Earnings Call: Q4 2019

Sep 5, 2019

Greetings. Welcome to Guidewire's 4th Quarter and Fiscal Year 2019 Financial Results Conference Call. Please note this conference is being recorded. I will now turn the conference over to Curtis Smith, CFO. Mr. Smith, you may begin. Good afternoon and welcome to Guidewire Software's earnings Chief Financial Officer of Guidewire and with me on the call are Marcus Root, Chief Financial Officer of Guidewire and with me on the call are Marcus Ryu, Guidewire's Chairman of the Board and Mike Rosenbaum, our Chief Executive Officer. A complete disclosure of our results can be found in our press release issued today as well as in our related Form 8 ks furnished to the SEC, both of which are available on the Investor Relations section of our website at ir. Guidewire.com. As a reminder, today's call is being recorded and a replay will be available following the conclusion of the call. During the call, we will make forward looking statements pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 regarding trends, strategies and anticipated performance of the business. These forward looking statements are based on management's current views and expectations as of today and should not be relied upon as representing our views as of any subsequent date. We disclaim any obligation to update any forward looking statements or outlook. Actual results may differ materially. Please refer to the risk factors in our most recent Form 10 ksA and 10 Qs filed with the SEC. We will also refer to certain non GAAP financial measures to provide additional information to investors. A reconciliation of non GAAP to GAAP measures is provided in our press release. Reconciliations and additional data are also posted in a supplement on our IR website. During the call, we may offer incremental metrics to provide greater insight into the dynamics of our business. These details may be one time in nature and we may or may not provide updates in the future. With that, let me turn the call over to Marcus and Mike for their prepared remarks, then I will provide details on our results before providing our outlook for the Q1 fiscal year 2020. We will then take your questions. Thank you, Curtis. I'll provide some commentary on our Q4 and full year results before handing the call over to our CEO, Mike Rosenbaum, to share his observations from his 1st month leading the company and to frame our ambitions for fiscal 2020 and beyond. When I introduced Mike a month ago, I underscored that the transition was motivated by opportunity, not by challenge. Our performance in the Q4 in 2019 substantiated our momentum in pursuing that opportunity while also reinforcing that we are still in the early days of our journey. Our full year financial results were ahead of our total revenue and profitability guidance ranges with total revenue of $719,500,000 and non GAAP earnings of $1.45 per diluted share. Underlying these results was our strongest bookings quarter ever exceeding our internal targets. Fully 81% of our new software sales came in subscriptions for our offerings delivered via Guidewire cloud, bringing the total amount to 65% for the year, well above the 40% to 60% we had anticipated at the beginning of the year. Since subscription revenue was recognized ratably, instead of upfront like our term licenses, our reported revenue would have been meaningfully higher if the mix between subscription and term licenses had been within our expected range. Nonetheless, this was a welcome result as it substantiates the demand for Guidewire cloud and for transitioning P and C core systems to the cloud in general. The primary driver of subscription bookings in the Q4 was of course InsuranceSuite via Guidewire cloud. These are the most complex and strategically significant transactions in the company's history. So it was a remarkable result to close 6 new such deals in the quarter. It is further encouraging that this number includes 4 new customers as well as 2 customers with existing InsuranceSuite implementations and that it includes 1 new Tier 1 customer, USAA Group, and 1 Tier 1 insurer migration, American Family. For the year, we closed 9 InsuranceSuite via Guidewire cloud deals ahead of our expectations, representing customers of all sizes, including customers from North America and Europe and with a balanced mix of new and existing customers. We also introduced a new financial metric, annual recurring revenue at our Analyst Day at the beginning of fiscal 2019 to provide more insight to our business dynamics through this cloud transition. As we foreshadowed on our last call, the growth in this metric was below our initial expectations for fiscal 2019, with ARR growing by 13% on a constant currency basis. However, as we also pointed out, our market experience this year has taught us that we can maximize customer alignment and lifetime value by negotiating to ramp subscription fees over a multi year period to scale with usage. This entails that subscription fees typically reach their fully ramped annual amount after 3 to 5 years and the reported ARR does not reflect the ultimate value of these transactions until then. We refer to the final annualized value of these arrangements as fully ramped ARR. To quantify this effect for 2019, fully ramped ARR grew 24% year over year. For example, the 9 cloud deals we signed added approximately $20,000,000 in current period ARR and $65,000,000 in fully ramped ARR. Taking a closer look at our new business activity, the 4th quarter is typically our busiest period of the year and this Q4 was no different with 8 new customers, 5 of whom selected the entirety of InsuranceSuite and 4 of whom chose to deploy via Guidewire cloud as mentioned. We also signed additional business with 23 existing customers who selected 53 additional Guidewire products, including 2 customers who chose to migrate to Guidewire Cloud as mentioned. Notwithstanding this new customer activity, our customer count ended the year at 380 customers, which is the same as last year. As discussed throughout the year, we experienced customer attrition primarily related to proof of concept implementations to model risk in the nascent cyber insurance market. However, we ended 2019 with $502,000,000,000 in DWP under management, an increase of 11% from a year ago, reflecting our ability to attract new customers and expand within existing customers. New customers in the quarter included USAA Group, a $22,000,000,000 DWP Tier 1 insurer widely admired for outstanding service and uniquely high customer loyalty. USAA selected ClaimCenter via Guidewire Cloud, predictive analytics, data and digital for their organization that serves over 12,000,000 members, primarily those who serve or have served in the U. S. Military and their families. EMC Insurance, a Tier 2 insurer providing commercial lines selected the entirety of InsuranceSuite, predictive analytics, data and digital all via Guidewire cloud. Also selecting all of insurance via Guidewire Cloud in the Q4 was Gore Mutual Insurance in Canada who also chose data and digital. We have talked about recent attention and investments that new InsurTech startups have seen and we mentioned that some of these could be acquisition opportunities while others could represent new customer opportunities. We signed 2 such InsurTechs as new customers in the Q4. The first is Silicon Valley InsurTech, a short startup selected InsuranceSuite via Guidewire Cloud for their auto insurance line of business. Another InsurTech, MangoTeksurance based in Russia and funded by Alpha Group also selected InsuranceSuite, this time on premises to offer a completely digital personal lines product. Rounding out our new customers in the quarter were Church Mutual Insurance, the leading insurer of places of worship in the United States, serving over 90,000 religious institutions who selected ClaimCenter, Data and Digital and Heartland Farm Mutual, a Canadian insurer who selected InsuranceSuite Data and Digital. Our growth is driven both by new customers such as these, but also from existing customers who expand their Guidewire deployments by selecting additional Guidewire products and across different businesses. As I mentioned in the Q4, we saw 23 existing customers select additional Guidewire products. Among these, American Family, a Tier 1 insurer and 10 year Guidewire customer chose to migrate their InsuranceSuite implementation to Guidewire Cloud, as has The Co operators, a Canadian insurer who has been a customer since 2007. They joined longstanding Guidewire customers such as Amica Mutual and TV with very broad adoption of our products who have embraced the full migration of their implementations to Guidewire Cloud. Our data and digital momentum continued in the quarter as well with 13 customers selecting Guidewire Digital and 12 selecting Guidewire Data, including 4 who selected science products. Our extensive network of SI partners continues to play an expanding role in enabling our customers, consistent with our strategy to drive an increasing proportion of total revenue from higher margin recurring revenue streams. We had 19 core data or digital go lives in the 4th quarter. Our substantial progress this year notwithstanding, we are still in the very early days of our industry platform journey. Not only do we have the vast majority of our customer base and the $2,000,000,000,000 P and C industry itself to transition to the new technology and division of labor that we are offering with Guidewire Cloud. We have profound efforts underway to evolve our architecture and operations in the service of this demand. It is therefore fantastic to have the ideal leader to drive this evolution in Mike, who has done an exemplary job over the last month engaging our customers and team with his vision. I am energized to support him in every way possible in my role as an active Chairman, starting with the recruitment of 3 new independent directors who joined our Board this week. Margie Dillon, former EVP and Chief Customer Officer for Personal Lines at Liberty Mutual Insurance Kathy Lago, a veteran independent director with several public Silicon Valley companies and a financial expert and Michael Keller, former EVP and CIO of Nationwide Insurance and CTO of Bank 1. I am confident the additional industry expertise and diversity of perspectives will drive an engaged and effective Board for the long term. Thank you for the privilege of representing Guidewire on these calls since we have been a public company. Going forward, this duty of course belongs to Mike, to whom I now turn the call. Thanks, Marcus, and thanks to those of you joining us on the call today. Guidewire's 4th quarter capped another strong and transformative year for the company, With 9 InsuranceSuite cloud deals in the year and now a total of 13 InsuranceSuite cloud customers as of the end of the year, we are thrilled with the demand we see in the market for both new and existing customers. With a customer base of 380 insurers in a market of nearly 4 times that amount, the vast majority of which have yet to upgrade from legacy systems, we believe that we are still the improved total cost of ownership and business agility it provides insurance carriers will accelerate this transformation. When I spoke with you a month ago, I indicated that I believe Guidewire was well positioned to extend our long term leadership in this market with an industry standard platform and that we're further benefiting from the transition to a cloud delivery model. I also mentioned the incredibly strong culture here and the deep sense of customer commitment embedded in that culture. My initial impressions, I have to say, have not just been validated, but to a large extent reinforced and amplified. The dedication to this industry and to the modernization of its core systems is evident throughout the organization and our partner ecosystem. Our singular focus on this industry and the trust customers like USAA, American Family, EMC and Gore are placing in us to run their mission critical core systems as a service is, I believe, truly unique. I also want to give my initial impressions of some of the exciting innovation and future opportunity we are seeing in our data and our analytics and data services team. This team in partnership with multiple customers has now expanded beyond the core cyber use case and we are now using our data listing platform for the modeling of potentially any risk. Additionally, for the modeling of potentially any risk. Additionally, our Dev Connect developer environment continues to make progress in the market with 10 PartnerConnect solution partners signed to develop Ready for Guidewire add ons. 4 of them, LiveGenic, Ontellus, TruePic and WeGoLook have published Ready for Guidewire add ons to the Guidewire marketplace. The standardization of these integration patterns with DevConnect APIs and our marketplace point to the additional value we are able to provide our Insurance Suite customer and ecosystem partners. The data and analytics and DevConnect use cases provide tangible examples of the benefits that an industry platform like Guidewire has the potential to deliver to the P and C insurance industry. With respect to our financials, I recognize that we are completing a transition to a new revenue accounting standard while in the midst of a business model shift to subscription revenue. This has increased the complexity of our reported results and created some investor opacity. I'm excited to begin consistently reporting on annual recurring revenue, which I believe is the best indicator of the overall health of our business. I believe that we have the potential to achieve ARR growth rates of 20% or higher. Monitoring our progress on this metric will be instructive for investors and something I'll focus on with my team and the rest of Guidewire. As we look to fiscal 2020, we expect to further strengthen our position in this market through continued investments in our core in our cloud offerings and cloud delivery as well as our self managed offerings. We also see significant opportunities to offer hybrid solutions that will provide value to our self managed customers as well as helping them bridge to the cloud. We're excited to share details on all of this at our upcoming Connections user conference in November. We see before us an extremely positive and unprecedented opportunity to continue to invest and grow and increase our share in this market. I'm honored to have the opportunity to lead this community of professionals serving the $2,000,000,000,000 global P and C insurance industry. I'll now turn the call over to Curtis. Thank you, Mike. Total revenue for the year was $719,500,000 an increase of 10% from a year ago and above the high end of our guidance range. Fiscal 2019 license and subscription revenue finished at 385 point $3,000,000 representing a 25% year over year increase. As we have previously noted, year over year license and subscription revenue comparisons are impacted by the adoption of ASC 606 which affects the timing of revenue recognition of our term license contracts. Additionally, fiscal 2019 growth benefited from the reclassification of $12,000,000 in hosting revenue from services to license and subscription and from the 10 year term license deal signed in Q1 which was previously discussed. Normalizing for the impact of these items, the growth rate would have been 18%. Subscription revenue for the year was $65,000,000 representing 95% year over year growth. As Marcus discussed, subscriptions as a percent of total new sales were above our expectations at 65% for the full year reflecting the increasing demand for our cloud based services. Perpetual revenue for the full year was $2,100,000 compared with $11,800,000 in 2018 and consistent with our intention of reducing perpetual license sales. Maintenance revenue for the year was 85 $400,000 representing a 10% year over year increase and was above our guidance range. Services revenue for the year was $248,800,000 in the upper end of our guidance range compared with $266,500,000 a year ago. This year over year decline was largely driven by investments to ensure the success of cloud customers, increased SI participation and the aforementioned $12,000,000 hosting revenue reclass. Turning to profitability, we will discuss these metrics on a non GAAP basis And we have provided the comparable GAAP metrics and a reconciliation of GAAP to non GAAP measures in our earnings press release issued with the primary differences being stock based compensation expense, amortization of intangibles, the amortization of debt discount and issuance costs from our convertible note and the related tax effects of these adjustments. Non GAAP gross profit was $442,600,000 for the year. Gross margin for the year was 62% compared to 61% a year ago. Overall gross margin benefited from a revenue mix shift away from lower margin services revenue which was offset by declines in license and subscription and services gross margins. License and subscription gross margin for the year was 89%, a decrease from 95% a year ago, a trend we expect to continue as we add new cloud customers and invest in cloud operations to support these customers. Services margin for the year declined from 16% in fiscal 2018 to 11% in fiscal 2019, again mainly the result of investments in ensuring the success of our cloud customers. Total operating expenses were $320,500,000 for the fiscal year versus $298,800,000 a year ago. The growth in spend was driven by headcount expense, increases in IT spend and costs related to our new headquarters. Additionally, we had the full year impact of Cyence operating expenses in fiscal 2019. For the year this resulted in operating income of $122,100,000 or 17 percent of revenue and net income of 119 $900,000 or $1.45 per diluted share, all of which were above the high end of our guidance ranges. Turning to Q4, total revenue for the Q4 was $207,900,000 above the high end of our guidance range. License and subscription revenue was $127,700,000 versus $143,700,000 a year ago. This decline, which was anticipated, was primarily the result of revenue which would have been previously recognized in Q4 that was recognized in Q1 under ASC 606, dollars 3,200,000 in perpetual revenue recognized in Q4 of 2018 versus $500,000 in Q4 of 2019. In addition, the increase of subscriptions as a percent of new sales with $21,800,000 an increase of 6% from a year ago and was also above the high end of our guidance range. Services revenue for the Q4 was 58,300,000 dollars This anticipated decrease from a year ago was due to factors previously discussed. Q4 comparisons in particular were impacted by a benefit we received in Q4 of 2018 related to implementation work for a large German insurer where we were required to delay revenue recognition for work completed throughout fiscal 2018 until Q4 of fiscal 2018. Operating income was $51,100,000 and net income was $46,300,000 or $0.56 per diluted share, all of which exceeded the high end of our guidance. Turning to our balance sheet. We ended the quarter with $1,300,000,000 in cash, cash equivalents and investments, slightly higher than the $1,200,000,000 we had at the end of the 3rd quarter. Operating cash flow for the year was 116 $100,000 compared to $140,500,000 a year ago. Free cash flow for the year was 90,900,000 dollars excluding $24,000,000 in build out expenses associated with the new headquarters compared to $128,400,000 a year ago. This was below our expectations due to a customer payment of $12,000,000 scheduled for Q4 but collected after the close of the quarter. Due to the timing of payments for our new building for our new headquarters build out, we only paid $24,000,000 of the estimated $35,000,000 in new construction costs 2019. We now expect to pay the remaining $11,000,000 of one time costs in Q1 of fiscal 2020. As Marcus mentioned earlier, ARR grew 13% on a constant currency basis and 12% on an absolute basis. As a reminder, ARR represents the annualized value of recurring term licenses, subscriptions and maintenance agreements at the end of the quarter. There were several factors discussed on our Q3 call that have impacted this metric. Most notably is the impact of ramped deals on ARR. New customer contracts typically include multi year pricing schedules that outline escalating annual payments during and beyond the committed contractual term. Future annual payment expectations at the fully value outlined in these agreements represents our definition of fully ramped ARR. Under this definition, fully ramped ARR in fiscal 2019 grew 24% on a constant currency basis compared to fully ramped ARR in fiscal 2018. We think investors will find this metric instructive as we transition customers to the cloud. We believe it represents a tangible measure of the strong new sales activity we experienced this year. Now turning to our outlook, I first want to address our full expectations for the year. I will then speak to Q1. As a reminder, we want to reiterate 3 factors we discussed in Q3 that will impact our 2020 financial results. 1, the mix of term and subscription new sales 2, significant cloud operations and supporting organizational infrastructure investments and 3, stronger SI enablement. As Mike mentioned, we believe that ARR is the most effective way to evaluate our performance over the long term. With respect to fiscal 2020, we expect ARR to grow between 14% 16% accelerating from 13% constant currency growth this year. In fiscal year 2020, we expect fully ramped ARR to continue to grow faster than ARR. For the full year fiscal 2020, we anticipate total revenue to be in the range of 7 $59,000,000 to $771,000,000 an increase of 5% to 7% from fiscal 2019. We expect annual license and subscription revenue to be in the range of $443,000,000 to $455,000,000 an increase of 15% to 18% from fiscal 2019 or 18% to 21% adjusted for the 10 year term license deal signed in Q1 last year. This is lower than our preliminary fiscal 2020 view due to increased demand for cloud which drives subscription revenue and is ratably recognized instead of upfront and refinement of our estimates related to allocations between term license revenue and subscription revenue for our cloud migration agreements. As the guidance shows, our forecast is highly sensitive to the percent of new sales sold as subscription agreements. We currently expect to see 55% 75% of new sales as subscriptions with the midpoint roughly flat to 2019. Based on our forecast model, achieving the high end of this range would result in approximately $30,000,000 less in fiscal 2020 license and subscription revenue than achievement at the low end of this range. The timing and linearity of deals would affect the exact impact. For example, if cloud bookings are more back end weighted than our current assumptions then the impact of 61% to 77%. We expect perpetual license revenue to be less than $5,000,000 for the year. Our fiscal 2020 outlook for maintenance revenue is $85,000,000 to $87,000,000 As we have said before, ongoing maintenance activities are included in the subscription fees, thereby impacting maintenance revenue. Our outlook for services revenue is $224,000,000 to $236,000,000 representing an 8% decline at the midpoint. This moderated outlook reflects our long term goal to enable our strong SI partner ecosystem to deliver cloud implementation services. Of the 5 InsuranceSuite cloud deals signed with new customers in fiscal 2019, 3 are expected to be led by our SI partners and we expect that trend to continue in fiscal 2020. We expect total gross margin to be 58% to 59% in fiscal 2020 reflecting an anticipated decline. We expect license and subscription gross margin to be between 75% 80% this fiscal year approximately a 12 percentage point decline at the midpoint on continued investments in cloud operations and supporting organizational infrastructure and the accelerating shift to ratable subscription revenue. We expect services gross margin to increase to between 15% 16% this fiscal year. From an operating expense perspective, we continue to execute on our investments that were initiated in fiscal 2019. In addition to cloud operations, R and D continues to be a key investment area. We expect operating income from fiscal 2020 to be $96,000,000 to 108,000,000 dollars representing an operating margin of 13% at the midpoint. Both growth and operating margin are sensitized to the mix of subscription as a percent of new sales and decrease as subscription sales increases. We expect free cash flow to be between $90,000,000 $100,000,000 excluding the one time impacts associated with the build out of our new headquarters, which expected to be $11,000,000 Fiscal 2020 free cash flow expectations are positively impacted by ARR growth and the previously mentioned late customer payment. This is offset by ongoing investment in cloud and lower year over year services billings. In addition, our outlook for non GAAP net income is $92,400,000 to $102,300,000 or $1.10 to $1.22 per diluted share based on approximately 83,800,000 diluted shares and an assumed non GAAP tax rate of 16.8 percent for fiscal 2020. Turning to Q1, we anticipate total revenue to be in the range of $149,000,000 to $153,000,000 This represents a decrease from a year ago due to the $10,000,000 license agreement signed in Q1 last year and declining services revenue. Within revenue, we expect license and subscription revenue to be in the range of $78,000,000 to $80,000,000 representing a 17% decline at the midpoint, primarily due to the same 10 year deal last year. We expect Q1 maintenance revenue of $19,000,000 to $20,000,000 and Q1 services revenue of 51 to $54,000,000 For the Q1, we anticipate non GAAP operating income of between net operating loss of 3,000,000 to an operating profit of 1,000,000 and non GAAP net income between 0.6000000 to 4000000 dollars or $0.01 per share to $0.05 per share based on approximately 83,100,000 diluted shares. In summary, we were very pleased with the progress we made this year and our execution during this ASC 60 6 transition. And I'd like to thank the team for all the related extra effort and work. We look forward to providing more detail at our Analyst Day scheduled for September 26 at our new headquarters in San Mateo, California. Thank you. Operator, can you now open the call for questions? Yes, thank you. You. Our first question is from Ken Wong with Guggenheim Securities. Please proceed. Hey, great. Thanks a lot for taking the question. This first question maybe for Marcus or Mike. I'm just wondering what do you guys think drove the heightened cloud activity in the quarter? And as far as Tier 1s, do you think the TIA the USAA signing will kind of you'll get some halo effect there and drive more customers from the larger customers to cloud? Yes, Ken, this is Marcus here. The demand for cloud isn't really a quarter to quarter phenomenon. It's a much longer horizon kind of phenomenon than that. And as we talked about in previous calls, we've been seeing heightened demand for quite some time, driven I think by secular factors, by our maturation in the capabilities, the and as well as our kind of assertiveness that the cloud is going to be the primary locus of technology innovation for Guidewire and the industry overall. We worked hard to bring a lot of these conversations to fruition and to get them done within the year to live up to the commitments that we had made. And it was fantastic to be able to close 6 within the quarter. That was very, very demanding for the team, but I think the sense was that we were not so much constrained by not at all really constrained by demand, but just by the as we've talked about before by the sheer complexity of these really strategic relationships. So the kind of trend we're looking at is much more than a 1 quarter phenomenon, and we're really gearing up many facets of the company for this to be a longer phenomenon. Let me just add to that. I think the demand that we saw is great validation for the strategy of the company and the counts and especially as you mentioned the wins at these Tier 1 insurers really point to the validation of that strategy and the commitment that we've made to be able to successfully deliver these systems via Guidewire cloud. So we're certainly excited about the momentum that we see. Got it. A little additional commentary, Ken, as you highlighted, we were thrilled to secure a mandate from them. They're hugely respected insurer in our market, as well as one of the largest players. And it was striking that, they wanted to start a relationship with us in an entirely cloud based fashion. That was one of their, kind of starting assumptions for this core system initiative on their part. And it was fantastic to be able to convert that and get it closed within the year. I do think it will be a much noted transaction and of course we have to deliver against it for it to be the positive that we expect, But it was definitely one of the highlights for the year. Got it. And then Curtis, you touched on the ARR growth that you saw the fully ramped ARR growth. Any kind of rough quantification of what those ARR numbers were last year and this year? Or perhaps maybe just a sense of what total cloud ARR for your 13 customers look like? Yes, we'll in a few days here, Ken, we'll be publishing that ARR number in our 10 ks. So you'll be able to see that then when it comes out. We just wanted to provide the growth rate today both on a constant currency and on an absolute basis to understand that and some of the things we're impacting that we talked about in Q3. And then we'll have an opportunity when we get to Our next question is from Sterling Auty with JPMorgan. Please proceed. Hey, thanks. Hi, guys. It's Jackson Ader on for Sterling tonight. So the net customer count ending the year flat at 380. What about gross customer additions? How did that track maybe versus both your expectations and in previous years? So let me go ahead. I'll take it. I would say, first of all, I think it's important to understand that we did add a significant number of core suite customers during the year. And I think when you look at the actual count of customers year over year, what we saw was a significant number of proof of concept deals that were really just validating a use case for cyber. But what's exciting is that the ones that where we're able to really establish a strong partnership with, those become much more meaningful partnerships. And I think that those customer counts are more in line with what you would typically imagine the definition of a core suite customer is for Guidewire. But to answer your specific question, 2018 gross customer adds during the year, which I think is a very positive sign. Okay, great. And then just a clarifying question on the mix that we should be expecting of new sales being cloud going forward? I think there was mention of the outlook, but I didn't quite catch it. Yes. So last year, we provided a range of 40% to 60% new subscription sales as a percent of total sales. And we ended up for the year above the top end of that range at 65%. This year, we provided a range of 55 percent to 75 percent of new subscription sales as a percent of total new sales. And initially as we indicated targeting the midpoint of that range for now, we give that range again because as we experienced this year, if we see much stronger subscription sales, that's a good thing, but it does have a negative impact on the recognized revenues for the year. Right. Okay. Thank you very much. Our next question is from Michael Turrin with Deutsche Bank. Please proceed. Hey there. Good afternoon. Thanks for taking the questions. Can we first talk more about the ramp deal structures? Are the fully ramped years already under contract? Or are those projections based on what you'd expect to see as usage grows? And it sounds like somewhere between year 3 year 5 is when you'd expect those deals to hit fully ramp, is that right? That's right. It's somewhere between year 3 year 5. And for these subscription customers, we always provide a 5 year pricing schedule. But when we're doing our fully ramped ARR calculation, it may not be part of the contracted term. So some of these contracts may be 3 years, but we will still be looking at the AR amount in years 4 or 5 when it gets fully ramped when we calculate that fully ramped ARR. So most of our contracts are moving in the direction of 5 years. The ramps typically the ramps for these companies typically take place in years 3 to 5. The fully ramped number typically happens in years 3 to And just to be clear, I think you're also asking, it leaves open the opportunity that we'll sell additional products into those customers during that period of time. Right. Okay. And then thinking about margin trajectory from here, if guidance holds this will be the 3rd consecutive year of margin declines, understand there's a lot of sort of moving pieces in terms of this model and the move to 606 on top of everything else. But is there a point at all where you're expecting margins can trough as we work through these transition impacts? Or does that 3 to 5 year ramp in ARR mean this transition could continue to play out over that timeframe as well? Yes, thanks for the question. You would have noted before and today that while increased subscription demand is happening and that's a positive thing, it does have a shorter term impact on our profitability. And that said, we remain confident about our long term profitability levels. The other thing I would add to that is, this is one of the reasons we're emphasizing ARR, fully ramped ARR and free cash flow as indicators of our progress. And when we get to Analyst Day in a couple of weeks, we'll be able to provide more discussion around that point. Okay, got it. Thanks. Good luck to both Marcus and Mike as you transition. Thank you. Thank you. Our next question is from Chris Merwin with Goldman Sachs. Please proceed. Okay. Thanks for taking my question. I think you mentioned that if the cloud transition accelerates revenue could be $30,000,000 lower and it seems like in the last few quarters, the execution has been great and you've been trending ahead of expectations on cloud. So when we look at this updated guidance for fiscal 2020 on license and subscription revenue, how would you qualify your visibility into that relative to prior quarters when you were earlier in the transition? Thanks. Thanks, Chris. I'd say Marcus here. I'd say that we've a really updated sense of the shape of the demand that's coming to us now. We're still in the early innings of the transition both for us and for the market, but there's substantially more clarity and I think an improvement in our ability to guess what form the demand will come as opposed to guessing at it. Also, I'll point out that we were only really enthusiastically in the market with respect to the cloud in a broad based market way halfway through the year at our Connections user conference last year. And so that kind of threw that created a wrinkle relative to our starting year assumptions because there was a great deal of market learning in the latter half that's now been internalized and is reflected in our outlook. As you see, there is a pretty meaningful step up in the proportion of our bookings that we expect to come in subscription form and that's just going to continue to increase into future years. I think we've bracketed it pretty it's a fairly broad bracket, but right now from where we sit, we're pretty confident it's going to fall within those. It's always possible that things could accelerate even further, but I think we've had enough conversations with our customer base now to know that it's not yet a complete binary switch from self managed to cloud and that the mix is likely to fit within that range that we put out. And one thing I'd just add to that is the range we gave the $55,000,000 to $75,000,000 in the $30,000,000 number, that is if we came in at the very top of that range versus the very bottom of that range, the revenue difference would be $30,000,000 or more specifically a 1% shift in that subscriptions as a percent of new sales would equal about $1,500,000 shift in revenue. Okay, that's great. Thanks. And then just a follow-up on margins. I imagine you might speak to this more at Analyst Day, but you're thinking about that gross margin for the cloud business at scale as you sort of ramp up hiring there. And I'm sure there's still a lot of visibility to be gained, but how are you thinking about that? And I guess when we think about the margin, the updated margin guidance, was that more a reduction in gross margin or was that more a reduction in EBITDA higher OpEx? Just curious what was the main thing driving that? Thanks. Yes. So we're definitely seeing and we noted in the quarter, right, our gross margin overall is 62 versus 61 last year. That was largely because the cloud operations hiring that we expected in Q4 got pushed into this year. So as we've noted, a big part of our hiring will take place in our subscription COGS related to our cloud operations as we ramp up now for the demand we're seeing there. So that will put overall pressure directly on our subscription margin, but then that will impact our overall gross margin. So we see that happening in the near term here and we expect that until we start to see some of these other efficiencies from our operations going forward. Okay. Thank you. Our next question is from Todd Roderick with Stifel. Please proceed. Yes. Hi. Matt Van Vliet on for Tom tonight. Thanks for taking my questions. I guess as you look at the overall demand pipeline that you're seeing out there, how would you or how much you're doing the demand across your major regions? There's been a lot of talk obviously around Europe weakening from a macro standpoint. Curious if you're seeing that much in overall demand or what those conversations are looking like between the U. S, Europe and APAC in particular? I can offer some commentary, Matt. I'd say, so far we've been this has been true for most of our history. We've been kind of buffered from the macro and political questions that maybe other companies are a little more vulnerable to that is just generally not foremost on insurers' minds. But Europe is still a more challenging frontier for us in general, not so much for macro reasons, but just because of the difference in requirements, regulatory regime, etcetera. And we continue to just pour additional effort into that into the continent because it's such a large portion of our TAM and because we have we continue to get very encouraging signs for the demand. We did not close quite as much in Europe as we might have hoped at the start of the year, but I think that our outlook overall on the TAM and the demand for what we can do there is really unchanged. Also, there has been a natural there was a very concentrated company focus on making our internal and externally communicated targets for new cloud relationships and it was natural to do that focused in North America. Of course, we did have that one very substantial European cloud deal that we talked about in Q3, MACIF. But that was another factor I think in the shape of the bookings that we ultimately closed within the year. But every outlook that we have over a multiyear horizon relies on probably faster growth in Europe than in North America, at least with respect to our progress as a company. And then a quick follow-up. On the ramp deals, is there a potential that those ramp more quickly? Are they tied to specific milestones? Or are they truly calendar based ramp up deals? You can generally think of them as date certain relationships that may have an out, and that out is something that would only be exercised if the program were to severely disappoint expectations. I think even our ability to negotiate those out will be will only be enhanced with greater market progress and customer referenceability in the cloud. But they are almost always just kind of date certain markers and a schedule that rolls out over time. Great. Thanks, Steve. Our next question is from Tyler Rygiel with Citi. Please proceed. Hey, thank you. Can we talk a little bit about the ramp deals? I'm just curious if you have had to kind of if you're finding yourself having to either extend the longevity of the ramps or make kind of incremental more ramp deals than you were previously? And then just a follow-up as we just to kind of understand the mechanics behind the new ramped ARR number. I guess what gives you the confidence that those customers will ultimately pay that given that it appears that year 4 year 5 are beyond what is contractually committed? Thank you. Sure. And then just to explain on the ramps, they're more pronounced for our migration customers and there are logical reasons for that. Our existing customers who are migrating to the cloud, they're already paying a full fee for their term license in year 1 of their cloud transition. And so those are where we saw those ramps more pronounced. The timing of the ramp is pretty consistent though on being 3 to 5 years, but a little bit of a steeper ramp for those migration customers for the reasons we just talked about. The second part of your question around the fully ramped ARR, for all of our end customers, we include a 5 year pricing schedule in there. More and more of our contracts now are moving to that 5 year committed term, but some of them have less than that. And so these customers are very committed to that cloud journey. We are with them too and our expectation in moving into the arrangements with them is 2 or 3 years in. They will continue to focus on that ramp and on the implementation and that's why we put those pricing schedules in place. Going forward, we do expect too that those pricing schedules will be part of the actual 5 year contractual term. One thing I'd add just because this was one of the things that I dug into a little bit very specifically in the 1st 30 days. You want to I think you want to understand or think about consider the nature of the implementation of the partnership and the commitment that Guidewire and the customer are making to these systems. The track record of the company as it relates to successfully deploying these core systems and those systems then lasting very, very significant periods of time, I think lends itself to the surety associated with that financial metric. And so I think that's an important thing to consider when you look at this metric. Great. Thank you. And maybe I might have missed this, but did you talk about the expectations on the number of InsuranceSuite cloud deals for fiscal year 2020. Do you think that's still a good metric to track or would you encourage us to look at kind of this ramped ARR number? Thank you. Yes, thanks for the question. And we did the last couple of years talk about the number of Icloud deals as a transition metric. And so we've reached that transition when we talked about the 48 Icloud customers last year coming in at 9 at the top end of that range. And so we think that was helpful in the 1st couple of years, but it was a transition metric. And now we think what will be more helpful is the focus on our ARR and our fully ramped ARR metric going forward. So we will not be providing that number of IS Cloud deals forecast going forward. We will however at the end of every quarter report the number of IS Cloud deals that we signed up in the quarter. Thank you. Our next question is from Brad Sills with Bank of America. Please proceed with your question. Hi, guys. Thanks for taking my question. So I wanted to ask about the implementation cycles for InsuranceSuite Cloud. I know it's a limited sample set, but how are you feeling about kind of the learnings you've had there? What are some of those learnings and your confidence level and maybe seeing more compressed cycles and then also kind of channel readiness to take on more of these implementations? Yes. Brad, I'll speak to kind of the experience to date and then maybe Mike can comment on his outlook and intentions for the future there. I think the as we've always said, the cloud is not some silver bullet that makes a complex transformation program suddenly simple. There's still a vast amount of business change and integration work and just core operational transformation that have to have to go always goes along with one of our programs and all of that is the same in a self managed or a cloud mode. That said, because we take on full post production responsibility in the cloud for the project, we, if you will, we kind of exert a greater moral authority to insist that the program conform to certain standards. And I think we have greater leverage to drive a highly standardized program. And we've been able to do that with to an increasing degree with each of our cloud relationships. And we're certainly starting the newer relationships very much in that shared spirit with the customer that they recognize they're better off, the more conformant, the more standardized they can be. Now in terms of really driving a function improvement in total cost of ownership and the speed of implementation, that requires certain product enhancements and architectural platform improvements that are at the top of our priority list. And we'll be announcing a couple, I think, think really consequential changes in that direction at connections that we're excited about and that will really be an important part of driving the long term demand and economics that we want out of the cloud transition. Yes, I say if you think about the overall story of the situation right now, you've hit on what I would describe as my number one priority is helping to ensure that we're continuing to standardize and align and drive the type of collaboration that we need between all the teams necessary to ensure that these are implemented successfully and efficiently each and every time. We're seeing steady progress. And as Marcus said, we're excited to talk about some pretty innovative and new additions to the approach that will continue that track towards more efficient delivery and better execution in terms of the overall system implementation. The centralization of that work that's represented through our participation in running these systems, whole industry. And aligning the teams here in our product development organization around that exercise is going to be very, very positive for all of our customers. So, I'm excited for that to be top of my list in terms of coordinating and executing here at the company. Great. Thanks guys. And then one more if I may just on digital and data. It sounds like that business is really going well. It sounds close to 100% attached, it sounds like, on these new deals. Are there any use cases you'd point out that are you seeing some commonalities there? And how has that changed over, say, a year ago or even a couple of years ago? Thank you. Yes, Brett, I would say that every insurer right now has engaged at some phase of what they would call in their own language, a digital transformation, reinventing themselves for a new digital era of customer service. Even the most kind of business commercially focused, commercial lines focused insurer still thinks about kind of consumerization of their of the experience that they have to provide to all of their counterparties. So digital is just the dominant theme across the industry as it is in other industries, I'm sure. And so more and more digital is a native part of the program and data is close behind that. And one of the other catalysts for the cloud I think, is a promise that we still have to fulfill, but the promise that by having a much more standard and conforming implementation running in the cloud that our customers access to their operational data will be dramatically enhanced, as well as all kinds of options to syndicate and experiment with the data in ways that the industry is really hungering for. So I think data and digital are becoming less and less add ons a core system project as inherent to the rationale for the programs to begin with. And I think we're very well we've been very well positioned for that and more and more they will just become kind of native parts of the whole offering. Great. Thanks, Marcus. Our next question is from Pat Walravens with JMP Securities. Please proceed. Hi, this is Joey on for Pat. Thank you for taking our question. We are wondering how competitive the cloud wins in the quarter were and if maybe you could provide an update on the competitive landscape? Thank you. Sure, Joey. A number of the cloud wins were actually directly competitive. No new names that you wouldn't be familiar from following us. But a number of them were competitive, some including even existing customers that said, well, now that we're contemplating the cloud, let's revisit and let's check out our options across the market. We had a couple of those as well as net new customers that of course compared us to competitive choices. The second part of your question, I'd say there's really no change in the competitive landscape. I mean, we say this pretty much period after period. There aren't really new entrants into our market. Every deal is very consequential for us and for any of our competitors. So, of course, they're all very fiercely contested. But I'd say the dynamic is pretty much exactly the same as it has been for quite some time now. Thank you. Our next question is from Bhavan Suri with William Blair. Please proceed. Hey, guys. This is Dylan Becker on for Bhavan. Thanks for taking our questions. Just one quick one here. I guess it sounds like the mix of new deals versus conversions is about fifty-fifty for this past year. As we look forward, how should we expect to see this mix kind of continue to develop? And yes, just kind of interested in how you guys are kind of viewing that opportunity over time? Well, I think first of all, I think it's an incredibly positive sign that we're adding new cloud customers just directly, implementation expense that are delivered via the cloud should accelerate demand for our core systems migrations in the 1st place. So, I'm excited about that mix and excited to see that the opportunity for us is most definitely not just a conversion of the self managed or on prem install base. So, we'll see how that ratio develops over time, but I think it's a very, very positive sign what we were able to achieve for the last fiscal year. And then a quick follow-up, if I may. Just, around I know Q4 of this past year was very cloud heavy. Looking into 2020, should we expect to see any more any kind of linearity around cloud deals or expected to be Q4 heavy again? Kind of any insight there would be helpful. Thanks. My sense is that you shouldn't expect a change in the business dynamic associated with the way the company operates. And I think that is based on, I would say, the complexity of the decision making process for our customers. These are long sales cycles. These are very deeply considered and studied. And I don't think that we're yet at the point where that business dynamic is going to change. Great. Thanks for taking my questions. And our final question is from Rishi Jaluria with D. A. Davidson. Please proceed. Hi, guys. This is actually Hannah on for Rishi. Thanks for taking my questions today. Just first one, as you look into 2020, what do you think of as the biggest headwinds or risks to hitting your fully ramped ARR goal? Well, I would say for our migration customers, it's the steepness of the ramp. And so those are one of the things that we're focused on here going forward. There's a lot of learnings that came out of 2019. And then we have a much bigger set of customers that we can talk to when we're contracting with our migration customers going forward. Okay, thanks. And then Mike, just broadly speaking, could you share anything that surprised you in the quarter either for the positive? Sure. Any surprises? To be honest with you, I've had an experience in the last 30 days that has been much more about validation than surprise, which I think speaks to the I don't know, the very deep consideration and study that I did at the company during the process of considering joining, but also I would say just the handle on the business that both Marcus and the Board had. Just time after time, whether it was the product or the execution or the cloud opportunity, there was more validation than surprise. Maybe just because we haven't talked enough about it, I mentioned it in the in our in our data and analytics unit. I mean, we have this small thing about being able to take our data listening platform and apply it to risks beyond cyber, I think may sound like a small thing, but I think it points to something very, very transformational, not just for Guidewire, but for all of our customers, and I'm incredibly excited about that. So I wouldn't necessarily say it was a surprise, but it was great to see that use case validated and real, because it points to a positive future for that team and for that use case. Great. Thank you. I would like to turn the conference back over to Mike Rosenbaum for closing remarks. So I just wanted to say thank you all for joining us on the call today. We're excited about the opportunities ahead and look forward to seeing those of you who will be attending the Deutsche Bank Conference next week in Las Vegas, as well as our Analyst Day later this month here in San Mateo. And if you have not already registered and are interested in attending, please let us know. So thank you all very much and goodbye. Thank you. This concludes today's conference. You may disconnect your lines at this time and thank you for your participation.