimistic we can have some of the lowest air our attrition numbers. This year in the last five six years and so that's been a positive backdrop as well.
Richard Pollen: Okay, Great Super helpful context, there and then.
Richard Pollen: Just kind of around we.
Richard Pollen: We talked a little bit about consolidation earlier, and if you look across policy claims and billing in the installed base.
Of those three core components is there any one in particular that stands out as maybe being underpenetrated in the base or any context around how you guys tried to block and tackle opportunities like that.
Richard Pollen: Yes, I would say.
Richard Pollen: Generally.
Richard Pollen: Client Center has has a very very strong footprint.
Richard Pollen: So there's a lot of policy center upsell, we typically sell billing center and policy Center alongside one another and every once in a while this this quarter being an example will do a billing center deal.
But typically.
Richard Pollen: But you see examples of policy center, leading the charge as well. So you see all of the cases, but I think the company had a long we've had a long track record of very successfully selling claims implementations and Thats established just a very strong base.
Claims.
Richard Pollen: We obviously started with the claim center product and so the installed base there is a bit more mature.
Richard Pollen: But if you look at sales activity, it's pretty balanced across policy Center and claim center.
Richard Pollen: Billings that are usually attaches to policy center. It is unusual to lead with a billing center and so that's kind of an interesting pattern for us.
Richard Pollen: I think a big part of that is the opportunity to then grow into policy Center and claim center, but if you look overall, it's been pretty balanced.
Speaker Change: Alright, Thanks, Richard Our final question comes from Michael Funk with Bank of America.
Yes. Thank you for taking the question one quick one actually so.
Speaker Change: Earlier, you mentioned, the one competitive takeaway during the quarter.
Speaker Change: Scenario of larger insurer.
Speaker Change: Question, though is what factors do you think functionality otherwise that are contributing to the competitive takeaways.
Speaker Change: Are you seeing a shift in the competitive landscape.
Speaker Change: Either in your favor or maybe competitors now getting more aggressive.
Speaker Change: Yes, I think you are typically going to see a competitive takeaway when either.
Speaker Change: Theres some upgrade cycle that is necessary.
Speaker Change: One on the competitive installed application that where there is a desire to reassess and decide for a new platform or a failed implementation.
Speaker Change: We see both.
Speaker Change: Is there there is a you know like I call. It out just like we are so focused on a successful implementation.
Speaker Change: There is a possibility that these implementations just don't succeed and so.
Speaker Change: I'll go to market wouldn't get any vendor to run the program and so we see both of those.
No.
Speaker Change: Sorry second half of the question tell me again.
Speaker Change: Just trying to assess the competitive landscape is shifting.
Speaker Change: With your comment there, though I don't think a guy named names but.
Speaker Change: Failed implementations just.
Speaker Change: Scale you're.
Speaker Change: Onboarding.
Speaker Change: Is that a widespread issue or are there specific competitors, maybe where the service while we will be onboarding. It's deteriorated that has opened up the opportunity for you to win these competitive takeaways.
Speaker Change: Well look there is two different things one I want to be very clear, we still compete for all of our deals it's still a competitive marketplace.
Speaker Change: And I think.
Speaker Change: When we've talked about win rates steadily improving quarter over quarter, So and I think that that a lot has to do.
Speaker Change: Now with the track record of success and the investment that we've been able to make in the progress in the Pea.
Speaker Change: Products excuse me the applications and the platform and the products and so steadily those win rates have improved but we're competing on almost every deal that we win.
Speaker Change: Thats kind of distinct from what I would say, it's like a competitive takeaway where wed like we call those out just because there is sort of unusual because once you pick one of these well why did you pick a vendor and you start a program and you start implementing in its couple of years in content, there's a lot of opportunity cost to switching.
Speaker Change: And so we.
Speaker Change: We are seeing that I mean, we do see that every once in a while we tried to call. It out because I think it kind of speaks to <unk>.
Speaker Change: Positive potential for us down the line.
Speaker Change: No I would say generally it's a competitive market and we compete all over the world with different vendors.
Speaker Change: But like I said steadily improving win rates.
Speaker Change: We're very very happy about and Jeff called that out in terms of one of the things that we're starting to say it's like now we can we can sort of start to expect that we've seen enough quarters in a row, where we feel like we've got an advantage in certain circumstances.
Speaker Change: Great. Thank you for hanging over for me guys I really appreciate you given the time.
Speaker Change: Thank you.
Speaker Change: That was our final question, so okay, well, hey, I just wanted to thank everybody for joining us on the call was a great quarter couldn't be more excited about the second half and the momentum that we've established and we look forward to talking to a lot of you throughout the quarter otherwise, we'll see you on the Q3 call. Thanks very much.
Speaker Change: Goodbye.