Q4 2019 Earnings Call
Greetings welcome to Guidewire fourth quarter fiscal year 2019.
Financial results conference call at this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded I will now turn the conference over to Curtis Smith CFO Mr. Smith, you may begin.
Good afternoon, and welcome to Guidewire Software's earnings conference call for the fourth quarter fiscal year 2019, which ended on July 31 2019.
I'm, Chris Smith, Chief Financial Officer of Guidewire, and with me on the call are Marcus Ryu Guidewires Chairman of the board and Mark Mike Rosenbaum, Our Chief Executive 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 FCC both of which are available on the Investor Relations section of our website at <unk>.
IR Dot Guidewire dotcom.
As a reminder, today's call is being recorded and a replay will be available following the conclusion of the call.
During the call we will make forward looking statements pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act of 1995 regarding trends strategies and anticipated performance of the business.
These forward looking statements are based on management's current views and expectations as of today and should not be relied upon as representing our views as of any subsequent date.
We disclaim any obligation to update any forward looking statements or outlook.
Actual results may differ materially.
Please refer to the risk factors in our most recent Form 10-K , and 10-Q filed with the SEC.
We will also refer to certain non-GAAP financial measures to provide additional information to investors a reconciliation of non-GAAP to GAAP measures is provided in our press release.
Reconciliations and additional data are also posted in a supplement on our IR website.
During the call we may offer incremental metrics to provide greater insight into that the dynamics of our business.
These details may be onetime in nature.
And we may or may not provide updates in the future.
With that let me turn the call over to Marcus and Mike for their prepared remarks, and then I will provide details on our results before providing our outlook for the first quarter and fiscal year 2020, We will then take your questions.
Thank you Kurt I'll provide some commentary on our fourth quarter and full year results before handing the call over to our CEO , Mike Rosenbaum to share his observations from his first month, leading the company and to frame our ambitions for fiscal 2020 and beyond.
When I introduced like a month ago I underscored that the transition was motivated by opportunities not by challenge our performance in the fourth quarter and 2019 substantiated our momentum in pursuing that opportunity well also reinforcing that we are still in the early days of our journey.
Our full year financial results were ahead of our total revenue and profitability guidance ranges with total revenue of 719.5 million and non-GAAP earnings of $1.45 cents per diluted share.
Underlying these results was our strongest bookings quarter ever exceeding our internal targets fully 81% of our new software sales came in subscriptions for our offerings delivered via Guidewire cloud, bringing the total amount to 65% for the year well above the 40% to 60% we had anticipated at the beginning of the year.
Subscription revenue is recognized ratably instead of upfront like our term licenses reported revenue would have been meaningfully higher if the mix between subscription and term licenses have been within our expected range. Nonetheless. This was a welcome result, as it substantiates the demand for Guidewire cloud and for transitioning PNC core systems to the cloud in general.
The primary driver to subscription bookings in the fourth quarter was of course insurance suite via Guidewire cloud.
These are the most complex and strategically significant transactions in the company's history. So it was a remarkable result to close six new such deals in the quarter.
It is further encouraging that this number includes four new customers as well as to customers with existing insurance suite implementation and that it includes one new tier one customer USA group and one tier one insurer migration American family.
For the year, we closed nine insurance, we'd be a guidewire cloud deals ahead of our expectations representing customers of all sizes, including customers from North America, and Europe , as Ed with a balanced mix of new and existing customers.
We also introduced a new financial metric annual recurring revenue at our analyst day at the beginning of fiscal 2019 to provide more insight to our business dynamics through this cloud transition.
As we foreshadowed on our last call the growth in this metric was below our initial expectations for fiscal 2019 with air are growing by 13% on a constant currency basis.
However, as we also pointed out our market experienced this year has taught us that we can maximize customer alignment and lifetime value by negotiating to wrap subscription fees over a multiyear period to scale with usage.
This entails that subscription fees typically reach their fully ramped annual amount after three to five years and that reported a R.R. does not reflect the ultimate value of these transactions until that we referred to the final annualized value of these arrangements as fully ramped our.
To quantify this effect for 2019 fully ramped a R.R. grew 24% year over year. For example, the nine cloud deals we signed added approximately $20 million in current period, AOR and $65 million in fully ramp there are.
Taking a closer look at our new business activity. The fourth quarter is typically our busiest period of a year and this fourth quarter was no different with eight new customers. Five has been selected the entirety of insurance suite in four of whom chose to deploy via Guidewire cloud as mentioned.
We also signed additional business with 23 existing customers, who selected 53 additional guidewire products, including two customers, who chose to migrate to guide where cloud as mentioned.
Notwithstanding this new customer activity, our customer count ended the year at 380 customers, which had the same as last year.
As discussed throughout the year, we experienced customer attrition primarily related to proof of concept implementations to model risk in the nascent cyber insurance market. However, we ended 2019 with 502 billion in DWP under management, an increase of 11% from a year ago, reflecting our ability to attract new customers and expand within existing customers.
New customers in the quarter included USAA group, a $22 billion DWP tier one insurer widely admired for outstanding service and uniquely high customer loyalty.
USAA selected Claimcenter via Guidewire cloud predictive analytics data and digital for their organization that serves over 12 million members, primarily those who serve or have served in the us military and their families.
M.C. insurance, a tier two insurer, providing commercial lines selected the entirety of Insurancesuite predictive analytics data and digital all via Guidewire cloud.
Also selecting all of insurance, we fight via Guidewire cloud in the fourth quarter with Gore mutual insurance in Canada, who also chose data and digital.
We have talked about recent attention and investments that new ensure tech startups have seen and we mentioned that some of these could be acquisition opportunities, while others could represent new customer opportunities. We signed two such ensure Texas new customers in the fourth quarter. The first to Silicon Valley ensure tech Assurant startup selected Insurancesuite via Guidewire cloud for their auto insurance line of business. Another insurer Tech Mango Texturants based in Russia and funded by Alpha Group also selected insurance suite. This time on premises to offer a completely digital personal lines products.
Rounding out our new customers in the quarter were church mutual insurance, the leading insurer places of worship in the United States, serving over 90000 religious institutions, who selected Claimcenter data and digital.
And heartland far mutual a Canadian insurer, who selected insurance suite data and digital.
Our growth is driven both by new customers such as these but also from existing customers to expand their guidewire deployments by selecting additional guidewire products and across different businesses as I mentioned in the fourth quarter, we thought 23 existing customers select additional guidewire product.
Among these American family, a tier one insurer and tenure guidewire customer chose to migrate their insurance, we'd implementation to Guidewire cloud as has the cooperative a Canadian insurer, who has been a customer since 2007.
They join long standing guidewire customers, such as Amica mutual and TD with very broad adoption of our products, who have embraced the full migration of their implementation Guidewire cloud.
Our data and digital momentum continued in the quarter as well it was 13 customer selecting guidewire digital and 12 selected guidewire data, including four who selected clients products.
Our extended our extensive network of ESI partners continues to play an expanding role in enabling our customers consistent with our strategy to drive an increasing proportion of total revenue from higher margin recurring revenue streams. We had 19 core data or digital go lives in the fourth quarter.
Our substantial progress this year notwithstanding we are still in the very early days of our industry platform journey not only do we have the vast majority of our customer base and the two trillion dollars PNC industry itself to transition to the new technology and division of labor that we are offering with Guidewire cloud, we have profound efforts underway to evolve our architecture and operations in the service of this demand. It is therefore fantastic to have the ideal leader to drive this evolution and Mike without an exemplary job over the last months engaging our customers and team with his vision.
I am energized to support them in every way possible in my role as an active chairman.
Starting with the recruitment of three new independent directors, who joined our board. This week Margie Dillon, former EVP and chief customer officer for personal lines at Liberty mutual insurance.
Kathy Legault, a veteran independent director with several public Silicon Valley companies and a financial expert and Michael Keller formal former EVP and CIO nationwide insurance and CTO of bank one.
Im confident the additional industry expertise and diversity of perspectives will drive an engaged and effective board for the long term.
Thank you for the privilege of representing Guidewire on these calls since we've been a public company going forward. This duty of course belong to Mike to whom I now turn the call.
Thanks, Marcus and thanks to those of you joining us on the call today Guidewires fourth quarter capped another strong and transformative year for the company with nine insurance suite cloud deals in a year and now a total of 13 insurance suite cloud customers as at the end of the year, we're thrilled with the demand we see in the market for both new and existing customers with a customer base of 380 insurers in a market of nearly four times that amount the vast majority of which have yet to upgrade from legacy systems. We believe that we are still in the early days of the transformation to modern more agile core systems insurance suite via Guidewire cloud and the improved total cost of ownership and business agility. It provides insurance carriers will accelerate this transformation.
When I spoke with you a month ago I indicated that I believed guidewire was well positioned to extend our long term leadership in this market with an industry standard platform and that were further benefiting from the transition to a cloud delivery model. I also mentioned the incredibly strong culture here and a deep sense of customer commitment embedded in that culture. My initial impressions I have to say have not just been validated but to a large extent reinforced and amplified the dedication to this industry and to the modernization of its core systems is evident throughout the organization and our partner ecosystem. Our singular focus on this industry and the trust customers like USAA American family FMC and Gore are placing in up in us to run their mission critical core systems as a service is I believe truly unique.
I also want to give my initial impressions of some of the exciting innovation and future opportunity. We are seeing in our data and our analytics and data services team. This team in partnership with multiple customers has now expanded beyond the core cyber use case and we are now using our data listening platform for the rating of small commercial lines insurance. This use case is an important milestone as it demonstrates an opportunity to leverage our large scale data assets for the modeling of potentially any risk.
Additionally, our Dev connect developer environment continues to make progress in the market with 10 Partnerconnect solution partners signed to develop ready for Guidewire add ons four of them live Janet on tell us troop pack and we go look at public have published ready for Guidewire add ons to the Guidewire marketplace.
The standardization of these integration patterns with depth and act.
And our marketplace point to the additional value we are able to provide our insurance, we'd customer and ecosystem partners the data and analytics and depth connect used cases provide tangible examples of the benefits that an industry powerup platform like Guidewire has the potential to deliver to the PNC insurance industry.
With respect to our financials.
I recognize that we are completing a transition to a new revenue accounting standard while in the midst of a business model shift to subscription revenue. This has increased the complexity of our reported results and created some investor capacity I'm excited to begin consistently reporting on annual recurring revenue, which I believe is the best indicator of the overall health of our business I believe that we have the potential to achieve our growth rates of 20% or higher.
Monitoring our progress on this metric will be instructive for investors in something I'll focus on with my team and the rest of Guidewire.
As we look to fiscal 2020, we expect to further strengthen our position in this market through continued investments in our core and our cloud offerings and cloud delivery as well as our self managed offerings. We also see significant opportunities to offer hybrid solutions that will provide value to our self managed customers as well as helping them bridge to the cloud we're excited to share details on all of this at our upcoming connections user conference in November we see before US an extremely positive an unprecedented opportunity to continue to invest and grow and increase our share in this market I am honored to have the opportunity to lead this community of professionals, serving the two trillion dollar global PNC insurance industry.
Ill now turn the call over to Curtis.
Thank you Mike.
Total revenue for the year was $719.5 million, an increase of 10% from a year ago and above the high end of our guidance range.
Fiscal 2019 license and subscription revenue finished at 385.3 million, representing a 25% year over year increase.
As we have previously noted year over year license and subscription revenue comparisons are impacted by the adoption of NSC six so six.
Which affects the timing of revenue recognition of our term license contracts.
Additionally, fiscal 2019 growth benefited from the reclassification of $12 million in hosting revenue from services license and subscription and from the 10 year term license deals signed in Q1, which was previously discussed.
Normalizing for the impact of these items the growth rate would have been 18%.
Subscription revenue for the year was $65 million, representing 95% year over year growth.
As Marcus discussed subscriptions as a percent of total new sales were above our expectations at 65% for the full year, reflecting the increasing demand for our cloud based services.
Perpetual revenue for the full year was $2.1 million compared with 11.8 million in 2018, and consistent with our intention of reducing perpetual license sales.
Maintenance revenue for the year was $85.4 million, representing a 10% year over year increase and was above our guidance range.
Services revenue for the year was $248.8 million in the upper end of our guidance range compared with $266.5 million a year ago.
This year over year decline was largely driven by investments to ensure the success of cloud customers.
Increased ESI participation.
And the aforementioned 12 million hosting revenue reclass.
Turning to profitability, we will discuss these metrics on a non-GAAP basis.
And we have provided the comparable GAAP metrics and the reconciliation of GAAP to non-GAAP measures in our earnings press release issued today with the primary differences being stock based compensation expense amortization of intangibles, the amortization of debt debt discount and issuance cost from our convertible notes and the related tax effects of these adjustments.
non-GAAP gross profit was $442.6 million for the year gross margin for the year was 62% compared to 61% a year ago.
Overall gross margin benefited from a revenue mix shift away from lower margin services revenue, which was offset by declines in license and subscription and services gross margins.
License and subscription gross margin for the year was 89% the decrease from 95% a year ago a trend we expect to continue as we add new cloud customers and invest in cloud operations to support these customers.
Services margin for the year declined from 16% in fiscal 2018% to 11%.
In fiscal 2019 again, mainly the result of investments ensuring the success of our cloud customers.
Total operating expenses were.
$320.5 million for the fiscal year versus $298.8 million a year ago.
The growth in spend was driven by head count expense increases in it spend and costs related to our new headquarters.
Additionally, we had the full year impact of science operating expenses in fiscal 2019.
For the year. This resulted in operating income of $122.1 million or 17% of revenue.
And net income of $119.9 million or $1.45 cents per diluted share all of which were above the high end of our guidance ranges.
Turning to Q4 total revenue for the fourth quarter was $207.9 million above the high end of our guidance range.
License and subscription revenue was $127.7 million versus $143.7 million a year ago.
This decline, which was anticipated was primarily the result of.
Revenue, which would have been previously recognized in Q4 that was recognized in Q1 under NSC six ACICS.
$3.2 million in perpetual revenue recognized in Q4 of 2018 versus point $5 million in Q4.
2019.
In addition, the increase of subscriptions as a percent of new sales with ratable revenue recognition minimize the impact of new sales on recognized revenue in the fourth quarter.
Maintenance revenue was $21.8 million, an increase of 6% from a year ago and was also above the high end of our guidance range.
Services revenue for the fourth quarter was $58.3 million.
This anticipated decrease from a year ago was due to factors previously discussed Q4 comparisons in particular were impacted by a benefit we received in Q4 of 2018 related to implementation work for a large German ensure where we were required to delay revenue recognition for work completed throughout fiscal 2018 until Q4 fiscal 2018.
Operating income was 51.1 million and net income was $46.3 million or 56 cents per diluted share all of which exceeded the high end of our guidance.
Turning to our balance sheet.
We ended the quarter with $1.3 billion in cash cash equivalents and investments slightly higher than the 1.2 billion. We had at the end of the third quarter operating cash flow for the year was $116.1 million compared to 140.5 million per year ago.
Free cash flow for the year was 90.9 million, excluding $24 million in build out expenses associated with the new headquarters compared to $128.4 million a year ago. This was below our expectations due to a customer payment of 12.
<unk> costs in Q1 fiscal 2020.
As Marcus mentioned earlier.
They are our grew 13% on a constant currency basis, and 12% on an absolute basis.
As a reminder, EMR represents the annualized value of recurring term licenses subscriptions and maintenance agreements at the end of the quarter.
There were several factors discussed on our Q3 call that have impacted this metric.
Most notably is the impact of ramp deals on our.
New customer contracts typically include multi year pricing schedules that outline escalating annual payments during and beyond the committed contractual term.
Future annual payment expectations at the fully ramped value outlined in these agreements represent our definition of fully ramped they are.
Under this definition fully ramped they are in fiscal 2019 grew 24% on a constant currency basis compared to fully ramp they are in fiscal 2018.
We think investors will find this metric instructive as we transition customers to the cloud we believe it represents a tangible measure of the strong new sales activity, we experienced this year.
Now turning to our outlook I first want to address our full expectations for the year I will then speak to Q1.
As a reminder, we want to reiterate three factors we discussed in Q3 that will impact our 2020 financial results.
One the mix of term and subscription new sales.
Two significant cloud operations, and supporting organizational infrastructure investments and three stronger ESI enablement.
As Mike mentioned, we believe that air ours, the most effective way to evaluate our performance over the long term.
With respect to fiscal 2020, we expect they are to grow between 14, and 16% accelerating from 13% constant currency growth this year.
In fiscal year 2020, we expect fully ramped they are to continue to grow faster than they are.
For the full year fiscal 2020.
We anticipate total revenue to be in the range of 759, two $771 million, an increase of 5% to 7% from fiscal 2019.
We expect annual license and subscription revenue to be in the range of $443 million to $455 million, an increase of 15% to 18% from fiscal.
2019, or 18% to 21% adjusted for the 10 year term license deals signed in Q1 last year.
This is lower than our preliminary fiscal 2020 view due to.
Increased demand for cloud, which drive subscription revenue and is ratably recognize instead of upfront.
And.
Refinement of our estimates related to allocations between term license revenue and subscription revenue for our cloud migration agreements.
As a guidance shows our forecast is highly sensitive to the percent of new sales sold as subscription agreements. We currently expect to see 55, and 75% of new sales as subscriptions with the midpoint roughly flat to 2019.
Based on our forecast model achieving the high end of this range would result in approximately 30 million less in fiscal 2020 license and subscription revenue that achievement at the low end of this range.
The timing and linearity of deals with also.
Of deals would affect the exact impact.
For example, if cloud bookings are more back end weighted than our current assumptions then the impact of license and subscription revenue would be larger.
We expect subscription revenue to be in the range of $105 million to $115 million, an increase of 61% to 77%.
We expect perpetual license revenue to be less than $5 million for the year.
Our fiscal 2020 outlook for maintenance revenue is $85 million to $87 million as we have said before ongoing maintenance activities are included in the subscription fees, thereby impacting maintenance revenue.
Our outlook for services revenue is $224 million to $236 million, representing an 8% decline at the midpoint.
This moderated out look reflects our long term goal to enable our strong aside partner ecosystem to deliver cloud implementation services of the five insurance suite cloud deal signed with new customers in fiscal 2019, three are expected to be led by ASI partners and we expect that trend to continue in fiscal 2020.
We expect total gross margin to be 58% to 59% in fiscal 2020, reflecting an anticipated decline.
We expect license and subscription gross margin to be between 75 and 80%. This fiscal year approximately a 12 percentage point decline at the midpoint on continued investments in cloud operations and supporting organizational infrastructure and the accelerating shift to ratable subscription revenue.
We expect services gross margin to increase to between 15 and 16% this fiscal year.
From an operating expense perspective, we continue to execute on our investments that were initiated in fiscal 2019.
In addition to cloud operations R&D continues to be a key investment area. We expect operating income from fiscal 2020 to be $96 million to $108 million, representing an operating margin of 13% at the midpoint.
Both gross and operating margin our sensitize the mix of subscription as a percent of new sales and decreased as subscription sales increases.
We expect free cash flow to be between 90 and $100 million, excluding the onetime impacts associated with the build out of our new headquarters, which is expected to be $11 million.
Fiscal 2020 free cash flow expectations are positively impacted by air our growth and the previously mentioned late customer payment. This is offset by ongoing investments in cloud and lower year over year services billings.
In addition, our outlook for non-GAAP net income is 92.4 million to $102.3 million or $1.10 cents to $1.22 per diluted share based on approximately 83.8 million diluted shares and an assumed non-GAAP tax rate of 16.8% for fiscal 2020.
Turning to Q1.
We anticipate total revenue to be in the range of $149 million to $153 million. This represents a decrease from a year ago due to the 10 million license agreement signed in Q1 last year and decline in services revenue.
Within revenue, we expect license and subscription revenue to be in the range of $70 million to $80 million, representing a 17% decline at the midpoint, primarily due to the same 10 year deal last year.
We expect Q on maintenance revenue of $19 million to $20 million in Q1 services revenue of $51 million to $54 million.
For the first quarter, we anticipate non-GAAP operating income of between net operating loss of $3 million to an operating profit of $1 million and non-GAAP net income between.
Point 6 million to $4 million.
Or one cents per share to five cents per share based on approximately 83.1 million diluted shares.
In summary, we were very pleased with the progress we made this year and our execution. During this assay six or six transition and I'd like to thank the team for all the related extra effort and work.
We look forward to providing more detail at our analyst day scheduled for September 26 at our new headquarters in San Mateo, California.
Thank you.
Operator can you now open the call for questions.
Yes. Thank you I would like to ask a question. Please press star one on your telephone keypad a confirmation tele indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the Q.
For participants using speaker equipment and may be necessary step your handset before pressing the star teams and the interest of time, we ask that you limit yourself to one question and one follow up question.
Our first question is from Ken Wong with Guggenheim Securities. Please proceed.
Hey, great. Thanks, Thanks, a lot for all for taking the question. Just first question maybe for off of markets or Mike Im just wondering what do you guys think drove the heightened cloud activity in the quarter and as far as tier one do you think the T.I. yeah. Okay.
The USA finding will connect you'll get some halo effect, there and drive more customers from the larger customers to the cloud.
Yes, Ken this is markets here in the demand for cloud isn't really a quarter to quarter phenomenon, it's a much longer horizon kind of phenomenon than that and as we talked about in previous calls we've we've been seeing heightened demand for quite some time.
Driven I think by secular factors by our maturation.
And the capabilities, the and as well as our kind of assertiveness that.
With the cloud is going to be the primary locus of technology innovation for Guidewire and the industry overall.
We worked hard to bring.
A lot of these conversations to to fruition and to get them done within the year to live up to their commitments that we have made.
And it was it was fantastic to be able to close six within the quarter I was very very demanding for the team.
But.
I think.
A sense was that we were not so much constrained by them in that not all fairly constrained by demand, but just by the company.
As we've talked about before by the sheer complexity.
Of these really strategic relationships.
So.
The kind of handle looking at is much more than a than a one quarter phenomenon and we're really.
Gearing up many many facets of the company for this to be.
A longer phenomenon.
Yes, let me just add to that that I think.
The demand that we saw is great validation for the strategy of the company and.
The accounts and especially as you mentioned the wins at these tier one insurers really point to the validation of that strategy and the commitment that we've made to be able to.
Successfully deliver these systems via Guidewire cloud so.
We're certainly excited about the momentum that we see.
Got it within days with the little of additional commentary can you as you highlighted.
We were thrilled to secure a mandate from them. They are hugely respected insurer in our market.
As well as one of the largest players.
And it was striking that.
They wanted to start a relationship with us and entirely cloud based.
Fashion that was one of their kind of starting assumptions for for this.
Core system initiative on their part and it was it was fantastic to be able to convert that can get to close within the year I do think it will be.
A much noted.
Transaction and of course, we have to deliver against it.
For it to be the positive that we expect.
But it was definitely one of the highlights for the year.
Got it and then Curtis.
Can you touch on the our our growth.
That you saw the fully ramped they are growth any kind of rough quantification of what that what those numbers are or last year and this year.
Perhaps maybe just a sense of what total cloud EHR are for your 13 customers look like.
Yes, well and in a few days here can we will be publishing that.
Our number in our in our in our 10-K, so you'll be able to see that then when it comes out we just wanted to provide the the growth rate today, both on a constant currency and on an absolute basis to understand that in some of the things were impacting that we talked about in Q3.
And then we will have an opportunity when we get analyst days talk little bit more about.
Our our fully ramped they are our transition metric.
Got it there will be helpful. Thanks, a lot guys.
Our next question is from Sterling Auty with Jpmorgan. Please proceed.
Hey, thanks.
Hi, guys its Jackson ader on for Sterling Tonight.
So the net customer count ending the year flat at 380, what about.
Gross customer additions, how did that track maybe versus both your expectations and in previous years.
So.
Got it I'll take it.
I would say first of all I think it's important to understand that.
We did add a significant number of core suite customers during the year.
And I think when you look at the actual count of customers year over year. What we saw was a significant number of proof of concept deals that were really just validating a use case for cyber.
But what's exciting is is that the ones that we're able to really establish a strong partnership with those become much more meaningful partnerships and I think that those customer accounts are more in line with what you would typically imagine the definition of a of a core suite customer is for Guidewire.
But to answer your specific question 18 gross customer ads.
During the year, which I think is a very positive very positive sign.
Okay, Great and then just a clarifying question.
On the mix that we should be expecting.
New sales being cloud going forward I think there was mention of of the outlook, but I didnt quite catch it.
Yes, so last year, we provided a range of 40% to 60% subscription new subscription sales as a percent of total.
Total sales and we ended up for the year above the top end of that range at 65%.
This year, we provided a range of 55% to 75% of new subscription sales as a percent of total new sales and initially as we indicated targeting the midpoint of that range for now we give that range again, because as we experienced this year, if we see much stronger subscription sales thats a good thing, but it does have a negative impact on the recognized revenue for the year.
Right. Okay. Thank you very much.
Our next question is from Michael Karen with Deutsche Bank. Please proceed.
Hey, there good afternoon. Thanks for taking the questions can we first talk more about the ramp deal structures are the fully ramped years already under contract or are those projections based on what you would expect to see as usage grows and it sounds like somewhere between between year three and year five is when you'd expect those deals to hit fully ramp that is that right.
Thats right its somewhere between year, three and year five and for these.
Subscription customers, we always provide a five year pricing schedule, but when we're doing our fully ramped our calculation. It may not be part of the contracted term. So some of these contracts may be three years, but we will still be looking at the HR amounts in years, four or five when it gets fully ramp when we calculate that fully ramped our.
So most of our contracts are moving in the direction of five years.
The ramps typically the ramps for these companies typically take place in years three to five.
The fully ramped number typically happens in years three to five and just to be clear I think you're correct also asking that it leaves open the opportunity that will sell additional products into those customers during that period of time.
Right.
Okay.
And then thinking about margin trajectory from here if guidance holds this will be the third consecutive year of margin declines I understand there is a lot of sort of moving pieces in terms of this model and the move to six six on top of everything else, but is there a point at all where you're expecting margins can trough as we work through these transition impacts or does that three to five year ramp in a army in this transition could could continue to play out over that timeframe as well.
Yes, thanks for the question.
You have noted in before and today that wall increased subscription demand is happening and that's a positive thing. It does have a shorter term impact on our profitability in that said, we remain confident about our long term profitability levels that the thing I would add to that is.
This is one of the reasons were emphasizing air are fully ramped there are in free cash flow as indicators of our progress and when we get to analyst day in a couple of weeks, we'll we'll be able to provide some some more discussion around that point.
Okay got it thanks, good luck to both markets and like as a transition.
Thank you. Thank you.
Our next question is from Chris Merwin with Goldman Sachs. Please proceed.
Okay. Thanks for taking my question.
I think you mentioned that if the cloud transition accelerates revenue could be 30 million lower and it seems like in the last few quarters. The execution has been great and you've been trending ahead of expectations on cloud. So when we look at this updated guidance for fiscal 20 on on license and subscription revenue how would you qualify your visibility into that relative to prior quarters. When you were earlier in the transition. Thanks.
Thanks, Chris I'd say markets here I'd say that we've we have a really updated sense of the shape of the demand is coming to us now where.
We're still in the early innings of that the transition both for us and for the market but.
There's substantially more clarity.
And I think an improvement in our ability to to guess what form the demand will come as opposed to as opposed to getting at it.
Also at all.
I'll point out that we were only really enthusiastically in the market with respect to the cloud in a broad based market way halfway through the year our connections user conference last year.
And so that that comes through.
That created a wrinkle relative to our starting your assumptions there was a great deal of market learning in the latter half that's now been internalized and is reflected in our outlook.
As you see there is.
A pretty meaningful step up in the proportion of our bookings that we expect to come in subscription form and and that's just going to continue to increase into future years, I think weve I think we bracketed pretty.
It's pretty it's a fairly broad bracket, but I'd add book right now from where we sit we are we're pretty confident it's going to fall within those.
It's always possible that things could accelerate even further but I think we've had enough conversations with.
With our customer base now to know that.
It is not yet complete binary switch from from.
From self managed to cloud and that the mix is likely to fit within that range that we put out one thing I'd just add to that is the.
The the range, we gave the 55 to 75 in the 30 million number that is if we came in at the very top of that range versus the very bottom of that range. The revenue difference would be 30 million or more specifically, a 1% shift in that subscription as a percent of new sales would equal about a 1.5 million shifting revenue.
Okay Thats great. Thanks, and then just a follow up on margins.
Yes measurement you might speak to this more at analyst day, but thinking about that gross margin for the cloud business at scale as you sort of ramp up hiring there and.
So there's still a lot of visibility to be gained but how are you thinking about how about that.
And I guess, when we think about the margin you have to any margin guidance was that more a reduction in gross margin or is that more a reduction and.
Yes, EBIT due to higher Opex, just curious what was the main thing driving that thanks.
Yes, so we're definitely seeing.
We noted in the quarter right. Our gross margin overall 62 versus 61 last year largely because the cloud.
Operations hiring that we expected in Q4 got pushed into two this year. So as we've noted a big part of our.
Hiring will take place in our subscription Cogs related to our cloud operations as we ramp up now for the demand. We're seeing there so that will that will put overall pressure directly on our subscription margin, but then that will impact our overall gross margin. So we see that happening in the in the in the near term here and we expect that.
Until we start to see some of these other efficiencies from our operations going forward.
Okay. Thank you.
Our next question is from Tom Roderick with Stifel. Please proceed.
Yes, Hi, Matt Vanvliet on for Tom Tonight, Thanks for taking my questions.
I guess as you look at the overall demand pipeline that you're seeing out there.
How how would you are how much you donate the demand across your major regions. There's been a lot of talk obviously around Europe weakening from a macro standpoint curious if you're seeing that much.
And overall demand or what those conversations are looking like.
Between the us Europe and APAC in particular.
I can offer them some commentary.
Matt I'd say.
Well so far we've been on this has been true for most of our history weve been kind of buffered from the macro and political questions.
That maybe other companies are a little more vulnerable to.
That is just generally not performance on insurers mines, but Europe is still a more challenging frontier for us in general not so much for macro reasons, but just because of the difference in requirements regulatory regime et cetera.
And we continue to just pretend to pour additional effort.
Into that into the continent, because it's such a large portion of our Tam and because we have we continue to get very encouraging signs for the demand.
We did not close quite as much in Europe as we might have hoped at the start of the year.
But.
I think that our our outlook overall on the Tam in the the demand for what we can do there is though is really unchanged also.
There's been a natural.
There was if there was a very concentrated company focus on.
On making our internal and externally communicated targets for for new cloud relationships and it was natural to do that.
Focused in North America.
Of course, we did have that one very substantial European cloud deal that we talked about in Q3 messy.
But that was another factor I think in the shape of the of the bookings that we ultimately closed within the year.
But every outlook that we have over a multiyear horizon relies on.
On probably faster growth in Europe than than in than in North America.
With respect to our progress for the company.
And then a quick follow up on on the ramp deals is there potential that those ramp more quickly are they tied to specific milestones or are they truly calendar based.
Ramp up deals.
You didn't you can generally think of them is date certain relationships.
That may have an out.
And that out is something that would only be exercised if.
As the program or to what a severely disappointed expectations.
I think even our ability to negotiate those out.
It will be we will only be enhanced with greater market progress and and customer referenceability in the cloud.
But.
They are.
Almost always just at a date certain markers and a schedule that the role that overtime.
All right great. Thanks.
Our next question is from Tyler Radke with Citi. Please proceed.
Hey, Thank you.
Can we talk a little bit about the ramp deals I'm just curious if you had to kind of.
If you find yourself, having to either extend the longevity of the ramps are or may kind of incremental.
More more ramp deals that then.
You were previously.
And then just a follow up as we understood just to kind of understand the mechanics behind the new ramp. They are our number I guess what gives you the confidence that those customers will ultimately pay that given that it appears that your foreign your fiber are beyond what is contractually.
Committed thank you.
Sure and just to explain on on on the ramps they are more pronounced for our migration customers and their logical reasons for that.
Our existing customers, who are migrating to the cloud they're already paying a full fee for their term license in year, one of their cloud transition and so those are where we saw those ramps more pronounced the timing of the ramp is pretty consistent though on being three to five years, but a little bit of a steeper ramp for those migration customers for the reasons.
We just talked about.
The second part of your question around the fully ramped a R.
For all of our end customers. We include a five year pricing schedule in there.
More and more of our contracts now are moving to the five year committed term, but some of them have less than that and so.
These customers are very committed to that cloud journey, we are with them too and our expectation and moving into them the ranges with them as two or three years and they will continue to to.
To focus on that ramp and on the implementation and Thats why we put those those pricing schedules in place.
Going forward, we do expect to that those pricing schedules will be part of the actual five year contractual term.
One thing I'd add just because this was one of the things that.
I dug into a little bit.
Very specifically in the first 30 days.
You want to I think you want to understand or think about consider the the nature of the implementation of the partnership and the commitment that guidewire and the customer make into these systems.
The track record the company as it relates to successfully deploying these core systems and those those systems then lasting.
Very very significant periods of time I think lens.
Itself to the surety associated with that financial metric.
And so I think thats it thats an important thing to consider when you when you look at this metric.
Great. Thank you and.
Maybe I might have missed this but did did you talk about the expectations on the number of Insurancesuite cloud deals.
For the.
Fiscal fiscal year 20.
Do you think thats still a good metric to track or you would would you encourage us to look at kind of this ramped era number. Thank you.
Yes. Thanks for the question and we did the last couple of years talk about the number of IPH cloud deals as a transition metric and so weve reached that transition when we talked about the fortyk I ask our customers last year coming in at nine of the top end of that range.
And so we think that was helpful and in the first couple of years, but it was a transition metric and now we think we'll be more helpful. As a focus on our AR and are fully ramped our metric going forward. So we will not be providing that.
Number of iOS cloud deals forecast going forward, we will however at the end of every quarter report the number of ice cloud deals that we signed up in the quarter.
Thank you.
Our next question is from Brad Sills with Bank of America. Please proceed with your question.
Hi, guys. Thanks for taking my question.
Just wanted to ask about the implementation cycles for insurance suite cloud I know, it's a limited sample set but how are you feeling about kind of the learnings you've had there what are some of those learnings and.
Your confidence level and it may be seeing more compressed cycles, and then also kind of channel readiness to take on more of these implementations.
Yes, Brian I'll speak to kind of experienced to date and then maybe Mike can comment on is.
Outlook, an intention to for the future there.
I think the as we've always said you know the cloud is not some silver bullet that makes a complex transformation program suddenly simple you know theres still a vast amount of business change and you know in integration work.
And.
You know and just core operational.
Transformation that has to have to go always goes along with one of our programs and all of that is the same in a self managed or cloud mode.
That said.
Because we take on full post production responsibility in the cloud for the project. We if you will we kind of exert a greater moral authority to insist that the program conform to certain standards and and I think we have greater leverage to drive us to a highly standardized program and we've been able to do that with our.
To an increasing degree with a with each of our of our cloud relationships and we're certainly starting the newer relationships very much in that shared spirit with a customer that they recognize there they're better off the more conforming to more standardized they can be now in terms of really driving.
You know a step function improvement in.
In the total cost of ownership and the speed of implementation that requires certain product enhancements and architectural platform improvements that are at the top of our of our priority list and we will be announcing a couple I think I think really sick consequential changes in that in that direction. A connections that were excited about and that will really be an important part of driving the long term demand and economics that we want out of the cloud transition.
Yeah, I'd say, if you think about the story of the situation right now you've hit on what I would describe is my number one priority is helping to ensure that.
There were continuing to standardize and align and drive the type of collaboration that we need between all the teams necessary to ensure that these are implemented successfully and efficiently.
Each and every time, we're seeing steady progress and as Mark has said we are excited to talk about some.
Some pretty innovative than.
New additions to the approach.
That will continue that track towards more efficient delivery and better execution in terms of the overall system implementation.
The centralization of that work that's represented through our participation in running these systems is just overall, a very very beneficial thing for the whole industry and aligning the teams here in our.
Product development organization around that exercise is going to be.
Very very positive for all of our customers. So I'm excited for that to be top of my list in terms of coordinating coordinating and executing here at the company.
Great. Thanks, guys and then one more if I may just on digital and data it sounds like that business is really.
Going well at something close to 100% attach it sounds like on these new deals are there any use cases you'd point out that our you are seeing some commonality is there and how has that changed or over say a year ago or even a couple of years ago. Thank you.
Yes, Brad I would say that every insurer right. Now has is engaged in some some phase of what they would call in their own language digital transformation reinventing themselves for a new digital era of customer service.
Even the most kind of business.
Commercially focused.
Commercial lines focused insurers still thinks about kind of consumerization of there.
The experience that they have to provide all of their counterparties.
So digital is just be dominant theme across the industry as it is in other industries I'm sure.
And so more and more digital is a native part of the of the program and and data is close behind that.
And one of the.
One of the other catalysts for the cloud I think is a promise that you know that we still have to fulfill but the promise that.
By having a much more standard conforming implementation running in the running in the cloud that.
Our customers accessed via their operational data will be dramatically enhanced as well as all kinds of options too.
To syndicate and experiment with the data in ways that the industry is really hungering for so I think data and digital are becoming less and less add ons to of course system project as inherent to the rationale for the programs to begin with and I think we're very well, we've been very well positioned for that and more and more they will just become kind of native parts of the of the whole offering.
Great. Thanks Marcus.
Our next question is from Pat Walravens with JMP Securities. Please proceed.
Hi, This is Joey on for Pat. Thank you for taking our question. We were wondering how competitive the cloud wins in the quarter were on if maybe you could provide an update on the competitive landscape. Thank you.
Sure Julie a number of the cloud wins, we're actually we're actually directly competitive no new names that you wouldn't be familiar from from following us.
But a number of them were competitive.
Some including including even existing customers that said, we'll now that were.
Contemplating the cloud less we know thats, let's revisit let's checkout our options across the market. We had a couple of those as well as net new customers that have that of course compared us to competitive choices.
The second part of your question I'd say, there's really no no change in the competitive landscape, we say this pretty much period after period.
It's there aren't really new entrants into our.
Into our market.
There.
Every deal is very consequential for us and for any of our competitors of course, they're all very fiercely contested.
But.
I'd say the dynamic is pretty much.
Exactly the same as it has been for quite some time now.
Thank you.
Okay.
Our next question is from five in Suri with William Blair. Please proceed.
Hey, guys. This is Dan Becker on for above on thanks for taking our questions. Just one quick one here I guess it sounds like the mix of new deals versus conversions is about 50 50.
For this past year as we look forward how should we expect to see this this mix kind of continue to develop.
And yes, just kind of interested in how you guys are kind of viewing that opportunity over time.
Well I think first of all I think it's an incredibly positive sign that we're adding new cloud customers just directly right and it kind of speaks to what I was saying before about how.
The improvements that we're able to make to the overall system total cost of ownership and implementation expense that are delivered via the cloud.
Should accelerate demand for core systems migrations in the first place so.
I'm excited about that mix and excited to see that this that the opportunity for US is most definitely not just a conversion of the.
The self manager on Prem installed base. So we'll see how that ratio develops over time, but I think it's a very very positive sign what we were able to achieve for the last fiscal year.
And then a quick quick follow up if I may just are I know Q4 of this past year was.
It was very cloud heavy I'm looking into 2020 should we expect to see anymore any kind of linearly.
Linearity around cloud deals are expected to be Q4, heavy again kind of any insight there would be helpful. Thanks.
My sense is that you shouldn't expect a change in the business dynamic associated.
With with the way the company operates and I think that is based on.
I would say that the complexity the decision making process for our customers. These are long sales cycles. These are very deeply considered and studied.
And I don't think that we're yet at the point, where that business dynamic is going to change.
Great. Thanks for taking the questions.
And our final question is from Rishi Jaluria with D.A. Davidson. Please proceed.
Hi, guys. This is actually Hana on for Ritchie. Thanks for taking my questions. Today I just first one as you look into 2020, what do you think of as the biggest headwinds or risks to hitting your fully ramped a article.
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Well I would say for our migration customers is the steepness of the ramp.
So those are one of the things that we're focused on here going forward. There is lot of learnings that came out of 2019.
And then we have a much bigger set of customers that we can talk to when we're contracting with with our migration customers going forward.
Great. Thanks, and then Mike just broadly speaking could you share anything that surprised you in the quarter either for the Pos.
Okay.
Sure any surprises.
To be honest with you.
As Ive had an experience in the last 30 days it has been much more about validation and surprise.
Which I think speaks to the.
I don't have the very.
As a deep consideration and study that I did as a company during the process of considering joining but also I would say just the handle on the business that that both markets and the board had.
You just just.
Time after time, whether it was the product or the.
Or the execution or the cloud opportunity that was more validation than surprise.
Maybe just because we havent talked enough about it I mentioned it in the remarks and I wouldn't say this is really a surprise as much as it is I think incredibly innovative opportunity for us.
In our.
In our data and analytics unit I mean, we we have this this this small thing about being able to take our day listening platform and apply it to risks beyond cyber I think may sound like a small thing, but I think it points to something.
Very very transformational not just for guidewire, but for all of our customers and.
Incredibly excited about that and so I wouldn't necessarily say it was a surprise, but it was great to see that that use case validated and real because it points to a positive future for that for that team and for that use case.
Great. Thank you.
I would like to turn the conference back over to Mike Rosenbaum for closing remarks.
So just wanted to say thank you all for joining us on the call today. We're excited about the opportunities ahead and look forward to seeing those of you who will be attending the Deutsche Bank Conference next week in Las Vegas.
As well as our analyst day later this month.
Here in San Mateo.
And if you have not already registered and are interested in attending please let us know so thank you all very much and goodbye.
Thank you. This concludes today's conference you may disconnect your lines at this time and thank you for your participation.
Yes.