Duck Creek Technologies Q3 2022 Earnings Call Transcript

Quartr
Provided by Quartr
June 28, 2022

There are 10 speakers on the call.

Operator

Standing by, and welcome to Duck Creek Technologies Third Quarter 2022 Earnings Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session. Please be advised that today's call is being recorded. I would now like to hand the call over to Brian Denyeau.

Operator

Please go ahead.

Speaker 1

Good afternoon, and welcome to Duck Creek's earnings conference call for the Q3 of fiscal year 2022, which ended on May 31. On the call with me today is Mike Jekowsky, Duck Creek's Chief Executive Officer and Kevin Rhodes, Duck Creek's Chief Financial Officer. A complete disclosure of our results can be found in our press release issued today, which is available on the Investor Relations section of our website. Today's call is being recorded and a replay will be available from the conclusion of the call. Statements made on this call may include forward looking statements regarding our financial results, Products, customer demand, operations, the impact of COVID-nineteen on our business and other matters.

Speaker 1

These statements are subject to risks, Uncertainties and assumptions that are based on management's current expectations as of today and may not be updated in the future. Therefore, these statements should not be relied representing our views as of any subsequent date. You should not rely on forward looking statements as predictions of future events Actual results and events may differ from any forward looking statements that management may make today. Additional information regarding the risks, uncertainties and other factors that could cause such differences appear in our press release and Duck Creek's latest Form 10 ks and other subsequent reports 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, with the primary differences being stock based compensation expenses, With that, let me turn the call over to Mike.

Speaker 2

Thank you, Brian, and good afternoon, everyone. Who recognize that leveraging Duck Creek's industry leading SaaS core systems can deliver significant operational improvements that create substantial business value. On today's call, I'll highlight some of these key wins, provide an update on market dynamics and also provide an overview on PrimaXL, an exciting and strategically important acquisition that we announced yesterday. Let me start with a quick overview of our financial results for the Q3. We reported total revenue of $72,400,000 up 7% year over year.

Speaker 2

And this was underpinned by subscription revenue, which is our revenue derived from SaaS of $38,000,000 up 13% year over year. Our annual recurring revenue or ARR was $155,300,000 which resulted in 25% growth over the prior year. And we delivered our 14th consecutive quarter of profitability with adjusted EBITDA of $2,400,000 From a new sales perspective, we closed several important deals in the quarter, one with a notable global Tier 1 insurer. However, the sales environment in the 3rd quarter was similar to what we saw in Q2. The P and C market continues to face some near term uncertainty As our customers and prospects navigate the complex crosscurrents of rising inflation, geopolitical uncertainty and in some cases staffing challenges.

Speaker 2

Last quarter, I told you that my confidence in the business was driven in part by the number of deals at the most mature stages of our pipeline, including deals where we have won the technical decision and agreed on financial terms. That still remains true. We closed a few of these deals in the 3rd quarter, But as we experienced throughout the year, several deals that were targeted to close in this quarter were pushed out in a similar manner. With the growing maturity of our overall pipeline, I remain bullish on our future prospects. We remain confident that the current spending environment will be transitory and that we will begin to sign more of these deals in our pipeline.

Speaker 2

However, we do not expect sales cycles to normalize until fiscal 2023. Importantly, our demand generation efforts continue to be very strong and we're pleased with the level of interest in the market from carriers of all sizes For our SaaS platform, Duck Creek On Demand. I spoke to a number of CIOs during the quarter and their appetite to invest in digital transformation projects has not changed. They understand their long term competitive positioning requires investing in flexible, scalable and intuitive cloud core platforms And empower their employees to provide better products and a higher level of service to their customers. So while the interest and the capacity to invest remains very healthy, Customers are being mindful on the timing and scope of new projects as they adapt their business to recent market conditions.

Speaker 2

The P and C industry has a long track record of performing well And due to the fact that insurance is not considered a discretionary expense for families and businesses, We do expect that the insurance industry will remain strong despite today's uncertain economic climate. One other dynamic that I would point out to you in our results for the quarter With a SaaS fee contract adjustment with an existing customer, this insurer has faced significant challenges in its business, primarily due to specific dynamics in their target end markets. As a result, their book of business declined by more than 50% in recent years. We have worked with this customer to adjust the size of their contract to lower the amount of capacity in the coming year and better reflect their current business requirements. This adjustment drove a reduction in our ARR of nearly $2,000,000 during the quarter, but the contract does provide the future possibility for expansion if their business outcomes were to improve.

Speaker 2

Typically, pricing our business off of DWP is a benefit to Duck Creek and drive incremental growth, but occasionally situations like this may arise. I can tell you this customer is very happy with our performance of our platform and our commitment to their success. I'd like to highlight some of our key wins in the quarter, which reinforces our success in the market. First, we expanded our relationship with Leading Tier 1 P and C insurer, who will now be deploying Duck Creek policy on demand. This strategic deal will enable them to provide a modern flexible underwriting platform for the Global Specialty Business.

Speaker 2

We are excited to extend our relationship with this Tier 1 insurer, who is an existing Duck Creek on demand claims customer. This is an important win for Duck Creek that shows how our on demand suite meets the needs for some of the largest, most complex insurers in the industry. And it also demonstrates that we have multiple avenues to engage with customers and create value with multiple on demand SaaS solutions. During the quarter, Duck Creek also signed our 1st large Canadian distribution management deal with SGI, a $2,000,000,000 multiline P and C carrier across 5 Canadian provinces and who also provides government mandated auto coverage in Saskatchewan. SGI chose Duck Creek Distribution Management to more effectively manage their network of independent brokers and issuers by streamlining relationship management, performance metrics, compensation changes and self-service with their strategic distribution partners.

Speaker 2

An area which we're beginning to see more traction is migrating Duck Creek on premise customers to the cloud. This quarter, we signed another cloud migration deal with a leading Australian carrier. Pollard will upgrade their core policy, billing and rating Duck Creek on premise installation to Duck Creek On Demand. Beyond providing market leading cloud based core systems, Duck Creek proved to be a perfect fit to integrate Holler's existing and new ecosystem partners Well, we're excited to be part of Hollard's solution of choice to modernize our underwriting, service and support technologies using Duck Creek On Demand. Another notable win for Duck Creek and one of the largest deals of our quarter was a full suite on demand win with a mid market personal lines insurer It has roughly a $500,000,000 book of business and written premium.

Speaker 2

They chose Duck Creek for our ability to significantly improve their back office insurance operations and seamlessly integrate their chosen AssurTech partners, as well as our ability to support their agent distribution and direct to consumer business models with a leading digital experience. We're thrilled to partner with this forward thinking carrier and to help them deliver a digital first Highly personalized insurance experience for the policyholders. We continue to see further adoption of our solutions from industry leading insurance carriers. In fact, we achieved a major milestone for the company this quarter, surpassing 1,000 go lives across the Duck Creek suite since we began tracking this Statistic in 2012. These wins and with a high level of demand we are seeing in our pipeline are ultimately driven by the superiority of Duck Creek's On demand cloud native low code platform.

Speaker 2

And while the technical sophistication, scalability and security of our platform are important differentiators, What customers are most drawn to is our ease of use. We spent years engaging directly with business users and our customers to develop an intimate understanding of their roles and responsibilities and what they need from their core systems to be successful. And what we learned is that no two carriers are alike. Each insurer has their unique strategic priorities and way of doing business. So we built a platform that catered to the various ways they wanted to work rather than building a platform that required them to work a certain way.

Speaker 2

While that sounds obvious, in reality, it's very hard to do in our industry. And we hear from customers consistently that Duck Creek On Demand lets them innovate faster, service clients more efficiently and deliver better top line and bottom line results. An important part of our strategy is expanding and deepening our partner ecosystem. We recently expanded our strategic relationship with Microsoft with our announcement that Duck Creek On Demand is now available in the Microsoft Azure Marketplace. This provides BNC carriers of all sizes an opportunity to capitalize on their existing Microsoft Azure consumption commitments and more easily take advantage of Duck Creek Solutions.

Speaker 2

And we're thrilled that Microsoft has chosen Duck Creek as a winner Of their 2022 Microsoft Financial Services Partner of the Year, it is such an honor to be recognized for our outstanding customer centered innovation and for leveraging the Microsoft Azure platform. Through this partnership, we are modernizing the insurance industry and delivering a new standard of It's not just our customers and partners that are recognizing the strength of our solutions. Celent, a leading research and advisory firm, recently gave highest honors to Duck Creek's claims solution based on both our advanced technology And breadth of functionality. Importantly, Celent's rankings are based on customer feedback, which noted improving customer satisfaction, Increased efficiency of operations and reduced loss costs from deploying Duck Creek claims on demand. Building upon our product leadership and expanding the capabilities of our platform is a key priority for us.

Speaker 2

To that end, we are thrilled to have entered Physicians Duck Creek as a leader in the reinsurance market. This acquisition is strategically important for Duck Creek and PrimaXL delivers on 2 Key priorities. First, it significantly expands our portfolio of non core system solutions into reinsurance, a sizable market that is ripe for modernization and is currently transitioning to cloud based solutions. 2nd, This acquisition provides a broader foundation for our international strategy. The PrimaXL organization is based in France and has relationships With more than 35 non U.

Speaker 2

S. Insurers around the world, as I have said in prior calls, pursuing acquisitions that would accelerate our international expansion plans It's been a key priority for Duck Creek and this transaction achieved that goal. PremiumXL has developed a fantastic multilingual, multi currency SaaS platform for for reinsurance that is deployed at a number of leading insurers around the world, including AXA, Beasley, Covia, FBL, QBE and State Auto among others. Reinsurance for those who are not familiar It's a key risk management strategy in the insurance market where an insurer cedes part of its insurance liability to another insurer or a specialty reinsurer to help insulate itself from concentrated risk segments or major claim events. This is a complex market that requires a platform They can digitize complicated multifaceted reinsurance contracts and support the detailed tracking of catastrophe and financial accounting transactions related to those contracts.

Speaker 2

We believe PrimaXL is a premier reinsurance SaaS platform in the world It opens up parts of a carrier's budget that were not previously addressable by Duck Creek. We expect this transaction to close later in this quarter. I want to congratulate the PrimaXL and compliance team for the incredible job they've done at solving some of the most difficult problems facing the insurance industry. I look forward to welcoming all of you to the Duck Creek family and I'm incredibly excited about the possibilities ahead as we come together. We also continue to strengthen our management team and Board of Directors.

Speaker 2

We are thrilled to have recently added 2 outstanding executives to our leadership team. Jeff Keeney joins us as Chief Product Officer, having previously held senior positions at ZoomInfo and UKG. And Rohit Bedi will be joining Duck Creek in early July as our new Chief Revenue Officer after serving in leadership roles over the past 25 years At MetricStream, Cognizant, PeopleSoft and Siebel, both Jazz and Rohit bring a wealth of enterprise SaaS experience at Duck Creek They will be instrumental in our future success. I'm also thrilled to welcome Sunil Raju Seqar to our Board of Directors. Sunil is the President and CTO of Mindbody, a leading technology platform and consumer marketplace for the fitness, wellness and beauty industries and previously held senior engineering roles at Ebay and Lithium Technologies.

Speaker 2

Sunil's extensive product development experience will be an invaluable addition to our Board. Before I turn the call over to Kevin, let me just finish by reinforcing the strength of the customer conversations we are having. We continue to see very high levels of interest and commitment to core systems modernization. And ultimately, we believe the P and C industry We'll continue to make technology core modernization investments to help streamline their operations as insurers look to adapt to rising inflation and interest rates. Duck Creek is in a great position to benefit from this trend as carriers look to transition their core systems to the cloud, which is still in the early stages.

Speaker 2

With that, I'd like to turn the call over to our new CFO, Kevin Rhodes, who will walk you through the numbers in more detail. As you know, Kevin joined us in April. He has hit the ground running and has brought great energy and ideas to the team. I'm thrilled to have him on board. Kevin, over to you.

Speaker 3

Thanks, Mike. I wanted to start off by saying that I'm thrilled to be part of Duck Creek. I joined because I'm passionate about Duck Creek's purpose, provide leading technology solutions to the P and C industry and the great opportunity we have to build a much larger, more profitable company over time. I'm really excited to close on the Prima acquisition and believe it will add a lot of shareholder value now and in the future. Today, I'll review our Q3 fiscal 2022 results in detail and provide guidance for the Q4 full year of fiscal 2022.

Speaker 3

Total revenue in the Q3 was $72,400,000 up 7% from the year ago period. Within total revenue, subscription revenue, which is comprised solely of subscriptions to our SaaS products, was $38,000,000 up 13% year over year. In the 3rd quarter, subscriptions represented 81% of our software revenue And 53 percent of our total revenue. Revenues from on premise software licenses of $2,900,000 And maintenance of $6,000,000 are 12% of total revenue. Services revenue was $25,400,000 down 1% year over year.

Speaker 3

Services revenue was lower than expected in the quarter, primarily as a result of the delayed software bookings Mike described earlier. SaaS ARR, which we calculate by annualizing recurring subscription revenue recognized in the last month of the period was $155,300,000 as of May 31, up 25% from the prior year. As a reminder, SaaS ARR There's a snapshot in time of subscription contracts that are generating revenue during the last month of the period and can be impacted by timing. As Mike mentioned, ARR reflects the impact of approximately $2,000,000 decrease related to a contract adjustment that we had with a particular customer. SaaS net dollar retention as of May 31 was 112.3%, which was in line with our historical levels.

Speaker 3

As a reminder, our net retention is driven by a combination of high gross retention rates, Sales of new products into existing customers and growth of DWP for products already operating on our SaaS platform. Now let's review the income statement in more detail. These metrics are non GAAP unless otherwise noted, and we provide a reconciliation of GAAP To non GAAP financials in our press release. 1st on a GAAP basis, our gross profit for the quarter was $40,300,000 And we had a loss from operations of $4,700,000 We had a net loss in the quarter of $5,800,000 or $0.04 per share based on a weighted average basic shares outstanding of 132,500,000. Turning to our non GAAP results.

Speaker 3

Gross margin in the quarter was $42,400,000 or 58.6% compared to 62.2% in the Q3 of fiscal 2021. Subscription margin in the quarter was 65.5%. As we noted previously, we expect subscription margins for the full year of fiscal 2022 to be in the mid-60s. Professional service margins of 38% in the quarter We're in line with our expectations. Bring our professional services margins down to a more sustainable level In the 30s, in the high 30s has been a goal for the company.

Speaker 3

Turning to operating expenses. R and D costs were $13,700,000 or 19 percent of revenue, up 1 point year over year as a percentage of revenue. We currently expect R and D spend as a percentage of revenue for the full year to remain consistent with fiscal 2021. We continue to balance the scale benefits of our R and D organization with increasing investments in our products and our SaaS platform. Sales and marketing expenses were $13,100,000 or 18 percent of revenue from 16% of revenue in the prior year period.

Speaker 3

The year over year increase was driven in large part by hosting our Formation user conference in person this year. We expect to continue sales and marketing spend as a percentage of revenue for the full year to remain consistent with that of fiscal 2021. G and A expenses of $13,500,000 or 19 percent of revenue, down from 21% of revenue from the prior year period. G and A remains the most leverageable area cost area for us and is declining as a percentage of revenue in line with our expectations. Adjusted EBITDA for the Q3 was $2,400,000 which was ahead of our guidance.

Speaker 3

Adjusted EBITDA margin was 3% for the quarter compared to 8% in the prior year period. This represents our 14th consecutive quarter of adjusted EBITDA profitability, which we believe is an important indication of our ability to generate high levels of subscription revenue growth on a profitable basis. Non GAAP net income per share for the quarter was $0.01 based on approximately 134,000,000 fully diluted weighted average shares outstanding. Turning to the balance sheet and cash flow. We ended the quarter with $365,000,000 in cash, Cash equivalents and short term investments and we remain debt free.

Speaker 3

Free cash flow was $16,500,000 in the quarter compared to $6,600,000 in the prior period quarter. We had a particularly strong cash flow quarter driven by strong collections in the period. I would now like to finish with guidance, beginning with the 4th fiscal quarter. We expect Total revenue of $72,800,000 to $74,800,000 subscription revenue of $36,700,000 to $38,200,000 Adjusted gross margins are projected to be 58.5% to 59.5%. We expect adjusted EBITDA of $3,000,000 to $5,000,000 and our non GAAP net income is expected to be in a range of $1,400,000 to $3,400,000 or $0.01 to $0.02 on a non GAAP EPS basis.

Speaker 3

For the full fiscal 2022 year, we are updating our guidance to the following: total revenue of $295,000,000 to $297,000,000 subscription revenue of $150,000,000 We expect adjusted EBITDA of $20,500,000 to $22,500,000 And our non GAAP net income is expected to be in a range of $12,000,000 to $14,000,000 or $0.09 to $0.10 per share on a fully diluted basis. As you think about our guidance, there's a couple of things to keep in mind. Professional services revenue is expected to be flat to slightly down from Q3 levels. Our professional services performance in the second half of the year Reflects a couple of things, lower than expected year to date software bookings and a lower attach rate of professional services to those bookings. That slowed our rate of growth in our services bookings backlog.

Speaker 3

And we continue to push more of our non strategic professional services engagements to our system integration partners. In terms of subscription revenue, our updated guidance reflects the following: the cumulative impact of the year to date bookings performance An approximately $500,000 decline in revenue sequentially related to the contract adjustment Mike discussed, An assumption that we recognize little revenue from in quarter bookings. And lastly, we have taken a conservative approach to revenue guidance by excluding approximately $600,000 of subscription revenue related to a couple of customers that are facing similar business dynamics As the 2 customers we discussed on our most recent earnings calls. As a matter of prudence, we have reflected this in our revenue forecast. This will be a focus area for me in the Q4.

Speaker 3

To wrap up, Duck Creek continues to be well positioned to benefit from the trend Towards technology modernization and the global P and C industry, our acquisition of PrimaXL and Prima Compliance Expands the capabilities of the Duck Creek On Demand portfolio and significantly accelerates our global expansion efforts. We are confident in our ability to deliver on our long term financial and operational objectives. With that, we'd like to open up the call for Q and A. Operator?

Operator

Thank you. Our first question comes from Lane Parker of Stifel. Your line is open.

Speaker 4

Hi, Mike, and welcome, Kevin, to the team. This is Matthew Kicker on for Parker. You mentioned the lengthening of the sales cycles continued into this quarter. I'm just curious what are some of the key reasons that customers and prospects

Speaker 2

Hi, Matthew. Thanks. Look, I think what we're seeing is Carriers are faced with some additional challenges in their business. Obviously, they're looking at the macro uncertainty, and how they're going to adjust their business through some of the rising inflationary environment that we're seeing, and that's a lot of change for them to take in. So what we are seeing Is that customers are still committed to technology projects and moving forward, but they're exercising some more caution in terms of sizing deals We're signing deals and we're just finding that that's resulting in some delays with the buildup of our pipeline.

Speaker 2

So we feel good about the pipeline. It's just the timing aspect that we're adjusting our guidance for.

Speaker 4

Got it. And then secondly, I was wondering if we could touch on the acquisition of Prima. Specifically, how you think The premium acquisition would accelerate your go to market efforts in European region and what synergies that you see between their offering and Your Duck Creek platform right now.

Speaker 2

Thanks, Matthew. We think it's obviously a great acquisition and a great add to our portfolio. Adding reinsurance is Great. And reinsurance is something that is used by carriers globally. And in terms of the European aspect of it, They have over 35 customers that are outside of North America.

Speaker 2

They're based in Paris. So they have a sales team and a sales motion Calling on these carriers and it also gives us a really nice non U. S. Installed base. As I mentioned in my prepared remarks, they have Some global international carriers, like AXA and QBE, and we know that this will further our relationship with them and for us to engage in further discussions on other Duck Creek On Demand assets as well.

Speaker 4

Got it. Thank you very much.

Operator

Thank you. Our next question comes from Rishi Jaluria of RBC Capital Markets. Your line is open.

Speaker 5

Hi. This is Richard Pullen on for Rishi Jaluria. Thanks for taking my question. First one for me, just on the 600,000 that is assumed in the full year guide for customers facing similar dynamics to the Two customers, the one who downsized the contract and the one who bought out a contract last quarter. Can you just help walk us In terms of downsizing contracts or any color you could give around that would be great.

Speaker 5

Thanks.

Speaker 2

Sure, Richard. It's Mike. I would just say that, we had some inbound requests because we have a similar situation. Now I really do want to highlight We have contracts in place and we feel good about those contracts. But as I said in my prepared remarks, having DWP based pricing is In the long term, it's very good for Duck Creek because we're facing some of this uncertainty in the market.

Speaker 2

Carriers are looking at their overall capacity needs And they're just bringing in some inbound questions. And as Kevin is getting his arms around some of these inbounds, We've decided to just be a little bit more conservative in the guidance that we're putting out in Q4.

Speaker 5

Got it. Super helpful. Thank you. And just as a In terms of what you've seen from the pipeline, it's good to hear the pipeline still looks strong in terms of Kind of the deals in there and no slippage, it sounds like or I guess no lost deals. But could you help us understand, For the customers that you're hearing some pause for, is it particular to any segment of the market?

Speaker 5

So maybe it's Some of the smaller insurers or maybe Tier 1, Tier 2 is seeing some of that, just kind of delay in deal cycles, Just any color in terms of the bifurcation across customer segments would be great. Thanks.

Speaker 2

Sure. Sure. And we are seeing some more conservative patterns from Cares of all sizes, although we are seeing some deals get signed and we did get some nice deals signed in the quarter. But I would say that the difference in terms of tiers of carriers is really not the slippage because we're seeing that across all tiers. But I would say that the Tier 1s are being more conservative in terms of the size of the deal.

Speaker 2

So if we look 12 months ago, Quite often carriers would have a larger commit. And I think in the current environment, they're really looking at what are their immediate needs and doing a more Focused project around perhaps launching a line of business or doing something that is strategically important for the organization, But not committing multiple years in advance. Now we still think that's good for Duck Creek because if we go with a Smaller contract as an initial contract, we know that there's plenty of upside selling motion and opportunity for us in the future. And with the Tier 1 that we did announce on the policy side, we saw something similar to that where we're helping them with a specific line of business, But we know that upon our success, there'll be future opportunities for Duck Creek within the account.

Speaker 5

Great. Thank you.

Operator

Thank you. Our next question comes from Dylan Becker of William Blair. Your question please.

Speaker 6

Hey guys, thanks for taking the question. And I just wanted to maybe double click. You guys called out some of the same kind of macro headwinds and near term uncertainty that you talked about last quarter. Is there any incremental change that you're seeing from that customer purchasing behavior? Again, these are highly strategic discussions.

Speaker 6

I guess, how should we think about that pipeline confidence? And then it seems like as well, the bigger impact kind of obviously flowing through to the services front As a lag to that subscription provisioning, is that kind of the best way of thinking about the timing impacts to what you guys are calling out in Q4?

Speaker 2

Yes. And I think as we're looking at it, we're seeing a continuation of what we Saw in Q2. So in Q3, it was much of the same. I would say that bookings did improve, but they did not improve as much as we expected because Even though the pipeline is rich, we see deals continuing to slide. And then obviously, we have Kind of a knock on effect into our services, but what I really want to highlight on the services side is What we did do is temper some staffing and hiring so that we can proactively manage our cost structure with that And then also enable our partners.

Speaker 2

So we continue to be very committed to strategically enable our partners and grow our ecosystem. So we know we have capacity to pick up new work, but really it's just some small adjustments as we saw some of these deals slide out of the quarter and sometime in the future.

Speaker 6

Got it. Okay. That makes sense. And then maybe kind of pivoting higher level here. As you think about the combination and leverage ability Of data and automation from a carrier perspective, they're obviously focusing on business agility.

Speaker 6

But again, to unlock automation, you have to have Your proverbial ducks in a row on the data front, how do you think about the puts and takes here around kind of that more effective decisioning? It seems like kind of one potentially leads

Speaker 2

The first one is, we are at work on a low code analytics platform that will be woven into Duck Creek, and We talked a little bit about that at our formation users conference last quarter. And in that organic build out, we're excited that we have Jess and she's bringing in some great talent from the outside to really help us focus on that analytics work effort. The second element is we continue to work with leading partners in our ecosystem, where we're pre plumbing solutions into Duck Creek on demand, which allows a lot of that automation to take place. And that's one of the beautiful things about our low code platform As when we get decisioning from our 3rd party solution partners and data and analytics, it allows Carriers to use our low code platform to configure automation so that we can automatically bind policies or process Claims or open claim coverages. So there's a lot that's wired into Duck Creek that enables that for carriers today, but we continue to invest heavily in that area as well.

Speaker 6

Got it. Thank you,

Operator

guys. Thank you. Our next question comes from the line of Alex Zukin

Speaker 7

I guess, Mike, You mentioned confidence of normalizing sales cycles in fiscal 2023. I guess I just want to understand what gives you that confidence As the macro environment continues to deteriorate and then if I think about the commentary on the contract that The adjustment to the contract that was made for the carrier that suffered a VWP loss, Can you help us understand what type of risk profile you have as you analyze the customer base In terms of you mentioned a couple of customers reaching out asking for similar type of contract adjustments. But what is the risk inherent In the kind of current customer portfolio and subsequent to that, how should we be thinking about NLR, both next quarter but also going into fiscal 2023.

Speaker 2

Sure. Alex, first on what gives us confidence in terms of things opening up in 2023. I'll just say with my experience in the insurance industry, I've seen this movie before, where the insurance industry is very resilient to the economic climate and downturns in the economy. I think what happens is when there's a sudden change in the economic environment, carriers go through a short term set of decision making to really look at how are they going to deal with the short term swing in profitability, which we've seen this past year, Even though written premiums grew 9%, their overall loss costs grew about 12%. So they grew at a much higher rate than they can get rates in there.

Speaker 2

So what carriers need to do is they need to make adjustments. And in those adjustments, they have to find where do they want to take more rates to get more premium in. And then once they decide where they would like to take it, they have to go through a regulatory filing process. And that creates a little bit of a lag in terms of Then getting the revenues back in the door that they want. But what I found is once they get through some of that uncertainty, it's back to business as usual.

Speaker 2

And I think we would expect nothing to be materially different in terms of the way carriers will behave through some of this economic uncertainty. That gives us a degree of confidence. And then in your second question, in terms of the overall risk, we are very confident In the contracts that we have in place, and the beauty about our business model is because we're the core processing engine, kind of The heart and lungs of an insurance carrier, it is the reason why we're very, very sticky within that. But also as I've indicated in past calls, Our relationships with each customer is very intimate and very personal. So we want to focus on their business success.

Speaker 2

And I think time to time, we will look at what they're trying to achieve and how that would work with Duck Creek. And if we can work with them, then Time to time, we'll make some changes. But I think when we look at the overall risk portfolio, we think we will continue with a very Healthy net dollar retention, we've been between 112% to 120%. We would expect us to be somewhere in that range for the foreseeable future with no indication of it having a material drop. Understood.

Speaker 2

And I guess maybe just

Speaker 7

as a follow-up question then. I'm not sure you've given this metric out recently, but As you look at the written premium growth inside of your customer base, how again, given these current dynamics,

Speaker 3

How has that changed? How do

Speaker 7

you expect it to trend for this year versus last year? And just as a clarification, are you Anticipating any incremental revenue contribution to the model that come from the acquisition, not necessarily in the quarter, but how should we think about it beyond that?

Speaker 2

Yes. When we look forward, we would expect the written premium of our installed base to grow over the coming year more than it has in

Speaker 4

historical years. But what I want

Speaker 2

to caution you on is, But what I want to caution you on is the growth in written premium is still one of the Smaller contributors to our net dollar retention. Most of our net dollar retention increase is coming from cross selling product into the carrier and also cross selling into different subsidiaries. We think with our DWP model, it gives us protection in the inflationary environment. But at the same time, please know that they have to cross through a threshold in order for us to get More dollars in the door for Duck Creek, and sometimes they'll cross over the threshold and sometimes they won't based on their premium changes. So, it will be a contributor to revenue growth, but I just want to make sure that you don't over model that.

Speaker 2

It's not going to be And significant is some of the other mechanisms like cross selling into the account?

Speaker 3

Hey, Mike, let me just comment on that too. We did not add because we have not Close the acquisition yet. This is Kevin. We have not modeled into our guidance any contribution from

Speaker 6

the Q4.

Speaker 3

Yes. When we get to 2023 guidance at the end of this next quarter, this Q4, we will provide a little bit more Insight into what Prima's contribution is to the company at that time.

Speaker 7

Perfect. Thank you, guys.

Operator

Thank you. Our next question comes from Michael Funk of Bank of America. Your line is open.

Speaker 8

Thank you very much. I appreciate the time tonight. A few if I could. So first, you mentioned the pipeline remains very healthy and some deals are stalling. So a bit of a pig in the python situation at this point.

Speaker 8

So first, what is the stimulant To get those deals moving through the pipeline, where are they stuck? Like what phase in the pipeline are they stuck right now? And then I guess kind of third

Speaker 6

part of that first question

Speaker 8

would be, what is your confidence in your ability to provision those contracts Once they do become unstuck and transition those to revenue.

Speaker 2

Sure. First off, what is the What do we have to do to have them unstuck? What I'll say is we've seen a buildup in the latter stage of the pipeline And a lot of that decision is out of our control. We do everything we can to work on a business case, to work You know the benefits for our overall customers and prospects to really help them tell the story to their respective boards In terms of doing the projects and the good news is even though they're deferring, I've had a lot of discussions with CIOs over the past quarter And they're saying they're committed to technology spend. It does come down to a matter of timing.

Speaker 2

So quite often, an executive team or even a Board may be deferring decisions and not giving us a clear date into when they're deferring them. So that's why we're exercising some caution Because now we've watched this occur about 2 quarters in a row, and I want to make sure that I'm just adequately setting expectations. Great. And then in terms of visioning, I'll just say that we're highly confident. We are with our automation and where we're at, When we're ready to go on a contract, we're highly confident in our ability to get that provision and start recognizing the revenue.

Speaker 2

There is typically Somewhere around a 30 day lag between the booking and when we can start recognizing that as revenue.

Speaker 8

And that leads to the second question then, because the guide for 4Q applies a pretty sharp step down in year over year Revenue growth, once again, I appreciate your commentary on the drivers there. But looking at fiscal 2023 consensus, I understand you're not giving guidance right now 23, but that's a pretty big delta implying high teens revenue growth about 350,000,000 In fiscal year 2023, so tying that back to your comment about an unsticking of this revenue with a pipeline in 2023, Any kind of commentary on guardrails for thinking about revenue growth in 2023, how that might ramp in timing, because I think that's going to be a major Question for all of us going through our models trying to figure out where that consensus should go from $350,000,000 and obviously it can't be there It's given the step off in 4Q. So any kind of commentary on guardrails or color around that ramp or unsticking in 2023 would be helpful.

Speaker 3

I appreciate that, Mike. I'll take this because it's related to kind of guidance. I mean, obviously, you're right. Like we can't get ahead of ourselves in terms of What 'twenty three is going to look like today because we're not guiding on 'twenty three. That being said, I actually think Q4 is going to be Q4 and Q1 are kind of a meaningful quarter as it relates to what revenue is going to look like for 2023.

Speaker 3

I would say that our pipeline looks healthy. And as we look at that bottom end of the pipeline, the mature levels of the pipeline, they're still very strong. It's of this macroeconomic kind of environment that we're talking Drew, right now that whether it's a deferral or whether it's a slight delay, etcetera, it really kind of depends on what we do in Q4 and Q1 That's going to set up for 2023. I think it's going to come down, right, a little bit given that we thought that Q3 was going to be stronger than it was, like we thought the second half was going to be stronger than it's going to be now, right, given the Q3 kind of underperformance of the bookings That is expected. We still think Q4 is still got enough pipeline in it to make Q4 a good quarter.

Speaker 3

But at the

Speaker 6

end of the day, it really we

Speaker 3

have to, I think, wait until we get through Q4 to give you a lot more guidance on what 2023 is other than I would say it is going to come down a bit.

Speaker 8

Got it. And I'm not trying to put you on the spot. I know still a bit away from 4Q guidance. And one more if I could kind of last, I think maybe concern people might have heard the commentary about Tier 1 being more conservative on deal size. I think the fear might be that Last few years, companies have been spending like drunken sailors, right?

Speaker 8

I mean capital with chief and CFOs were handing out big budgets.

Speaker 2

Yes. I would say that when I look at overall technology budgets, and that is a question I've been asking every CIO that I could talked to over the past quarter is how are they looking at the remaining budget this year and how are they shaping up for their budget next year. And the feedback that I get is that insurers are committed to their certain technology spend levels. They think about it as A percentage of written premium and in the average across the industry, you'll see somewhere around 3.5% to 4% of premium As an average, you'll see some carriers that are higher or maybe for a period of time higher and some that are lower. And we're not there's no evidence that that's going to materially change.

Speaker 2

So I think we're confident that There's still going to be available budget. The one thing that is changing is boards, I think, Are more cautious about approving multi year, multimillion dollar spend, so commitments without Really understanding what's going to happen in the economy, making those commitments right now for the next 2 to 3 to 4 years out. So what they are doing is taking those plans and breaking those down into smaller digestible projects. And that's really kind of a trend that we've seen.

Speaker 8

Hey, thank you all for the time.

Speaker 7

Thanks, Mike.

Operator

Our next question comes from Pete Heckmann of D. A. Davidson, your line is open.

Speaker 9

Good afternoon. Thanks for taking my question. Mike, when you think about M and A, Things like PREMI XL or PREMI compliance, how much do you think about that as basically being introduction to the customer, so So that you can cross sell into them or taking their solution and cross selling into your base. And given that, how do you think about additional M and A here, Adding continue to add either company technologies or add geographic scope.

Speaker 2

So the way that I'll say that we here, the way that we think about M and A is just as you said, an opportunity to add Meaningful capabilities into our portfolio, and how we can cross sell those capabilities. So the first thing that we look at during M and A is the quality of the technology that we'll acquire first. And we're looking for things That are meaningful business problems for insurance carriers. That's really important to us. We like business problems that are highly complex to solve because This is our sales motion in terms of helping carriers understand and how to solve complex business problems, and that's why We enjoy such a high net dollar retention and high gross retention.

Speaker 2

So we look at the technology that we're going to acquire that way as well. And then from there, I would say that we look at other relations to our strategy. So in the case of PrimaXL, I've made it clear that I would love to get a non core asset that is domiciled outside of North America. We know that that would Benefit Duck Creek in a meaningful way. So can it assist us in our broader strategy?

Speaker 2

And I think that is A great thing that PrimaXL is going to do for us, they're located in France and Continental Europe. They have global accounts. They have again over 35 customers that are outside of North America that help us with introductions to those accounts and to establish a Duck Creek brand. So I think that's a halo effect as well. But 1st and foremost, we're buying a very highly high quality Technology SaaS solution that we think is really the industry leader in its category.

Speaker 2

So that's important for us. And then your last question is, are we thinking about more M and A? We are, but again, we're going to Look at M and A for the technology and assets that our customers really would like, and that adds very well to the core that we offer. So we're not going to rush into transactions and we have it to date. I think we're going to be a very disciplined acquirer, but we're going to continue to look at future opportunities as well.

Speaker 9

Okay. Okay, that's helpful. And then just any thoughts in terms of looking at your underlying cost base, looking at certainly, it seems that Given some of the multiyear decision making plans of these carriers, there could be short term decision push outs, but generally they're going to stick to these all 2 year plans. But it doesn't necessarily make sense for you to throw a lot more resources at sales and marketing In North America, probably, maybe in Europe, but any changes in the way you're thinking about kind of the long term economic model and in getting to those target margins?

Speaker 2

Let me start Pete with that and then I'll hand it over to Kevin. The one thing I've repeatedly said is I feel like we've run our business with discipline. We've been, in essence, like I said, on an adjusted EBITDA basis, we had 14 quarters in a row of profitability. We had a really good cash flow quarter this quarter. And when we look at our overall expenses, we're always mindful around You know the hiring that we're doing and what that's going to do for our business.

Speaker 2

On the sales and marketing front, we feel like we've made really strong investments sales and marketing, so we're not missing opportunities. The new investments that we are making are more on an international basis and trying to strengthen ourselves Outside of North America, but I think as we look at bookings, we look at revenue, we're making sure that we're I think discipline our cost structure, because we know that making money and showing a profit is important. But Kevin, you have some perspective on this. I'd love for you to add that.

Speaker 3

I mean, I think you nailed it, Mike, but also I would say even though some revenue is coming down in the rest of this year, we're maintaining our EBITDA guidance That we had before throughout the rest of this year. So despite some revenue challenges from these delayed bookings, We have also rightsized what our cost structure is going to be, at least from either new costs coming in or in general. So we're doing a good job there and being prudent and kind of exercising discipline around what our cost structure will be. In terms of the future, like what's the model look like, I actually am very excited about what we can do With this business and the growth that we can, I think we are a disciplined company that looks at profitable SaaS business and we're looking at the services with reasonable expectations of what those services are? We're not trying to buy business With very, very low margins, that's maybe going to hurt our model in the future.

Speaker 3

What we're really trying to do is build a business Fairly consistently, that is going to be profitable and expand that profitability over time.

Speaker 9

All right. Fair enough. I appreciate

Speaker 3

it.

Operator

Thank you. At this time, I'd like to turn the call Over to Mike Czechowski for closing remarks. Sir?

Speaker 2

Okay. Thank you, everyone, for participating in our Q3 earnings call. And let me wrap up by highlighting the enormous opportunity that we continue to have in front of us as the insurance industry continues to migrate core systems to the cloud. I'm also thrilled to continue to expand our Duck Creek product offerings to include what we believe is the premier reinsurance management and compliance cloud solution in the market As we look to acquire and integrate PrimaXL in compliance, not only does this provide Duck Creek with an expanded set of SaaS offerings, But this acquisition will also help us with our international strategy as PrimaXL is a European based organization and they also provide us

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.

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Earnings Conference Call
Duck Creek Technologies Q3 2022
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