Guidewire Software Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
September 7, 2023

There are 10 speakers on the call.

Operator

Greetings, and welcome to the Guidewire 4th Quarter and Full Year Fiscal 2023 Financial Results Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Alex Hughes, Vice President, Investor Relations.

Operator

Thank you, Alex. You may begin.

Speaker 1

Thank you, operator. Good afternoon, everyone. I'm Alex Hughes, Vice President, Investor Relations and with me today is Mike Rosenbaum, Chief Executive Officer and Jeff Cooper, Chief Financial Officer. The complete disclosure of our results can be found in our press release issued today as well as in our related Form 8 ks furnished to the SEC, both both of which are available on the Investor Relations section of our website. Today's call is being recorded and a replay will be available following the conclusion of the call.

Speaker 1

Statements made on the call include forward looking ones regarding our financial results, products, customer demand, operations, the impact of local, national and geopolitical events on our business and other matters. These statements are subject to risks, uncertainties and assumptions and are based on management's current expectations as of today and should not be relied upon as representing our views of any subsequent date. Please refer to the press release and the risk factors and documents we file with the SEC, including our most recent quarterly report on Form 10 Q and our prior and forthcoming annual reports on Form 10 ks filed and to be filed with the SEC for information on risks and uncertainties and assumptions that may cause actual results to differ materially from those set forth in such statements. We also will refer to certain non GAAP financial measures to provide additional information to investors. All commentary on margins, profitability and expenses are on a non GAAP basis unless stated otherwise.

Speaker 1

A reconciliation of non GAAP to GAAP Measures is provided in our press release. Reconciliations to additional data are also posted in the supplemental on our IR website. And with that, I'll now turn the call over to Mike.

Speaker 2

Thank you, Alex. Good afternoon and thanks everyone for joining today. I want to start the call by expressing a sincere appreciation to everyone Leading its category to a new cloud delivery model was never going to be easy. But I think that if we're being honest, sometimes it felt harder than expected. But the culture of this company and the determined approach to steady and daily progress all contributed to and culminated in what ended up being a fabulous result for us this fiscal year.

Speaker 2

The 4th quarter sales results were unprecedented and validate that we are very clearly on the right track. We are steadily building a franchise that will have a lasting and positive impact on the P and C Insurance Industry and will produce the durable, profitable long term growth that is commensurate with a vertical market leader. We closed 17 cloud deals in the quarter, bringing total for the year to 37. We finished the year at $763,000,000 in ARR, up 15% and just under $900,000,000 in fully ramped ARR, up 17%. As something that I'm particularly Proud of, we finished the year at a positive operating margin, significantly ahead of our plan.

Speaker 2

Underlying these results It's a growing acceptance in the industry that the cloud solution we have built is the logical next generation platform capable of supporting the P and C industry's requirements, goals and aspirations. We are uniquely positioned to be the industry's innovation platform and are now working with carriers of all sizes all over the world to help them engage with customers in new and more efficient ways to innovate and respond to market dynamics quickly with new products and distribution channels and to optimize their operations to help manage through a very challenging business dynamic. The financial results this fiscal year clearly demonstrate a market position and sense of conclusion to what I would say With our cloud transformation, we are very clearly now the leading cloud platform serving our industry and this position affords us the opportunity to redirect our focus towards the products and innovation that enable insurers to engage, innovate and grow efficiently. As I said, it was an incredible end to an incredible year and I want to call out several key takeaways that are important for us strategically. First, We saw broad based strength for InsuranceSuite on the Guidewire cloud platform.

Speaker 2

We made notable progress up market with Tier 1 insurers. We saw momentum in all key geographies and continued to see balanced momentum in both new logos and on prem to cloud migrations. The sales success this quarter is a great validation of our platform and ecosystem centered approach and bolsters our confidence in our go forward position in the market. Sales highlights in the quarter include phenomenal progress with Tier 1 insurers closing 11 Tier 1 deals this quarter. This includes a win at Progressive Insurance, one of the leading insurance brands in North America, where our partnership is specific to their non personal auto lines of business and a full suite win at Allstate Canada.

Speaker 2

Based on the success this quarter, we now have some form of core systems relationship with 13 of the top 15 insurers globally, including 12 with Guidewire Cloud and with exciting potential to expand these relationships over time. This This fact validates the strategic focus that we have always placed on this specific segment of the market and its very demanding and unique set of requirements. We also drove further global expansion of GWCP with 3 wins in Europe and 2 in our Asia Pacific market. This international success was highlighted by a major commitment from IAG, a leading Australian insurer to adopt PolicyCenter This is a tremendous validation of our platform approach and combined with the local insurance content required to ensure Guidewire is the right choice in every key market we serve. As I have mentioned in previous calls, we continue to see signals from the market That there is opportunity for us in competitive takeouts.

Speaker 2

And in Q4, we completed an agreement with West Bend Mutual Insurance To move their claims processes to ClaimCenter on the Guidewire cloud platform, competitive displacements are rare in our And I believe our recent momentum in this area speaks to our track record, strength of platform and growing market alignment to our vision. And finally, it was great to see InsuranceNow also achieve a competitive takeout at a Tier 3 insurer, which represented its largest win in the last 5 years. As I mentioned in last quarter's call, P and C insurers are working through a challenging and complex environment that has stressed Almost every insurance company in the world, the decision to embark on a core transformation in the midst of this market dynamic is consequential and I believe supports the fact that our relationship with these carriers is highly strategic and expected to last decades. It was very gratifying So many of the deals we were working on this quarter close and I look forward to driving the follow through expected of us based on the trust that they have placed in our company. Turning to adoption.

Speaker 2

We continue to make progress in Cloud deployments with 13 go lives on Guidewire cloud platform in the quarter and we enter our new fiscal year positioned for continued success. Supporting this momentum is a healthy and growing ecosystem of SIs who continue to be valuable partners as we transition the industry to cloud. We finished the quarter with over 23,000 Guidewire consultants in our systems integrator ecosystem and over 8,000 of these are now cloud certified, a total that grew 53% this fiscal year. Additionally, we continue to drive more efficiency in our cloud product and company overall. Jeff will talk more about this in a minute, but the significant improvements we are driving in cloud efficiency along with better operating leverage means we crossed Back into positive operating margin this year.

Speaker 2

The work that Diego Duvall and our development teams are doing to not only ensure we're building out a Pure and reliable service, but also beat their efficiency targets was tremendous. This is a meaningful milestone that we were able to achieve ahead of plan and it gives us increased confidence that we will continue to grow steadily grow into our target model. Finally, our pipeline Fiscal 2024 is healthy. As we continue to enhance the capability of our platform with each release, as we continue to grow our ecosystem of partner applications in our marketplace, As we continue to hone our analytics and data offerings, the value proposition we offer to our customers improves and our competitive position improves. This sets us up well for the New Year and gives us a clear path to our fiscal 2025 targets of $1,000,000,000 in ARR and 14% Non GAAP operating margin.

Speaker 2

Jeff will talk more about our deal dynamics and how they translate to ARR and fully ramped ARR. But coming out of a tremendous Q4, we feel great about the business, our pipeline, the success customers are seeing in our platform and how we are tracking towards our long term targets. Last comment before turning it over to Jeff. While we are proud of the work we have done put us in a position to hit our financial targets, we are more proud of the potential we've created to meaningfully and positively impact the industry we serve. Our position as the leading cloud platform for the P and C industry affords us the opportunity to now amplify our focus on the business processes and decisions that drive improved insurance outcomes.

Speaker 2

We can legitimately improve the efficiency of the broader Which ultimately helps people, families and corporations better manage and transfer risk. I'm very excited about this potential And I'm confident in saying on behalf of everyone at Guidewire that we are all motivated to continue driving this mission forward. With that, I'll turn it over to Jeff to discuss the financials.

Speaker 3

Thanks Mike. 4th quarter ARR ended $161,400,000 up 15% year over year on a constant currency basis and ahead of our expectations. As a reminder, we measure ARR on a constant currency basis throughout the year and then update ARR for year end FX rates. Making this update modestly impacted ARR by $1,100,000 resulting in ARR of 762,500,000 This outcome was ahead of our expectation due to very strong sales activity in the quarter. As Mike noted, this Q4 saw tremendous execution and was our largest quarter ever.

Speaker 3

Fully ramped ARR, which is defined as the fully ramped annual price outlined in our customer contracts, grew 17% year over year on on a constant currency basis. This is a meaningful acceleration compared with 14% growth last year and again is a reflection of the better than expected Our sales activity in Q4 is a validation of our investment strategy as we work to modernize this industry. Total cloud ARR, which includes ARR for all of our cloud products and for customers that have contracted to move to the cloud, grew 28% year over year and comprised 59% of total ARR. Total revenue for the year was $905,000,000 ahead of our expectations due to stronger performance across all components of revenue. Notably, cloud strength continues to be visible in subscription revenue, which was $352,000,000 up 36% year over year.

Speaker 3

It is exciting to see the progression of our subscription revenue line. In 2018, our subscription revenue was just over $30,000,000 primarily from acquired products. Since that point, we have delivered a 5 year CAGR of 60%. Subscription and support revenue was $430,000,000 up 25% year over year. Turning to profitability for fiscal year, which we will discuss on a non GAAP basis, gross profit was $495,000,000 This was up 18% year over year.

Speaker 3

Overall gross margin was 55% compared to 52% a year ago. Subscription and support gross margin was 55%, an 8 percentage point increase over last year driven by margin improvement on our subscription line. We are delivering on the expected benefits associated with running a cloud platform at scale. Services gross margin was just under breakeven compared to positive 3.5% a year ago. Notably in Q4, Services gross margin was positive 10.5% compared to negative 6.4% a year ago.

Speaker 3

This is due to the multi quarter strategy that we have been talking about for some time that includes moving away from fixed bid arrangements, lowering our reliance on subcontractors and increasing overall services utilization rates. We are pleased with progress here and expect us to continue into FY 'twenty four and beyond. Operating income was $11,700,000 better than our guidance range Overall stock based compensation was $143,000,000 for the year, up 4% and a little higher than our expectations due to low employee attrition levels. Share repurchase activity in 2023 more than offset the effects of stock based compensation dilution. Total shares issued and outstanding ended at 81,400,000 compared with 84,100,000 ended last year.

Speaker 3

For the year, we bought 4,000,000 shares at an average price of $64.78 per share. Operating cash flow ended the year at $38,000,000 We're pleased with our collections in the quarter. We ended the quarter with $927,500,000 in cash, After multiple years of strategic investment in our business to drive our industry's adoption of cloud core systems, A key priority in 2023 was to drive efficiency and margin expansion. We are pleased to see strong progress with key profitability measures this year. We are confident in the long term cash generation potential as we have established our cloud leadership and accelerated our market leading position.

Speaker 3

Now let me turn to our outlook. For fiscal 2024, we expect ARR of between 846,000,000 858,000,000 representing 12% constant currency at the midpoint. In FY 2025, we expect ARR growth to accelerate to 16% to 17 The driving force behind these growth rates are committed ramps embedded into our cloud contracts. As I've already noted, fully ramped ARR grew 17% this year. This is the highest growth on this metric since 2019.

Speaker 3

When we look at the shape of the ramps for deals sold in fiscal 2023, we see a pronounced acceleration of annual fees in year 3, which is our fiscal 2025. Total revenue for the year is expected to be between 976 and $986,000,000 We expect that subscription revenue will be approximately $471,000,000 representing 34% growth. Support revenue will decline by about $8,000,000 year over year as a result of the continued migration of our installed base to cloud, resulting in approximately $541,000,000 in subscription and support revenue. As a reminder, support revenue attaches to term license customers. For cloud customers, support activities are included in the subscription fee.

Speaker 3

We expect license revenue to decline due to steady progress on cloud migrations. Our outlook for services revenue is approximately $200,000,000 We are shifting more services work to our partners who have made large investments to align their with our cloud This approach allows us to work together with our partners to standardize this industry on Guidewire cloud platform. We expect total gross margins for the year to be approximately 60%, subscription and support gross margins to be approximately 59% and professional services gross margins to be approximately 15%. We are pleased with this progression as we work to continue to drive margin improvement. With respect to operating income, we expect an operating income of between $62,000,000 $72,000,000 for the fiscal year.

Speaker 3

We expect growth in operating expenses to continue to be muted in fiscal year 2024. Cash flow from operations in fiscal 2024 is expected to be between $95,000,000 $125,000,000 Our CapEx expectations for the year are between $20,000,000 $25,000,000 including $15,000,000 in capitalized software development costs. Our Q1 outlook can be found in our earnings press release, but let me provide a bit more color. Given the strong sales activity in Q4, we did not have many deals slip Into Q1, so we expect typical seasonality for our Q1, which impacts sequential ARR growth expectations. We expect subscription and support revenue of approximately $123,000,000 and services revenue of approximately 43,000,000 Also, annual employee bonuses and commission expenses related to Q4 sales are paid out in Q1, which impacts cash flow.

Speaker 3

As a result, we expect cash flow from operations to follow a similar pattern to what we experienced last year. Finally, let me make a comment about our FY 2025 targets that we have been tracking for some time now. We will address this in more detail at our Analyst Day, but I wanted to make a comment As Mike noted, we remain focused on achieving our target of $1,000,000,000 in ARR and the strength of Q4 sales activity demonstrates Total revenue is also tracking to our prior range. On the margin side, we're progressing a bit ahead of plan That we discussed at last Analyst Day and our expectations for subscription and support gross margin, total gross margins, operating margins and cash flow from operations margins For fiscal 2025 are now expected to finish closer to the high end of previously discussed ranges. We are thrilled with the progress we made in FY2023 to allow us to deliver increasing confidence towards our long term targets.

Speaker 3

We have built a tremendous cloud company at Guidewire and I want to give special thanks to the finance team for helping Guidewire manage through what has been a complicated business model In summary, we're proud of what the team was able to accomplish in fiscal 2023 and are excited for what fiscal 2024 will bring. With that, let's open the call to questions.

Operator

Thank you. We will now be conducting a question and answer session. A confirmation tone will indicate your line is in the question may be necessary to pick up your hands and before pressing the star key. One moment please while we poll for questions. Thank you.

Operator

Our first question is from Dylan Becker with William Blair. Please proceed with your question.

Speaker 4

Hey, guys. Great job here. And Mike and Jeff, it seems like the tone is really clear on the model transition. I guess maybe starting With Jeff, obviously, the encouraging sales activity here, there's still some moving parts and appreciate the color on kind of the 25 targets.

Operator

I guess, can you help us kind

Speaker 4

of give a sense of what's instilling that confidence relative to the time based outcomes of the ramped activity? Sounds like subscriptions, very healthy, maybe a little bit of an offset on the services front, but just kind of level set some of the puts and takes to the guide and outlook for 2024 and 2025. Thanks.

Speaker 3

Yes, absolutely. We're thrilled with the activity we saw in Q4. And as you know, we are cloud contracts typically contain multiple years of committed fees in the contracts. We call these ramps, Right. So the shape of these ramps can be impacted by a number of factors, including our insurers' rollout schedule, their implementation strategy and the business case to We noted last quarter that we were thrilled with the activity and what we're seeing in the environment and our ability to transact with some of these ramps We're taking a little bit more time to develop.

Speaker 3

Ultimately, I really care the most about getting to an attractive fully ramped And I was thrilled with the activity that we saw in the quarter to drive to that outcome. That also is what underpins Our fully ramped ARR growth of 17%. And so as we inspected the cohort analysis and the deals that underpinned kind of the activity in Q4. We did see a little bit of a slower develop and that had an impact in how we in our outlook How much of our ARR will come off of the backlog in FY 2024, but we also see a material acceleration in FY 2025 giving us Really good line of sight in some of those longer term targets that we talked about. So, in general, just thrilled with the activity to set us up the foundation for as we think about FY 2024 FY 2025.

Speaker 4

Great. Okay, that's super helpful. Thanks, Jeff. Mike, maybe switching over to you It's kind of from a foundational level, right, the idea of what an intelligent core and embedded analytics can look like and how that forces a shift in these underwriting models. You called out an emphasis on product innovation, but how does this shift the strategic importance of what a core system can look like versus maybe what it was in the traditional sense?

Speaker 4

And how that incentivizes change from both a carrier perspective, but also kind of fuels your ongoing innovation roadmap there as well? Thank you, guys.

Speaker 2

Thanks, Dylan. Great question. And I think it lines up very much to what we what I was talking about in the script In terms of carriers being aligned with our strategic vision for the platform and where we're taking Guidewire, I think if you think about Just the most basic, maybe boring definition of what a core platform needs to be, needs to be a system of record database for policy claims and bills. But we see an opportunity to do so much more with that platform, because really doing anything innovative With at an insurance company, necessitates a connection to that core system of record. And so it's not just It's integration, it's the digital interfaces that they need to be able to build to connect to customers, to connect to agents, to connect to brokers.

Speaker 2

It's also workflow systems to drive better efficiency and automation. And obviously, as you say, it's analytics and embedding intelligence Into the system, we've worked incredibly hard to ensure that any piece of data, any business process You're running on this core platform. We're capturing every transaction. We're storing every change. Every single thing that's happening on that platform is stored in our data platform Available to these companies to be able to run the operational analytics that they need to be able to run just to do business, to be able to connect into the financial systems that they need to be able to used to do business and to do the complex sort of multi period, period over period predictions and deep analytics that really basically allow them to make better insurance decisions.

Speaker 2

We want all of that To be easier and easier and easier for our customers in this industry to harness and leverage, and like I said, it's like brought in a more efficient, better Insurance industry, we think we've done that with this platform and we're starting to see that, I don't know, attitude that reality picked up in the demand that we see for the product and the execution that we saw in Q4 in this fiscal year. So really do like the question, because we think that the industry is going to get smarter and get more efficient and we're excited to be part of it.

Speaker 4

Terrific. Thank you, guys. Appreciate it and congrats again on a very solid Q4.

Speaker 2

Thanks a lot.

Operator

Thank you. Our next question is from Kevin Kumar with Goldman Sachs. Please proceed with your question.

Speaker 5

Thanks for taking the question. Mike, on your comment on displacing other vendors, I think that's 2 quarters in a row that you called that out. So curious, is there a specific pain point or some common themes that's catalyzing these modernizations? And do you view this as a durable theme going forward?

Speaker 2

There's a yes, thanks for the question. It sort of depends. I would say part of it is just a bit of frustration with incumbent vendors and it's not specifically one, it's like There's multiple installed vendors where this is coming up. I'd say there's a bit of frustration associated with this, but Maybe that frustration is better understood in the context to, what I'd say alignment to our innovation vision And the track record that we have been able to establish with our platform and with the successful production implementations that are now live and running on the system. I think if I think about my 4 years at Guidewire, there's been an absolute change In the perspective around us painting a vision and partnering with companies to go ahead and sell it and get through project to get it implemented and get it live and get it running.

Speaker 2

But this is now much more something that's becoming the norm, You know, something that we're feeling very confident in and something that the systems integrators are feeling very confident in and alignment to that vision helps sort of juxtaposed to the experience that these companies might be having with other vendors. And so, It is a couple of quarters in a row that we're seeing this. We called it out because we thought it was important to sort of identify that This is a reasonable redefinition of how we think about total addressable market. In one case, you could think of Guidewire as targeting what you might call legacy systems, but if you open that up, broaden the perspective to systems that are Already kind of modernized, but not modernized the guide wire, that's a significant positive change for us. And so every quarter that we see these examples, We're very, very excited about it and excited to tell you, but more excited to welcome other customers to the fold and to the Guidewire ecosystem.

Speaker 5

Great. That's really helpful. And then I wanted to ask about the migration acceleration specialization that's being rolled out to your partners. I guess what's the implication there in terms of TCO to migrate? And in general, are you feeling more confident in terms of the pipeline of migrations?

Speaker 2

We're definitely feeling more confident about identifying all of the things that we need to do to ensure that these projects go smoothly. And what we're excited about is extending that expertise, that learning to the SI ecosystem, so that we have a broader Group of people, sort of more horsepower brings that we can bring to bear in successfully executing these migrations. I wouldn't necessarily say that it's going to change the pipeline or the run rate of that business for us. We work hard It's more so the signal that I think you should see is we're confident enough in these programs To now start to extend it to the partners and build that specialization with these specific partners, so that we can ensure, Like I said, we've got enough horsepower to meet the demand as we go forward to the next few years. Really, It's been great to see the balance in the bookings for us over the past couple of quarters Between new business and new deals and then also the migration of our customer base, which is progressing very well.

Speaker 2

So yes, glad that you picked up on that change that program, I guess, that we've launched this quarter.

Operator

Thanks and congrats on the quarter.

Speaker 2

Hey, thanks a lot.

Operator

Thank you. Our next question is from Parker Lane with Stifel. Please proceed with your question.

Speaker 6

Hi, guys. Thanks for taking the questions. Mike and Jeff, in the context of 17 cloud deals, 13 go lives here, it looks like the outlook for 2024 fiscal is Fairly conservative. Is that primarily a reflection of the pronounced acceleration of ramps in 2025 or is there something else you're baking in there? Thanks.

Speaker 2

Yes, I think it's 2 things. Like Jeff said, we have very good visibility into what internally we call the water call, right, like Contracted ARR that will flow into the model based on agreements that we've already done. The shape of the ramps that we've already completed, already contracted give us pretty good visibility into So what we should expect in 2024, what should we expect in 2025 and beyond. Then we may add to that a projection based on the pipeline we see for fiscal 4, and that gets us to the guide that we provided. But what's really critical, if you really want, I think, you.

Speaker 2

We really want to understand how powerful the business is and how great we're doing right now, because you got to look at the 17% growth in fully ramped ARR and we looked at, hey, are we still confident in the fiscal 2025 targets And based on the flow of the ARR coming in off the ramps in fiscal 2025, we felt comfortable that we could And if we could guide to that effectively, signal that acceleration in ARR growth year to year. So that's what's driving it. It's maybe a unique business that we have so much visibility into the out years of these committed contracts that we do, But it is the nature of the relationships that we sign up for. And it was a great, great year for us on bookings. And it was nice to be able to get these deals signed and to be able to add as much fully ramped ARR this year as we did.

Speaker 6

Got it. Very helpful. And Jeff, just one for you here, a quick one. Is the solid profit outlook for next year more a reflection of the improvements you made on subscription and support gross margins, services or a combination of both?

Speaker 3

Yes, I mean look, it's the subscription and support margins are ultimately We're going to drive the long term cash generation of this business and so the improvements we've made there have been significant and that's the key driver. But services organization returning back to positive margin in Q4, I think we have a very solid plan to continue to drive That margin moving forward, I almost think this year as we look at the services business, we're pushing a lot of work to our partners. We think that that's healthy. We want to do the very So if the revenue is a little bit below our expectations, but came in above our $30,000,000 gross profit dollar that's implied into our guide, that's a good outcome for Guidewire. So but we feel And that, the organization's ability to contribute, which is great.

Speaker 6

Makes sense. Thanks again, guys. Congrats on the quarter.

Speaker 2

Thank you. Thank you.

Operator

Thank you. Our next question is from Matt VanVle with BTIG. Please proceed with your question.

Speaker 7

Yes. Good afternoon. Thanks for taking the question. I guess following up a little bit on that last point, Looking at the overall margin profile, obviously, with the fully ramped deals impacting more of FY 2025, maybe that is sort of the underlying answer that you get more cloud efficiencies as you get more and more of those deals ramped up. But Are there any specific levels or key indicators that you'd look to point us to at Really expanding the gross margin on the cloud business, realizing those efficiencies of scale and being able to truly wind down some of the Support costs on the legacy business or is it a little too early to tell given Some complexity around the mix shift as it happens from more of your customers migrating.

Speaker 2

I'm going to take a quick pass at this and I'll let Jeff add to it. Expanding margins In my view, are going to happen by selling more cloud, continuing to sell more cloud deals, Continuing to ramp those deals over time into the fully ramped values as you say and executing as we have been continuously to improve the efficiency of the cloud platform. So it's both of those things. So we're increasing top line against a fixed headcount expense that we manage very carefully and we're continuously optimizing the way that we're using these services such that the platform becomes more efficient each period, each release. So the 2 of those things combined are what drive the improved margins.

Speaker 2

I don't want people to think that we're dependent on these like I think what did you say retiring the sort of first phase or like let's say legacy versions of the cloud. We're going to work with those customers to migrate them to our Guidewire cloud platform. But as I've said, I think in previous calls and other Our targets are not dependent on those transitions. We can achieve it. We're going to do right by those customers We're going to manage through that with them, but we're going to be able to grow into these margins and execute Through these engineering projects, the efficiencies we need to hit those targets.

Speaker 2

That's the way I see it. Yes.

Speaker 3

And I'd just add, I mean, look, I think as we manage through this transition, the outset, we started And a

Speaker 7

little bit more, of course, some

Speaker 3

of those early cohorts learning what the cloud requirements were. We developed Guidewire cloud platform. We standardized our customers on that And now we are scaling that. I think you've heard us talk for some period of time that we hired a bit and building out a cloud operations function to make sure that we had Folks ready to make sure that the early cohorts were successful and now as we're scaling the platform, we can leverage that investment. So we don't Need to add incremental cloud operations headcount because we've hired ahead of that demand curve and now we're seeing the scale benefits that we have planned for.

Speaker 3

In general, this is playing out kind of the way we thought it would. Now the other thing that is embedded in here is that ARR Follows cash collection cycles and so we have this dynamic that we talked about where we're seeing a really healthy step up in FY 2025 when we look at The cohort of the deals sold in FY2023, subscription revenue normalizes that under ASC 606. And So we are seeing very healthy and durable subscription revenue growth and the midpoint of our guide implies kind of continued 30 plus 2% subscription revenue growth, which is also obviously contributing to the margin expansion story.

Speaker 7

Okay, very helpful. And now Now that John Mullins has been in the head of the sales organization here for quite a while now. Anything you point to that has been, as you look back, kind of a meaningful shift in either the process or just The FlatOut execution, and then you touched on kind of the continued expansion of the SI partnerships. Would you credit him with much of that? Or is it really just a maturation of the industry they've Been investing in the Guidewire practice for a long time and he's just sort of enhanced that.

Speaker 7

Anything you'd highlight that he's really kind of brought to the table that Has that a sea change for Guidewire?

Speaker 2

Yes. John has been An incredible addition to the leadership team here. I would also say that David Kirk, who joined us has been an incredible addition. Michael Mahoney has been an incredible addition to the leadership team. We feel great about the Customer components of our team and I would also give a lot of credit to Christina Colby, who's our Chief Customer Officer and what she's done To ensure that we've driven the follow through around making sure that these projects are successful, I feel great About this team and the innovation and the energy that this team has brought to the company, It's for sure their contribution.

Speaker 2

It's also part for sure driven by the maturation of the product And the general improved increased experience that we have as an organization and ecosystem around what it takes to be successful with these projects. I think we've talked numbers of times about The conversations that we have with these insurance buyers, sort of not exactly wanting to be on the vanguard Of these new programs and wanting to kind of wait until they see the success of other companies who are charting the course ahead of them, Well, that maybe is starting to kick in, right, as you're seeing numbers in the triple digits now of Guidewire cloud customers and tens and maybe not a 100 yet, but growing every quarter by Over a dozen successful production go lives, that experience helps us sell. That experience helps Gain the confidence we need to get these deals across finish line. So certainly, it's John and the rest of the team that we've added, but it's also a lot of things that contribute to that success. And I would just highlight one additional thing that I think Kind of John has helped us think about and it's reflected in somewhat in the prepared remarks and how I'm describing where we are as a company As we have an opportunity now to think more deeply about and focus our Tension around the insurance specific value that we can embed into our products, into our solutions, into our platform.

Speaker 2

We spent a huge amount of time and effort around building a platform that was going to work worldwide that was going to be successful, secure, reliable, And you know that was going to enable us to scale this thing efficiently, and really run the top Tier 1, Tier 2, Tier 3 insurers all over the world on our platform. And that's never done. I don't want to ahead of myself and say we're finished because we're not. But it's got to the point now where we can start to refocus our attention around what innovation we can bring to help run claims processes more efficiently, to underwrite risks to embed analytics more effectively and harness the data and analytics that the system is creating. And John has really helped Bring that expertise around the insurance industry and what can really move the needle for insurance carriers worldwide.

Speaker 2

He's really helped us see that. And so I just like I said, I'll just sum it up by saying I feel great about the team and it's like a lot of these factors contributing to the success that we saw in the quarter.

Operator

Great. Thank you. Thank you. Our next question is from Ken Wong with Oppenheimer. Please proceed with your question.

Speaker 8

Great. Thank you for taking my question. Mike, I just wanted to maybe touch on one of the trends you guys called out last quarter in terms of The ARR pushing a little bit to the right and some of that caused by some kind of DWP visibility across your customers. You guys didn't really mention it this quarter. Is it fair to assume that perhaps some of that has started to fade?

Speaker 8

Or in any case, any update on that front?

Speaker 2

Sure. So we definitely are continuing to work through and deal with A very challenging environment for the insurance industry and that still exists. We called it out in Q3. We touched on it a bit. I touched on it a tiny bit in this quarter.

Speaker 2

We did however see an exceptional Sales result in the quarter. And what I would chalk that up to is the idea that The insurance companies can see the investment in Guidewire stretching way beyond the immediate economic Conditions that they're operating through right now and even in some cases thinking about Guidewire as a mechanism for dealing with These challenges more effectively if they have an agile, reliable core system that is not holding them back, but instead enabling them to connect with customers in different ways, open up new channels to brokers, operate their claims processes more effectively. So it is still a challenge and I would say it does have an impact on The types of deals and the structures of the deals that we are negotiating and closing with these companies, but we were able to have, as I said, an exceptional outcome in the quarter. Outcome in the quarter. And so both things can be true.

Speaker 2

So that Reality, I suppose, in the insurance industry still exists and we're working with our customers very carefully to help them navigate this.

Speaker 3

The only thing I would add is last quarter we talked about being cautiously optimistic about our ability to transact through this environment. I think coming out of Q4, we're obviously Thrilled with our ability to transact, but we did see and we talked about this in the prepared remarks, we are seeing some of these ramps taking a little bit longer than what we've Seen historically to materialize into meaningful ARR that has that impact in FY 2025 more so than FY 2024. So we are continuing to see that theme that we kind of introduced Last quarter a bit, but obviously thrilled with our ability to transact in the quarter.

Speaker 6

Got it. Got it.

Speaker 8

Yes, great to see the fantastic results in this tough environment. And then Jeff, just quickly on subscription and support gross margin, 25%, again, a nice step up from where Guys are closing out in I mean, sorry, 'twenty four from where you guys are closing out fiscal 'twenty three. I guess when I look at the exit trajectory, you guys are at 58. Can you maybe walk us through some of the puts and takes in, I guess, to why it wouldn't be higher building off of what was a very strong Q4 number?

Speaker 3

Yes. Obviously, 2023 delivered a lot of margin expansion. And over the last 18 months, This has been a huge focus for us. I think we've executed quite well. There's a variety of things that we've kind of taken advantage of to Kind of have that move in 2023.

Speaker 3

As we look ahead to 2024, we have a lot of deals that were transacted. And so we'll start to See those customers using the platform. We're seeing our existing customers start to use the platform in a bit more scale. So we're we have that flowing through our model combined with the overall revenue growth. But I think as we look ahead, we're proud of the trajectory we're seeing in 2024 and how that sets us up for kind of both our near term and long term targets.

Speaker 8

Got it. Okay, fantastic guys. Thank you so much.

Speaker 4

Thank you.

Operator

Thank you. Our next question is from Michael Turrin with Wells Fargo. Please proceed with your question.

Speaker 4

Hey, thanks. This is David Unger on for Michael Turrin Tonight, just one for me. Great to see the meaningful cash in the balance sheet with the seasonally strong 4Q. Can you guys remind us the best way to think about allocation pecking order at this point

Speaker 1

in the cycle? Thank you.

Speaker 3

Yes. Look, I mean, we are we benefit from having a Our customers appreciate these are long term consequential decisions that our customers are making. So they certainly appreciate seeing a Well capitalized company that they can partner with. When we talked about this in the past, we've talked about what do we really need as a minimum cash balance to running the operations of the business and we've talked about that kind of in that kind of $400,000,000 to $500,000,000 range. We have been Doing some share repurchase activity.

Speaker 3

And then we obviously think over the long term, we are a logical acquirer in our space. So Maintain some cash for strategic cash. That's how we think about it. And we're in an environment now where We feel very good about where we are in the cloud transition. And so it's possible that you could see us be a bit more strategic and start thinking about M and A a bit more, although we will continue to be price disciplined and cautious with respect to M and A.

Speaker 1

Great. Congrats. Thank you.

Operator

Thank you. Thank you. Our next question is from Michael Funk with Bank of America. Please proceed with your question. Yes.

Operator

Thank you for the question tonight. Maybe maybe

Speaker 9

a 2 parter, if I could. You mentioned earlier that Fewer deals slipped into 1Q and that contributed to the guidance for 1Q. Maybe also in addition to answering that question, Anything unique happened there. Just talk about the pipeline, size of deals in the pipeline, How far along in the pipeline those deals are? And then how that contributes to the confidence in guidance for the year?

Speaker 2

Yes, sure. Like we said, it was a very strong close for us In Q4, just relative to the percentages that you would normally expect in terms of deals closing, which So validates in a lot of ways our vision and team and execution. So this was phenomenal. Sometimes you end up with deals slipping into the Q1 at software companies and when you have a Q4, you have fewer deals slip into Q1. So that factors slightly into the Q1 perspective.

Speaker 2

That's like better news, right? If you want to close the deals early, it's not bad news. Speaking to the pipeline, we are We have a lot of confidence in the visibility that we have for the fiscal year. The position that we're in now is only As I described in my prepared remarks, we feel good about the product. We feel good about the customer success.

Speaker 2

We feel good about the track record. Feel good about the competitive position. All those things are pointing in the right direction. We've worked real hard over the past couple of years Drive a more linear business throughout the year, so pulling as much of the deals earlier in the fiscal year as we possibly can. And that also gives us just building confidence, I'd say, in our ability to project how we're going to do.

Speaker 2

But the other thing to keep in mind is like there's a percentage of what we close that flows into this year's ARR, but a significant amount we close Like Jeff talked about, flows via ramps into fully ramped ARR over the next few years. I'm increasingly We are now talking about Guidewire as a multiyear business and this is the way we transact with our customers. This is the way we think about This is the way we think about running the company. These are decades long relationships that we're establishing And the durability of the relationships really speaks to that. And so That's what it's like it's almost like, yes, we're talking about Q1, but we're also talking about the fiscal year and then we're also talking about fiscal year 2025.

Speaker 2

And that's why we feel a lot of we feel a very good sense of confidence in the business and how it's how we're executing right now And why we think it's appropriate or we think it's reasonable for us to project that acceleration in ARR into fiscal 2025. So hopefully that gives you enough of a sense of how confident we are in the business right now.

Speaker 9

It did. Thank you very much.

Speaker 2

Appreciate it.

Operator

Thank you. There are no further questions at this time. I would like to hand the floor back over to Mike Rosenbaum for any closing comments.

Speaker 2

I just wanted to say thanks everybody for participating in the call today. It It was an exceptional Q4 for us, an exceptional fiscal year. We're really excited about the prospects of the business going forward. And I just wanted to say hopefully we'll see all of you at our Connections Event and Analyst Day that is coming up in November. We'll see you in Nashville.

Speaker 2

Looking forward to hosting everybody and seeing everybody in person if you can make it. So thanks very much.

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Earnings Conference Call
Guidewire Software Q4 2023
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