Greetings. Welcome to Guidewire's fourth quarter and fiscal year 2019 financial results conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to Curtis Smith, CFO. Mr. Smith, you may begin.
Good afternoon, and welcome to Guidewire Software's earnings conference call for the fourth quarter of fiscal year 2019, which ended on July 31, 2019. I'm Curtis Smith, 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-K 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-K/A 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, and then I will provide details on our results before providing our outlook for the first quarter and fiscal year 2020. We will then take your questions.
Thank you, Curtis. I'll provide some commentary on our fourth quarter and full-year results before handing the call over to our CEO, Mike Rosenbaum, to share his observations from his first month leading the company and to frame our ambitions for fiscal 2020 and beyond. When I introduced Mike a month ago, I underscored that the transition was motivated by opportunity, not by challenge. Our performance in the fourth quarter 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 $719.5 million 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 as subscriptions for our offerings delivered via Guidewire Cloud, bringing the total amount to 65% for the year, well above the 40%-60% we had anticipated at the beginning of the year. Since subscription revenue is 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&C core systems to the cloud in general. The primary driver of subscription bookings in the fourth quarter 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 six new such deals in the quarter.
It is further encouraging that this number includes four new customers as well as two customers with existing InsuranceSuite implementations, and that it includes one new tier 1 customer, USAA Group, and one 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 3-5 years, and that 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 nine cloud deals we signed added approximately $20 million in current period ARR and $65 million in fully ramped ARR.
Taking a closer look at our new business activity, the fourth quarter is typically our busiest period of the year, and this fourth quarter was no different, with eight new customers, five of whom selected the entirety of InsuranceSuite and four of whom chose to deploy via Guidewire Cloud, as mentioned. We also signed additional business with 23 existing customers who selected 53 additional Guidewire products, including two customers who chose to migrate to 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 billion in DWP under management, an increase of 11% from a year ago, reflecting our ability to attract new customers and expand within existing customers. New customers in the quarter included USAA Group, a $22 billion DWP Tier 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 million 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 InsuranceSuite via Guidewire Cloud in the fourth quarter 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 two such insurtechs as new customers in the fourth quarter. The first, a Silicon Valley insurtech, a startup, selected InsuranceSuite via Guidewire Cloud for their auto insurance line of business. Another insurtech, Mango Insurance, based in Russia and funded by Alfa Group, also selected InsuranceSuite, this time on premises, to offer a completely digital personalized product. Rounding out our new customers in the quarter were Church Mutual Insurance, the leading insurer of places of worship in the U.S., serving over 90,000 religious institutions, who selected ClaimCenter, Data and Digital. Heartland Farm Mutual, a Canadian insurer who selected InsuranceSuite's 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 fourth quarter, 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 join 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 four who selected Cyence 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 fourth quarter. Our substantial progress this year notwithstanding, we are still in the very early days of our industry platform journey. Not only do we have the vast majority of our customer base and the $2 trillion P&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 three new independent directors who joined our board this week. Margaret Dillon, former EVP and Chief Customer Officer for personal lines at Liberty Mutual Insurance. Catherine Lego, a veteran independent director with several public Silicon Valley companies and a financial expert. Michael Keller, former EVP and CIO of Nationwide Insurance and CTO of Bank One. 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 fourth quarter capped another strong and transformative year for the company. With nine 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 four times that amount, the vast majority of which have yet to upgrade from legacy systems, we believe that we are still in the early days of a transformation to modern, more agile core systems. InsuranceSuite via Guidewire Cloud and the improved total cost of ownership and business agility it provides insurance carriers will accelerate this transformation.
When I spoke with you a month ago, I indicated that I believed Guidewire was well-positioned to extend our long-term leadership in this market with an industry-standard platform, and that 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 analytics and data services team. This team, in partnership with multiple customers, has now expanded beyond the core cyber use case, and we are now using our data listening platform for the rating of small commercial lines insurance. This use case is an important milestone, as it demonstrates an opportunity to leverage our large-scale data assets for the modeling of potentially any risk. Additionally, our DevConnect developer environment continues to make progress in the market, with 10 PartnerConnect solution partners signed to develop ready-for-Guidewire add-ons. Four of them, 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 InsuranceSuite 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&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 will 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 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 trillion global P&C insurance industry. I'll now turn the call over to Curtis.
Thank you, Mike. Total revenue for the year was $719.5 million, an increase of 10% from a year-over-year ago and above the high end of our guidance range. Fiscal 2019 license and subscription revenue finished at $385.3 million, representing a 25% year-over-year increase. As we have previously noted, year-over-year license and subscription revenue comparisons are impacted by the adoption of ASC 606, which affects the timing of revenue recognition of our term license contracts. Fiscal 2019 growth benefited from the reclassification of $12 million 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 million, representing 95% year-over-year growth.
As Marcus discussed, subscriptions as a percent of total new sales were above our expectations at 65% for the full year, reflecting the increasing demand for our cloud-based services. Perpetual revenue for the full year was $2.1 million, compared with $11.8 million in 2018 and consistent with our intention of reducing perpetual license sales. Maintenance revenue for the year was $85.4 million, representing a 10% year-over-year increase and was above our guidance range. Services revenue for the year was $248.8 million in the upper end of our guidance range, compared with $266.5 million a year ago. This year-over-year decline was largely driven by investments to ensure the success of cloud customers, increased SI participation, and the aforementioned $12 million hosting revenue reclass.
Turning to profitability, we will discuss these metrics on a non-GAAP basis, and we have provided the comparable GAAP metrics and a reconciliation of GAAP to non-GAAP measures in our earnings press release issued today. With the primary differences being stock-based compensation expense, amortization of intangibles, the amortization of debt discount and issuance costs from our convertible note, and the related tax effects of these adjustments. Non-GAAP gross profit was $442.6 million for the year. Gross margin for the year was 62% compared to 61% a year ago. Overall gross margin benefited from a revenue mix shift away from lower margin services revenue, which was offset by declines in license and subscription and services gross margins.
License and subscription gross margin for the year was 89%, a decrease from 95% a year ago, a trend we expect to continue as we add new Guidewire 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 Guidewire Cloud customers. Total operating expenses were $320.5 million for the fiscal year versus $298.8 million a year ago. The growth in spend was driven by 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 $122.1 million, or 17% of revenue, and net income of $119.9 million, 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 fourth quarter was $207.9 million, above the high end of our guidance range. License and subscription revenue was $127.7 million versus $143.7 million a year ago. This decline, which was anticipated, was primarily the result of revenue which would have been previously recognized in Q4 that was recognized in Q1 under ASC 606, $3.2 million in perpetual revenue recognized in Q4 of 2018 versus $0.5 million in Q4 of 2019.
In addition, the increase of subscriptions as a percent of new sales with ratable revenue recognition minimized the impact of new sales on recognized revenue in the fourth quarter. Maintenance revenue was $21.8 million, an increase of 6% from a year ago, and was also above the high end of our guidance range. Services revenue for the fourth quarter was $58.3 million. This anticipated decrease from a year ago was due to factors previously discussed. Q4 comparisons, in particular, were impacted by a benefit we received in Q4 of 2018 related to implementation work for a large German insurer, where we were required to delay revenue recognition for work completed throughout fiscal 2018 until Q4 of fiscal 2018. Operating income was $51.1 million, and net income was $46.3 million, 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 $1.3 billion in cash equivalents, and investments, slightly higher than the $1.2 billion we had at the end of the third quarter. Operating cash flow for the year was $116.1 million, compared to $140.5 million a year ago. Free cash flow for the year was $90.9 million, excluding $24 million in build-out expenses associated with the new headquarters, compared to $128.4 million a year ago. This was below our expectations due to a customer payment of $12 million scheduled for Q4, but collected after the close of the quarter. Due to the timing of payments for our new headquarters build-out, we only paid $24 million of the estimated $35 million in new construction costs in fiscal 2019. We now expect to pay the remaining $11 million of one-time costs in Q1 of fiscal 2020.
As Marcus Ryu 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 ramped 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. Turning to our outlook. I first want to address our full expectations for the year. I will then speak to Q1. As a reminder, we want to reiterate three factors we discussed in Q3 that will impact our 2020 financial results. One, the mix of term and subscription new sales. Two, significant cloud operations and supporting organizational infrastructure investments. Three, 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% and 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 $759 million-$771 million, an increase of 5%-7% from fiscal 2019. We expect annual license and subscription revenue to be in the range of $443 million-$455 million, an increase of 15%-18% from fiscal 2019, or 18%-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 % of new sales sold as subscription agreements.
We currently expect to see 55% and 75% of new sales as subscriptions, with the midpoint roughly flat to 2019. Based on our forecast model, achieving the high end of this range would result in approximately $30 million less in fiscal 2020 license and subscription revenue 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 loaded than our current assumptions, then the impact to license and subscription revenue would be larger. We expect subscription revenue to be in the range of $105 million-$115 million, an increase of 61%-77%. We expect perpetual license revenue to be less than $5 million for the year. Our fiscal 2020 outlook for maintenance revenue is $85 million-$87 million.
As we have said before, ongoing maintenance activities are included in the subscription fees, thereby impacting maintenance revenue. Our outlook for services revenue is $224 million-$236 million, 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 five InsuranceSuite Cloud deals signed with new customers in fiscal 2019, three 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%-59% in fiscal 2020, reflecting an anticipated decline. We expect license and subscription gross margin to be between 75% and 80% this fiscal year, approximately a 12 percentage point decline at the midpoint on continued investments in cloud operations and supporting organizational infrastructure, and the accelerating shift to ratable subscription revenue.
We expect services gross margin to increase to between 15% and 16% this fiscal year. From an operating expense perspective, we continue to execute on our investments that were initiated in fiscal 2019. In addition to cloud operations, R&D continues to be a key investment area. We expect operating income from fiscal 2020 to be $96 million to $108 million, representing an operating margin of 13% at the midpoint. Both gross and operating margin 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 million and $100 million, excluding the one-time impacts associated with the build-out of our new headquarters, which is expected to be $11 million. Fiscal 2020 free cash flow expectations are positively impacted by 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 $92.4 million-$102.3 million, or $1.10-$1.22 per diluted share based on approximately 83.8 million diluted shares and an assumed non-GAAP tax rate of 16.8% for fiscal 2020. Turning to Q1. We anticipate total revenue to be in the range of $149 million-$153 million. This represents a decrease from a year ago due to the $10 million 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 million-$80 million, representing a 17% decline at the midpoint, primarily due to the same 10-year deal last year. We expect Q1 maintenance revenue of $19 million-$20 million and Q1 services revenue of $51 million-$54 million.
For the first quarter, we anticipate non-GAAP operating income of between net operating loss of $3 million to an operating profit of $1 million and non-GAAP net income between $0.6 million to $4 million or $0.01 per share to $0.05 per share based on approximately 83.1 million diluted shares. In summary, we were very pleased with the progress we made this year and our execution during this ASC 606 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 26th at our new headquarters in San Mateo, California. Thank you. Operator, can you now open the call for questions?
Yes. Thank you. If you would like to ask a question, please press *1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press *2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. In the interest of time, we ask that you limit yourself to one question and one follow-up question. Our first question is from Ken Wong with Guggenheim Securities. Please proceed.
Hey, great. Thanks a lot for taking the question. This first question may be for Marcus or Mike. I'm just wondering, what do you guys think drove the heightened Cloud activity in the quarter? As far as tier 1s, do you think the USAA signing will get some halo effect there and drive more customers from the larger customers to Cloud?
Yeah, 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. 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, and as well as our kind of assertiveness that the cloud was 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. It was fantastic to be able to close six within the quarter. It was very demanding for the team.
I think, the sense was that we were not at all really constrained by demand, but just as we've talked about before, by the sheer complexity of these really strategic relationships. The kind of trend we're looking at is much more than a one-quarter phenomenon. 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. We're certainly excited about the momentum that we see.
USAA is worth 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. It was striking that they wanted to start a relationship with us in an entirely cloud-based fashion. That was one of their starting assumptions for this core system initiative on their part. 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. It was definitely one of the highlights for the year.
Got it. Curtis, you touch 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? Perhaps maybe just a sense of what total cloud ARR for your 13 customers look like?
Yeah. In a few days here, Ken, we'll be publishing that ARR number in our 10-K. 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. We'll have an opportunity when we get to Analyst Day to talk a little bit more about our fully ramped ARR transition metric.
Got it. That'll be helpful. Thanks a lot, guys.
Our next question is from Sterling Auty with JPMorgan. Please proceed.
Hey, thanks. Hi, guys. It's Jackson Ader for Sterling tonight. 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?
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. 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. What's exciting is that the ones that we're able to really establish a strong partnership with, those become much more meaningful partnerships. 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. To answer your specific question, 18 gross customer adds during the year, which I think is a very positive sign.
Okay, great. 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.
Yeah. Last year, we provided a range of 40%-60% new subscription sales as a percent of total sales. We ended up for the year above the top end of that range at 65%. This year, we provided a range of 55%-75% of new subscription sales as a percent of total new sales. 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. It does have a negative impact on the recognized revenue for the year.
Right. Okay. Thank you very much.
Our next question is from Michael 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? It sounds like somewhere between year 3 and year 5 is when you'd expect those deals to hit fully ramped. Is that right?
That's right. It's somewhere between year three and year five. For these subscription customers, we always provide a five-year pricing schedule. When we're doing our fully ramped ARR calculation, it may not be part of the contracted term. Some of these contracts may be three years, but we'll still be looking at the ARR amount in years four or five when it gets fully ramped, when we calculate that fully ramped ARR. Most of our contracts are moving in the direction of five years. The ramps for these companies typically take place in years three to five. The fully ramped number typically happens in years three to five.
Thanks.
Just to be clear, I think you were also asking, it leaves open the opportunity that we'll sell additional products into those customers during that period of time.
Right. Okay. Thinking about margin trajectory from here. If guidance holds, this will be the third consecutive year of margin declines. I understand there's a lot of sort of moving pieces in terms of this model and the move to ASC 606 on top of everything else, is there a point at all where you're expecting margins can trough as we work through these transition impacts? Does that 3 to 5-year ramp in ARR mean this transition could continue to play out over that timeframe as well?
Yeah. Thanks for the question. We've 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. 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. When we get to Analyst Day in a couple of weeks, we'll be able to provide some 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 million lower. It seems like in the last few quarters, the execution's been great, and you've been trending ahead of expectations on cloud. 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. Marcus here. I'd say that we have 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. 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. 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. That created a wrinkle relative to our starting year assumptions, even though it 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's 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. It's a fairly broad bracket. 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. 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, the mix is likely to fit within that range that we've put out.
One thing I'd just add to that is the range we gave, the $55 million-$75 million and the $30 million number. That is if we came in at the very top of that range versus the very bottom of that range, the revenue difference would be $30 million.
More specifically, a 1% shift in that subscriptions as a percent of new sales would equal about a $1.5 million shift in revenue.
Okay. That's great. Thanks. Then just a follow-up on margins. I imagine you might speak to this more at Analyst Day, but thinking about that gross margin for the cloud business at scale, as you sort of ramp up hiring there and I'm sure there's still a lot of visibility to be gained, but how are you thinking about that? I guess when we think about the updated margin guidance, was that more a reduction in gross margin, or was that more a reduction in EBIT due to a higher OpEx? Just curious what was the main thing driving that. Thanks.
We're definitely seeing, and we noted in the quarter, 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. 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. That will put overall pressure directly on our subscription margin, but then that'll impact our overall gross margin. 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 Tom Roderick with Stifel. Please proceed.
Yes. Hi. Matt VanVliet on for Tom tonight. Thanks for taking my questions. I guess as you look at the overall demand pipeline that you're seeing out there, how much do you delineate 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 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 it's just generally not foremost on insurers' minds. Europe is still a more challenging frontier for us in general, not so much for macro reasons, but just because of the difference in requirements, regulatory regime, et cetera. We continue to just to pour additional effort into the continent because it's such a large portion of our TAM and because 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.
I think that our outlook overall on the TAM and the demand for what we can do there is really unchanged. Also, 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, MAIF. That was another factor, I think, in the shape of the bookings that we ultimately closed within the year. 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.
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, 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 only be enhanced with greater market progress and customer reference ability in the cloud. They are almost always just date-certain markers and a schedule that rolls out over time.
Great. Thank you.
Our next question is from Tyler Radke with Citi. Please proceed.
Hey, thank you. Can we talk a little bit about the ramp deals? I'm just curious if you're finding yourself having to either extend the longevity of the ramps or make incremental more ramp deals than you were previously. Just to follow up, just to 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 four and year five are beyond what is contractually committed? Thank you.
Sure. 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 one of their cloud transition. Those are where we saw those ramps more pronounced. The timing of the ramp is pretty consistent, though, on being three to five years, but a little bit of a steeper ramp for those migration customers for the reasons we just talked about. The second part of your question around the fully ramped ARR. For all of our end customers, we include a five-year pricing schedule in there. More and more of our contracts now are moving to that five-year committed term, but some of them have less than that.
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 two or three years in. They will continue to focus on that ramp and on the implementation. 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 five-year contractual term.
One thing I'd add, just because this was one of the things that I dug into a little bit very specifically in the first 30 days. I think you want to understand or think about, consider the nature of the implementation, 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 significant periods of time, I think lends itself to the surety associated with that financial metric. I think that's an important thing to consider when you look at this metric.
Great. Thank you. 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 this ramped ARR number? Thank you.
Thanks for the question. We did the last couple of years talk about the number of InsuranceSuite Cloud deals as a transition metric. We've reached that transition when we talked about the 48 InsuranceSuite Cloud customers last year and coming in at nine at the top end of that range. We think that was helpful in the first couple of years, but it was a transition metric. We think what will be more helpful is the focus on our ARR and our fully ramped ARR metric going forward. We will not be providing that number of InsuranceSuite Cloud deals forecast going forward. We will, however, at the end of every quarter, report the number of InsuranceSuite 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. Wanted to ask about the implementation cycles for InsuranceSuite Cloud. I know it's a limited sample set, 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?
Yeah. 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 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 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, kind of exert a greater moral authority to insist that the program conform to certain standards. I think we have greater leverage to drive a highly standardized program.
We've been able to do that to an increasing degree with each of our cloud relationships. 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. In terms of really driving a step function improvement in the total cost of ownership and the speed of implementation, that requires certain product enhancements and architectural platform improvements that are at the top of our priority list. We'll be announcing a couple, I 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.
Yeah. I'd 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 is just overall a very beneficial thing for the whole industry.
Aligning the teams here in our product development organization around that exercise is going to be very positive for all of our customers. I'm excited for that to be top of my list in terms of coordinating and executing here at the company.
Great. Thanks, guys. Then one more, if I may, just on digital and data. It sounds like that business is really going well. It's close to 100% attached, it sounds like on these new deals. Are there any use cases you'd point out that you're seeing some commonalities there and how has that changed over, say, a year ago or even a couple of years ago? Thank you.
Yeah, Brad, I would say that every insurer right now is 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 line-focused insurer still thinks about a kind of consumerization of the experience that they have to provide to all of their counterparties. Digital is the dominant theme across the industry, as it is in other industries, I'm sure. More and more digital is just a native part of the program. Data is close behind that.
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 conformant 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. I think Data and Digital are becoming less and less add-ons to a core system project as inherent to the rationale for the programs to begin with. I think 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 were 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 Guidewire Cloud wins were actually directly competitive. No new names that you wouldn't be familiar from following us. A number of them were competitive, including even existing customers that said, "Well, now that we're contemplating the Guidewire 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. 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. Of course, they're all very fiercely contested. 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 50/50 for this past year. As we look forward, how should we expect to see this mix kind of continue to develop? Yeah, just kind of interested in how you guys are kind of viewing that opportunity over time.
Well, I think first of all, I think it's an incredibly positive sign that we're adding new Cloud customers just directly, right? It kind of speaks to what I was saying before about how the improvements that we're able to make to the overall system, total cost of ownership, and implementation expense that are delivered via the Cloud, should accelerate demand for core systems migrations in the first place. 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. 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.
A quick follow-up, if I may. I know Q4 of this past year was very cloud heavy. Looking into 2020, should we expect to see any kind of linearity around cloud deals, or expect it 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. I don't think that we're yet at the point where that business dynamic is going to change.
Great. Thanks for taking our questions.
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. 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. 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. 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.
Yeah.
Mike, just broadly speaking, could you share anything that surprised you in the quarter, either for the positives or negatives?
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 of the company during the process of considering joining. 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, it was more validation than surprise. Maybe just because we haven't talked enough about it, I mentioned it in the remarks, and I wouldn't say this is really a surprise as much as it is, I think, an incredibly innovative opportunity for us in our data and analytics unit.
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 transformational, not just for Guidewire, but for all of our customers, and I'm incredibly excited about that. 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.
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. If you have not already registered and are interested in attending, please let us know. 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.