Earnings Call: Q2 2019

Mar 6, 2019

Good day, ladies and gentlemen, and welcome to the Guidewire's Second Quarter Fiscal 2019 Financial Results Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Curtis Smith, Chief Financial Officer. Please go ahead. Good afternoon, and welcome to Guidewire Software's earnings conference call for the Q2 of fiscal year 2019, which ended on January 31, 2019. My name is Curtis Smith. I am the Chief Financial Officer of Guidewire and with me on the call is Marcus Ryu, Guidewire's 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 obligations 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 ks and 10 Qs filed with the SEC. We also will 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 for his prepared remarks, and then I will provide details on our results before providing our outlook for Q3 and fiscal 2019. Marcus and I then will take your questions. Thank you, Curtis. Our second quarter financial results exceeded our revenue and profitability guidance ranges with total revenue of $169,300,000 and non GAAP earnings of $0.34 per share. It was an active Q2 for new subscription sales, which represented 53% in the 2nd quarter and 47% in the first half of all new sales. As such, we believe we remain on track to see 40% to 60% of this year's bookings to be closed to subscriptions. In the Q2, we made progress against 2 of our strategic sales objectives, namely advancing momentum for InsuranceSuite Cloud and Guidewire Digital for Salesforce. With respect to the former, we sold InsuranceSuite Cloud to TD Insurance, our 1st InsuranceSuite Cloud deal of the fiscal year. TD Insurance is part of TD Bank Group, 1 of Canada's largest banks and a top 3 personal home and auto insurer. They licensed InsuranceSuite and Guidewire Digital via Guidewire Cloud and will be upgrading and migrating their existing implementation of InsuranceSuite to Guidewire Cloud as part of their journey to better protect more Canadians and be the most trusted insurer in the country. Additionally, 2 existing InsuranceSuite cloud customers expanded their commitments with us. Grinnell Mutual expanded their use of Guidewire cloud to include digital and our largest InsuranceSuite cloud customer reaffirmed their commitment by increasing their minimum spend in future periods. While there is considerable sales work ahead, this progress and the number and quality of discussions in which we are engaged informs our confidence regarding InsuranceSuite cloud deals this year, which we now expect will be between 58 in number. And most importantly, the demand for Guidewire cloud will be enduring and broad based across most or all segments of our market. Our ambition is to serve a major portion of the $2,000,000,000,000 global P and C industry with a cloud based industry platform driving standardization, contributory data and simplified integration to a marketplace of insurance technology partners. Consequently, it is imperative that we continue to build scale and customer reference ability for Guidewire Cloud, which has led us to actively position somewhat steeper subscription ramps for deals in our cloud pipeline than we have historically for self managed term licenses. A lower point of entry facilitates the journey for customers as they migrate on premises instances of InsuranceSuite to Guidewire cloud and convert term license contracts into subscription. We in turn benefit in the out years from significantly higher annual subscription values as customers expand their production use of our platform in the cloud. In other words, this approach enables us to build scale and maximize the lifetime value of customer relationships in the cloud. Turning to our partnership with Salesforce, we closed 2 deals with existing customers. 1 of the industry's largest P and C insurers that distributes its products primarily through a large captive agency force licensed both components of our Salesforce offering, ServiceRepEngage and ProducerEngage. We also sold ServiceRepEngage and ProducerEngage for sales force to P&V Insurance in Belgium. This early traction validates the strategic rationale of our sales force partnership in unifying the domains of horizontal CRM and our P and C core platform to enable digital distribution and policyholder service. Outside of cloud and Salesforce, we signed multiple new customers, among them PSA Insurance, a subsidiary of Banco Santander, who selected InsuranceSuite, Guidewire Digital and Data. PSA's implementation expands Guidewire's geographic footprint to 40 countries. In the United States, Lincoln Financial Group, a Fortune 250 American holding company operating multiple insurers selected billing center. 2 new customers in the quarter selected Science Products. A private reinsurance broker and risk management advisor selected Science Accumulation and a leading insurer focused on the energy industry selected Science Risk and Science Accumulation. Additionally, 4 customers expanded their use of Science, including 2 large and longstanding Guidewire customers, one of whom will now be using Cyence in their underwriting of a new line of business beyond commercial cyber. While we were pleased to see new Cyence customer wins, we also experienced higher than expected churn from Cyence customers in the quarter. We are learning that demand for Cyence, a cloud native application, is sensitive to the volatility of the emerging cyber insurance market it serves. Nonetheless, we see long term demand for Cyence as cyber growth become a mainstream insurance line forecasted to grow to tens of 1,000,000,000 in new premiums over the next decade. And as we broaden the science data listening platform to other new and established lines of insurance over this year and next. Turning to existing customer expansions in the 2nd quarter, we expanded our relationships with 26 customers. We extended our momentum with digital and data products with 11 customers selecting Guidewire Digital, bringing the number of digital customers to approximately 1 third of our customer base. We also added 2 new data customers in the quarter. As we continue to build on the key differentiator of our track record of successful implementation, we had 5 customers going into live production in the quarter with our core data or digital products. This includes eye care's go live on ClaimCenter in Q2 and Grinnell's go live last month, both via Guidewire cloud. Also within the quarter, we saw 7 customers complete major version upgrades for InsuranceSuite. Expanding on our launch of Guidewire Marketplace in 2018, last month we launched our ecosystem developer environment Guidewire Dev Connect. Dev Connect provides software development kits that our partner Connect connect ecosystem can use to build add ons to Guidewire Insurance platform. We continue to strongly believe that a large set of standardized prebuilt integrations to insurance technology partners is one of the most effective drivers of lower TCO and faster time to value for our customers and we are investing R and D and business development efforts accordingly. In summary, our Q2 advanced our progress in overall market adoption and in 2 of our key growth sectors, namely cloud and digital transformation. We enter the second half of the year optimistic in our long term ambition to serve as the most trusted and strategic technology partner to the $2,000,000,000,000 global TNC industry. I now turn the call over to Curtis to cover our results and financial outlook for Q3 and FY 2019. Thank you, Marcus. We finished the first half of the year on a strong note, exceeding revenue and non GAAP profitability guidance for the 2nd quarter, signing our 1st InsuranceSuite cloud deal of the fiscal year and showing strong momentum in our digital products. As Marcus stated earlier, total revenue for the Q2 was $169,300,000 which is an increase of 3% from a year ago and was above the high end of our guidance range. License and subscription revenue was 87,100,000 dollars Our better than expected performance was driven by high new sales activity, including the large sales digital deal that Marcus discussed in his remarks. This deal was structured as a 2 year term license consistent with our 2 plus 1 term license framework. Year over year license and subscription revenue growth was 3%. As we noted in our Q1 earnings call, year over year license and subscription revenue comparisons are impacted by the adoption of ASC 606, which affected the timing of revenue recognition of many of our agreements. Subscription revenue was $14,800,000 compared to $7,700,000 a year ago, representing a year over year growth rate of over 93%. The sequential decline in subscription revenue of $500,000 was largely driven by churn of Cyence customers at the beginning of the quarter, partially offset by new subscription deals completed toward the end of the quarter, which are ratably recognized. Perpetual license revenue in the quarter was $400,000 This amount reflects a usage true up from an existing customer. Maintenance revenue was $21,300,000 an increase of 11% from a year ago and was also above the high end of our guidance range. Services revenue for the Q2 was $60,900,000 up 1% from a year ago. 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 expenses, amortization of intangibles, the amortization of debt discount and issuance costs from our convertible note and the related tax effects of these adjustments. Gross profit was $101,900,000 representing a gross margin for the quarter of 60% compared to 66% a year ago. The decrease in gross margin was impacted by lower license and subscription margin as we continue to invest in cloud operations and by lower services margin. Additionally, gross margin in any given quarter is impacted by quarterly revenue fluctuations. And as noted, revenue in Q2 was negatively impacted by some timing shifts due to ASC 606. Total operating expenses were $75,800,000 in the 2nd quarter, relatively flat to last year. While we continue to invest in our cloud transition during the quarter, this growth in spend was offset by 3 factors. M and A costs related to Cyence in Q2 last year, the timing of connections, our annual customer conference, which incurred in Q2 last year but was in Q1 this year and capitalization of commission costs under ASC 606. As a result, operating income was $26,100,000 which exceeded the high end of our guidance range, largely due to license and subscription revenue upside and better than expected cost management. Operating margin for the quarter was 15%. Net income was $27,900,000 or $0.34 per diluted share. Turning to our balance sheet. We ended the quarter with $1,200,000,000 in cash, cash equivalents and investments, flat compared to the end of the Q1. Operating cash flow in the quarter was an inflow of $14,200,000 compared to an inflow of $47,700,000 a year ago. We are maintaining our services revenue outlook of $257,000,000 to 265,000,000 With respect to gross margin, we still expect our overall non GAAP gross margin to be between 59% 61%. And for services, we still expect non GAAP gross margin to be between 12% 13% this fiscal year. We're increasing the midpoint of our outlook for non GAAP operating income by $3,500,000 which we now expect to be in the range of 112 $1,000,000 to $118,000,000 representing the non GAAP operating margin of 16% at the midpoint. With respect to cash flow, we continue to expect free cash flow to be between $115,000,000 $130,000,000 before the one time impact associated with the build out of our new headquarters, which is expected to be approximately $35,000,000 to $40,000,000 and completed in fiscal 2019. In addition, our outlook for non GAAP net income is $100,800,000 to $115,800,000 or 1.35 dollars to $1.41 per diluted share. Based on approximately 82,400,000 diluted shares and an assumed non GAAP tax rate of 17% for fiscal 2019. Turning to the 3rd quarter, we anticipate total revenue to be in the range of $152,500,000 to $156,500,000 Within revenue, we expect license and subscription to be in the range of $68,000,000 to $72,000,000 We expect Q3 maintenance revenue of $19,500,000 to 20,500,000 dollars and Q3 services revenue of $63,000,000 to 66,000,000 dollars For the Q3, we anticipate a non GAAP operating income of between $4,000,000 and non GAAP net income of between $4,100,000 $7,500,000 or $0.05 per share and $0.09 per share based on approximately 82,400,000 diluted shares. Finally, with respect to ARR, there is no change to the expectations provided at Analyst Day. As Marcus referenced, we note that ramped deals where existing customers are transitioning to Guidewire cloud can dampen ARR in the current year, while providing a tailwind in subsequent years. We believe these ramps are positive, helping to facilitate deal closures, while maximizing the lifetime value of the customer relationship in the cloud. In closing, it was a strong quarter, highlighted by the InsuranceSuite cloud deal, the two deals with our Salesforce partnership and the cloud activity we see in the second half of the year. While we know there's a lot of work ahead of us, we are pleased with the multiyear cloud opportunity we see and the progress we have made to date. Thank you. Operator, can you now open the call for questions? Thank and one follow-up question when queuing to give everyone an opportunity to ask their questions. You may reenter the queue for additional questions as time permits. Thank you. We'll take our first question from Sterling Auty with JPMorgan. Yes, thanks. Hi, guys. I apologize, I jumped on late, but noticed with the cloud win, you also increased the target for cloud wins, I think for the year. Do you think that this win provides a little bit of a domino effect in terms of some of those discussions? And any additional color in terms of how you think about the sales process on the cloud side? Thanks, Sterling, for the question. We're engaged with a huge array of customers across all the different segments of our both customer and prospect base that goes by size, by geography, by line of business. Really the cloud discussion is relevant to almost the entirety of the market that we speak to and there's a lot of activity underway. As we talked about in previous calls, each of these transactions is very complicated and in many cases it's new terrain for the insurer to think about moving one of their core mission critical systems in a production context to us as a partner. And so every one of them is challenging, but we're encouraged by the number of them that we're involved in. As you suggest, the more that we get done, the easier they will be, the more standardized our terms will be, the more kind of pre negotiated a lot of the surface area that we're going through with customers will be. And so every deal incrementally helps standardize and accelerate the pace of these conversations. But I would emphasize it's still early days. We increased the number to represent that we are incrementally more confident about the target. But make no mistake, these are still very challenging deals to wrestle to the ground and have a lot of work ahead in the second half of the year. All right, great. And then one follow-up, just where the partners are in their training to help on the implementation side for the cloud deals? Or should we expect that the first handful will still be predominantly Guidewire implementation driven? So we've done a lot of work to activate and engage our SI partners with respect to the cloud. I think they are all excited by the opportunity and I think I speak for really all of the major ones with whom we've done dozens of projects in different geographies. I think to the last, they are all they all recognize their importance in our scaling to the demand that we want to serve and also the economic opportunity for them. I would expect that the next set of customers that we have that there will be SI involvement in most or all of them. And over time, perhaps as soon as next year, I would think that the proportion of the implementation work being done by a partner versus Guidewire will be pretty similar to what we see for our self managed customer base. Great. Thank you. We'll take our next question from Ken Wong with Guggenheim Securities. Please go ahead. Great. Thanks a lot. Marcus, I wanted to circle back on a comment you made about the steeper subscription ramp. Is this simply a willingness on your guys' behalf to take a lower upfront economics for obviously longer term value or a willingness to deploy at lower minimum thresholds at the start of a deployment? Yes. It reflects an intentional decision on our part to ease the transition for customers economically to a cloud relationship. The majority of the case of the customers that we're talking to are existing or even longstanding Guidewire customers where we have a term license relationship in place and we have to bridge that transition so that it doesn't so it feels like it makes economic sense for the customer. But we are we're really focused on the total area under the curve for a long term relationship. And our customers a and not have it be too disruptive to their IT budgets, etcetera. So it's an intentional choice. All these discussions are multiyear in nature. No customer would think about moving to the cloud for a single year. That would be nonsensical. So, they're all thinking about it over a multiyear horizon. But we're just doing our part to bridge the 1st year or 2, so that to remove that obstacle from the table while focusing on the total lifetime value of the customer. Got it. Got it. And then Curtis, in terms of the guidance, Q2, obviously, a pretty significant beat on the license side and didn't move it up all that much on a full year basis. Was that simply there was some pull forward that you guys are reflecting? Or is it maybe a term deal went cloud and that's what's impacting it? Any thoughts there would be great. Yes. Every quarter there are deals that can't come in and out of the quarter. And so, we saw this quarter too. There were some deals that came out of Q3 and came into Q2, but some that came out of Q2 into future quarters. So but the overall outlook for the year wasn't impacted that much and that's why we modestly increased the revenue guidance we gave on both the overall revenue side of things and the subscription side of things and also the maintenance side of things. Got it. Thanks a lot guys. We'll take our next question from Chris Merwin with Goldman Sachs. Great. Thanks very much for taking my question. So just as it relates to the cloud deal you signed, I think you might have said it was a migration, but please correct me if not. And I think in the past you talked about seeing 3 different types of cloud deals, migrations, brand new customers and existing customers taking additional cloud products. Is that still the expectation for the year? Maybe can you comment in particular about new cloud customers? And then I have a follow-up. Thanks. Right. Thanks, Chris. That's right. Those are basically the 3 flavors of cloud deals that are ahead of us. And the one that we just announced today is a long standing relationship where they have they are in production with InsuranceSuite. They are migrating that in production implementation to Guidewire Cloud, but there is also anticipated meaningful anticipated growth of the scope of that implementation to cover essentially the entirety of their book of business. So there is there is intended growth. Some of that growth or perhaps all of it would have happened in the on premise mode, but now that will be happening in Computing Guidewire Cloud. Okay, great. And then just a follow-up was around pricing. As you talk to customers, I know some of these discussions have been longer in nature. Has pricing ever really been a sticking point or as you've talked about in the past, has it really been much more about the new service level agreements and information security and all the additional features that you need to work into the contracts? And I guess for the cloud deal you did sign, was that within the pricing range that you had guided to previously? Sure. So economics, of course, are always a relevant dimension of the discussion. But I think the parts that are complicated that have led to these deals being intrinsically more complicated and challenging to get finally closed are not economic in nature. They're generally about the distribution of liabilities and risks and the specification of our service levels in all kinds of different situations that arise with a production mission critical system. So that's the primary locus of discussion and negotiation and discovery, and that's what primarily what contributes to the duration. With respect to this particular transaction, I think we were pleased with the economics of it, but again, thinking of it over a multiyear horizon and that's also the same terms in which the customer thought of it, but they had to transition an existing term license to now a new cloud subscription arrangement and that had to make sense in the transition year. But economic value of that customer relationship is expanding materially as a result of this deal. Okay, great. Thank you. We'll take our next question from Rishi Jaluria with D. A. Davidson. Please go ahead. Hi, guys. Thanks for taking my questions. Marcus, I wanted to circle back to the cloud, the IS cloud deal with TV Insurance. Was that one of the deals that you had mentioned in the past 1 or 2 quarters that was a little bit of a slip deal because of deal complexity or was a new deal that kind of came into the fray? And was it the same size of initial sign up as you expect it or was this one of these ramp deals that you had kind of a lower end share, but you expect it to expand very significantly over time and maybe kind of what motions help close this deal that you can apply to some of the future deals that are currently in motion? And then I've got a follow-up. Sure. It was indeed one of the relationships that we had hoped to get closed earlier. But as we talked about in previous earnings calls, it has been education for us to explore the full terrain of evaluation and risk mitigation and negotiation that we have to go through with all of our all of our prospective customers. And this one was, I think TD was a particularly good partner to work with. They were very rational, but they were also extremely thorough. And they I think they would be fine to hear me say that it was not only there in the insurance division, but also the governing bank that had considerable surface area that they wanted to be satisfied on with respect to data security, to service levels, to liabilities and so forth. And so I think it was a particularly helpful test case for us to go through and to reach conclusion with because it will inform really helpfully a lot of the other conversations that we're in, where in general are not banks not insurers owned by banks or managed by banks, but are standalone insurance entities. Got it. Thanks. And then any commentary just around the size of the deal relative to your expectation? I think it's in line with our expectations. And we're still there's still a price discovery ahead of us with the market. But in general, this conversation and the other ones that we're in have been broadly aligned with what we've talked about in the past. Got it. Thanks. And then just quick follow-up for Curtis. I mean cash flow on operating cash flow is a little light in the quarter, I think, at least relative to what I was expecting. How should we be thinking about kind of the puts and takes on cash flow in the quarter? And maybe what should we be expecting from or how should we think about cash flow for a full year basis? Thanks. Yes, great. And so for the full year basis, we're maintaining our original forecast of $115,000,000 to $130,000,000 in free cash flow. And that excludes the one time costs related to the headquarter build out we talked about being approximately $35,000,000 to 40,000,000 dollars In the quarter, we noted that free cash flow was lower this quarter than it had been last quarter. The biggest driver of that year over year change can be attributed to the timing of billings and collections. And also in this quarter, we paid a total of $7,000,000 in initial expenditures related to the new headquarters build out. Secondarily, we noted at the beginning of the year, we expect free cash flow in fiscal 2019 to be in line with fiscal 2018, excluding the one time headquarter CapEx. And this is due to the investments we were intentionally making in the cloud and in R and D to be cloud ready. Okay. That's helpful. Thank you, guys. We'll take our next question from Michael Turrin with Deutsche Bank. Great. Thanks for taking my questions. Just going back to the science comment a little bit and maybe some higher churn than expected there. Can we just talk more about that for a moment? Is that something that could persist or is that somewhat of a quarter specific event? And then how should we think about is there any potential for that to impact the trajectory of the subscription number going forward? Or just how to think about sort of the magnitude of what some influence from that would be helpful? Yes, those are fair questions Michael and the ones that we're been very focused on as you would expect. Churn as a phenomenon is not one that we Guidewire are much accustomed to thinking about. It's very difficult for us to secure new customer relationships, but generally they tend to be lifetime once we consummate them. So any kind of churn is very, very unusual for us. And so we were surprised with the churn that we experienced with some non renewals in science in the first half of the year. Things have progressed kind of back to the mean here since then, and I think we feel cautiously more optimistic or secure with respect to the latter half of the year. But as I mentioned in the remarks, the main the underlying cause and we did as much root cause analysis as we could in each case, is not about the product, the software or the service, all of which we get very, very high marks and strong customer support for. But the volatility of the underlying business that the product is designed to support, primarily cyber insurance, which is an emerging line of insurance. It's growing very quickly, so certainly relative to other insurance lines, but it has not growing as quickly over the last 12 months as was projected, something like half the speed by some estimates of what was expected. I think there's no doubt in the industry or among analysts that the cyber insurance will become a large and significant line of insurance, but it's still in the early days and the trajectory has been bumpier than one would have guessed. And so some business initiatives on the part of some science customers just proved not to be making the cuts and that impacted the business. Now, as you'll recall from if you followed our commentary about Cyence in the past, you know that it was never just about cyber insurance. It was a broader data listening platform that we saw applicability across many other lines of insurance, including well established multi $100,000,000,000 lines of insurance. And we've been working hard to generalize that and we have some early progress that we look forward to talking more about that as we have customer wins to describe. But that's still early days and most of the almost all of the existing revenue from Cyence comes from cyber insurance. And so we were a bit vulnerable to that. It is a headwind. It's reflected in our guidance for the remainder of the year. We don't think it will be a long term headwind for the business, but certainly relative to the expectations with which we started the year, it was an adverse surprise. And a couple of things I'd add to that too. We noted that Science's historical Q4 lines up with our Q2. So there were high volumes of renewal activity in the quarter that we don't expect to see going forward, number 1. And then number 2, with respect to our subscription revenue outlook, we're confirming the $60,000,000 to $66,000,000 this year. And as previously stated by Marcus, we foresee subscriptions as a percent of new sales to be between 40% and 6% in this fiscal year. Okay. I appreciate all the color there guys. And then maybe just to go back to the cloud one more time. You landed 1 cloud deal in Q2 and you also took this opportunity to increase the lower end of that target range. Is there a way for us to at all parse through how much, if at all, the change in ramp trajectory of deal structure is influencing how you're thinking about that range? And just more on your continued confidence in back half strength with those deals, I think is always appreciated. Thank you, guys. Yes, I think the year is more back end loaded with respect to cloud deals than we would ideally like, of course. And so we are calibrating our forecast in that number based on bottoms up based on the number and quality of the discussions that we're in to kind of range find we think we will end up. And each of them taken individually is challenging, but I would say that the nature of the challenge is lessening with each passing week of additional experience. I think more and more of the terms that we are discussing with customers are growing familiar to us and we're getting more practice in the answers. That said, we're also pursuing cloud deals not just in the U. S. Or in North America, but also in other geographies and different geographies, different countries have different requirements as well as language barriers that inevitably slow things down. So we're handicapping all of those factors in coming up with that range and standing by it with the same seriousness that we put forward any number to the community. Appreciate the detailed responses. Thanks guys. We'll take our next question from Tom Roderick with Stifel. Please go ahead. Yes. Hi, Matt VanVliet on for Tom. Thanks for taking my question. I guess thinking about first, Curtis, some of the spending in the quarter, obviously is a little better on the margin performance than most of us were expecting. And I think it serves notice that you guys are always very good stewards of capital. But just curious if any of that resulted more from timing of hiring in the quarter and how your overall hiring plans are on the trajectory for the rest of the year in terms of budget? Was there some done right at the end of the quarter that we'll see more in the next two quarters? Just any comments around hiring within the quarter and the outlook for the rest of the year? Yes. So we noted some of the in the quarter at least the spend improvement had to do with us actively managing the cost. Hiring is always a challenge for us and that impacts our expenses both in the quarter and how we're thinking about it for the rest of the year. That said, as we noted, we were increasing the midpoint of our outlook for non GAAP operating income by $3,500,000 Part of that has to do with us managing our expenses, part of that has to do with our hiring trajectory, and part of this has to do with some efficiencies that we're seeing as well. Great. Thanks. And then looking at what you're seeing on Cyence from a new deal pipeline, has the initial conversation been with a lot of your existing customers around their demand for cyber insurance elements, what maybe the overall product can do? I know you mentioned you're looking at some new use cases as well. I'm just curious how the cross sell opportunity has been relative to your expectations and how much of that is maybe built in over the next 24, 36 Yes. I mean our revenue expectation for Cyence are relatively modest and are not they're not a fundamental driver of our growth expectations for the next year or 2, I would say. Of course, we hope to be surprised by that in a positive way. But we do see it as a strategic asset because their approach to large scale data management and underwriting is so fundamentally different and also appropriate to emerging categories of risk that are huge areas of growth for the industry that we know it will be relevant and our customers tell us it will be relevant. But the emergence and maturation of a new category of insurance is a slow process, we're learning. Cyber insurance has been talked about for a long time. Everyone agrees on this need. Everyone agrees that the underlying risks are enormous and need to be indemnified. And yet, it's still very, very small relative to other well established lines of insurance. So, we're in for the long game with that and to make sure that it doesn't unduly distract the other strategic goals we have such as moving to the cloud for our core platform, we have a separate division in the company that is focused on that and that operates with a fair degree of autonomy and latitude to do the right thing for the long term there. I think we've gotten tremendously positive feedback about the product, about its distinctiveness, about the signal that it finds. But ultimately the success of any insurance business requires people who want to buy that category of insurance. And that market is still in its early days. And that's why we're not just betting on cyber insurance, but in the conviction that the same approach will be relevant to huge well established lines of insurance like workers' compensation, like commercial auto insurance, etcetera. Great. Thank you. We'll take our next question from Alex Zukin with Piper Jaffray. Hey, Marcus. Hey, Curtis. This is Scott on for Alex. So my question one of my first question, if I just take us back 3 months to the prior earnings call, you had taken down your services revenue expectation and told us that your guidance kind of applied a back half InsuranceSuite cloud expectation. So we have the new InsuranceSuite cloud customer and we've got 2 upsells this quarter, which would imply that things are better than they were 3 months ago. I'm curious what's keeping you from kind of increasing that services rep guide? Is that an indication that maybe these delays, these deals are going to be rolled out a little bit slower than you thought? Just curious what's going on there? No, Scott. I wouldn't read that into the services guide. I mean, that's it is one of the more challenging aspects of our business to forecast because now it's not just about when a deal will close, but the degree of services attached we'll have on that particular deal. And then the exact timing of when the deal when the project itself will start, which can be immediately or sometimes some weeks delayed after the or some weeks after the deal is signed. So it's always been one of the harder parts of our business to forecast and but we stand by the guide we have now. I think to the larger context of your question about our degree of confidence and how it's changed over the last 3 months, I would say incrementally we are more confident because we have some of these conversations have firmed up more, some that were a bit more abstract and interest are now trending towards what we would call selection and papers being exchanged and negotiations are happening. So yes, that we made progress on deals, but then again, some time has elapsed and we've committed ourselves to getting something done by an arbitrary deadline, but that's what businesses have to operate by of the end of our fiscal year. So I think we as the remainder of the time and the relationships that we have, we kind of put those on the balance. We think we will get there and we're incrementally more confident of that, but a lot of work to be done. Maybe piggybacking on that a little bit, are there any analogies to if I think about the potential for the long term ramp of InsuranceSuite cloud, are there any analogies you might be able to provide us with maybe how the launch of PolicyCenter or BillingCenter post your ClaimCenter launch kind of tracked within a certain time period of those products being generally available? Was there a certain number of customers that gave you critical mass and then allowed for acceleration? I'm curious how we might be anticipating the potential for not just fiscal 2019 deals, but 2020 2021 even, if there's any final analysis that you might want to provide? Yes, that's a thoughtful question, Scott. And in fact, we often talk in those terms like the first time we brought out PolicyCenter, that was a massive additional step beyond claim system claim center. And the first few customers were very, very hard to secure and things got incrementally, but only incrementally easier with each new customer until we were really able to lay claim to having the leading and most broadly adopted solution in the market, which was depending on how you want to count it 5 or 8 years hence, right? So I think it will be faster for us in the cloud, both because there is a deeper and broader appetite for that transition. I think our bona fides as a well established trusted partner to the industry is significantly different from when we launched policy. I think the urgency of digital transformation and doing things that are more differentiated as opposed to more standardized is much stronger for the industry than it was 10 years ago. So a lot of things are positive in terms of that happening faster, but there is still a cycle of early adoption. We're definitively in that stage where customers can feel confident that we're the right partner to entrust with something truly mission critical and high stakes for them. And we're really confident we're going to get through it. Every day is progress on that. And we're bringing those cloud customers into production and they're referenceable and the next wave of customers will be referenceable in turn. But it is still in the early adopter phase, make no mistake. Perfect. Thank you. We'll take our next question from Justin Furby with William Blair Company. Hey guys, thanks for taking my question. Just I wanted to ask on InsuranceNow, Marcus, what you saw in the quarter and what you see how that business is progressing? And then in Europe, just any commentary on sort of pipeline for the back half? And you mentioned you alluded to other geographies on cloud. Can you give a sense for what that mix looks like if you're sort of, call it, 50% of new business bookings coming from cloud, does it look similar in Europe, is it a lot lower, just any sort of directional time frame that would be helpful? Sure, sure, Justin. So first with respect to insurance now, we didn't have a win to announce, where we still have a meaningful target and a lot of business to get closed by the end of the latter half of the year. We think we have the pipeline for it, but unfortunately unlike the rest of everything else we're doing, there's more pressure on the second half of the year than ideal. But we're fully committed to that product and there's a segment of the market for which we're highly confident it is the best solution and one that is differentiated not only from the competitors, but from what we can offer with InsuranceSuite. With respect to Europe, still hugely important geography for us. Every year we invest more at a product delivery and sales level to succeed in Europe. There's enormous portion of our TAM. And if you look at the multinationals that we serve, the majority of them are in Europe, in fact, not in North America. We think that there are cloud discussions in Europe and we are hopeful of 1 or more of the remaining cloud deals to close that will happen in Europe. But I would say overall it's a bit slower there with respect to cloud. How much so? It's hard to calibrate, but we definitely have more conversations about cloud, more advanced ones here in North America. But there are some significant ones in Europe as well. So I would guess that the portion of bookings that will come in subscription form will be a bit lower in Europe than it will be in North America. That's pretty much what we expect and have modeled. But I think that that difference will equalize over time, maybe in the next year or 2. Okay, that's helpful. And then competitively, Marcus, like once an insurer has made the decision, let's just take a new prospect and they made the decision they want to go cloud for core. How does that change the dynamics for you versus Duck Creek versus Majesco versus any other vendor that you come up against? Yes. I think the competitors are the same, but and I don't think the cloud fundamentally changes the competitive dynamic. Obviously, it changes the evaluative scope of the sales cycle to ask other cloud focused questions. And we're in a couple of pretty high stakes and important competitive sales cycles now that will likely be cloud and we are being examined on those criteria. But it is essentially the same competitors. I think it will be so far the buying pattern is not to say, well, which partner do we want, and then to say, well, should we go cloud or not after that discussion. It's the at this stage of market evolution, our prospects generally know what they want and now are evaluating us versus our competitors or versus doing nothing at all. And just real quickly Salesforce, like how does that change like the partnership there? I know they announced something with Duck Creek, I think as well. But how does that change the conversation, in terms of insurers' willingness to go cloud and the partnership you have in the integration? Thanks. I think that Salesforce and cloud are kind of related, but still very distinct conversations. The Salesforce discussion is about CRM, the need to bring CRM capabilities, horizontal CRM capabilities to the problems of insurance distribution and insurance policyholder service. And Salesforce has a very relevant proposition with respect to those, but they would agree and this is the foundation of our partnership that it is hard to distribute insurance products and hard to service them without deep integration to the core environment. And that is the power of our partnership. Not every insurer is ready to tackle the CRM question. Many of them feel like they have a bigger issue with their products or with their core underwriting or with their claim system. But the general topic of digital service, digital distribution, especially for those insurers with a captive agency force, like one of the customers we talked about in the prepared remarks, especially for that group, Salesforce's proposition and the CRM proposition is highly relevant. But it's a distinct one from the cloud. The cloud it's almost like a lateral dimension to that functional question. Got it. Thanks very much. We'll take our next question from Tyler Radke with Citi. Please go ahead. Hey, Marcus. Hey, Curtis. Thanks for taking my question. Marcus, I was wondering if you could talk a little bit more about the revenue opportunity that you see in the digital business. I think you said roughly a third of the customer base is using the digital products at this point. Like what would that look like on revenue? And how big as a percent of just the Guidewire business do you think digital could become as you look down the road? It's a fascinating question Tyler because the full scope of digital is not yet known to insurance, right? Just how much of insurance can really be digital? How many insurance processes? What would they really look like in a truly digital future? And I think that novel is still being written. There is the sort of V1 or V0 of digital, which is can you sell an insurance product online, but that's just really scratching the surface of the potential to have for really offering consumer grade, always on device based, continuous advisory and protection services and the like that insurers are talking about. So I think that the digital opportunity is really unbounded and is certainly a more strategic topic than just than core policy administration in most insurers. Of course, part of our message is and which is I think we have broad consensus for is that you can't do a lot of these exciting digital things if you have 1980s mainframe. It's very challenging, right? You need to do it on a modern core policy admin environment. So today, I would say our the digital attach to our core systems is worth somewhere in the 20 sorry, in the 10% to 20% or maybe even 25% range of the value of the underlying core. But that number could increase significantly as the functional scope of what's done digital, digital expands over time as it surely will. And so if you were to look at the allocation of our R and D spend, obviously there's a lot that's going towards cloud and under the hood. But functionally speaking, we have directed as much as we can into the digital domain as possible because that's where a lot of the functional and user experience innovation is happening. And it's certainly the business catalyst that is driving core system transformation overall in the industry we serve. Great. That's helpful. And then as a follow-up for Curtis, I noticed on the slide deck that it looks like subscription revenue actually declined sequentially. And obviously, we've talked a lot about science, but I would have thought with most of your bookings coming in as subscription, we would just kind of see that increase each quarter. Is there anything else going on in that line? Or is that just the science churn that you called out? Yes, we noted 2 things in the sequential, the $500,000 in sequential decline from Q1 to Q2. Primary driver was churn in science that we saw at the beginning of the quarter and that was partially offset by new subscription deals that we completed towards the end of the quarter. And as you know, the subscription deals are ratably recognized, so you don't see the big uptick of the revenue because it's ratably recognized. That said, we noted too, we feel confident about our outlook of the $60,000,000 to $66,000,000 of subscription revenue for the year and are confirming that range. Thank you. We'll take our next question from Brad Sills with Bank of America. Please go ahead. Hi. Thanks guys for taking my question. I wanted to follow-up on your comments earlier, Marcus, on the SI channel preparedness is kind of ramping on the implementation side. Does that translate also to them becoming more of an asset in the sales cycle? In other words, going to market together and kind of influencing some of these cloud deals in the sales cycle? Absolutely. It would be quite challenging to have them involved if they didn't feel that they're if they were not aligned with that direction. And I think the real progress we've made over the last 2 quarters with a lot of focused effort and really great work by a new leader of our alliances organization, has been to convey to them in-depth like how their strategic and economic interests are really aligned with the Guidewire's transition to the cloud and how it's not a competitive journey at all. It's one where, and I think that that appreciation is now, has been internalized across our SI community. We spent a lot of time on roadshows and executive discussions to make sure that was really understood. Maybe we underestimated that a bit last year or the year prior, but I would say we've worked hard to correct any misperception on that count. And I think that's it's enhanced our confidence that we can that our long term model will look like the kind of services attach rate that we've that we were trending to before the cloud transition had took on such urgency. That's great. Thanks, Marcus. And then one more if I may. I know earlier in the year you formed a separate organization for digital. Would you feel like that organization is hitting its stride now with some of the success you've seen here in that offering? How much would you attribute that to just the execution of this new organization? Thank you. Well, actually just point of clarification, the new organization was focused on data, if you're referring to the analytics and data services group, which is called ADF. And they were the ones that took a bit of a body blow in the first half of the year with the science churn that wasn't as expected. I think the team understands and it's been reassured that this has not been about product execution or delivery. It's been just the volatility that's in the emerging market that we're serving. And I think that's well understood by the team and I think there's all kinds of other encouraging progress as we generalize the platform and other applications for it. But one of the reasons we separated them and give them a bit more autonomy is so that they did not they didn't get lost in the shuffle with the main strategic trust we're making in cloud and to know that they could pursue a long term really long term opportunity we think to find new signaling data, potentially persuade our customers to contribute data and the like to and there's a whole manifold of fascinating potential insurance applications, but we won't be able to serve that unless we invest now, and have the right talent on the team. Great. Thanks again, Marcus. Sure. We'll take our next question from Pat Walravens with JMP Securities. Please go ahead. Great. Thank you and congratulations. Marcus, I have a little bit of a sort of bigger picture question, which is recently when I've asked the CEOs of other cloud companies that are selling financials like Workday and Anaplan about the sensitivity of CFOs to put their financial data in the cloud. Like the response from Anaplan was, it's amazing how far that's come in the last year or 2. My sense is the same as not it's not quite true for the insurance industry. What would you say? No, Pat. I think I would broadly agree that there is increasing comfort with that. I think a key understanding is recognizing that security is an endless quest, that your own house is not perfectly secure and that if you work that there are capabilities of public infrastructure, there are respects in which public infrastructure are actually safer than what you can achieve on your own. That doesn't mean that you can just hand over the keys to the kingdom to a third party and just trust everything will be fine. There's a significant duty of care to make sure. And believe me, our customers are exercising that duty very rigorously. But there's a I think there's a deeper recognition that other parties with the right controls, with the right legal framework are perfectly capable of handling even mission critical data. And that's actually a strategic necessity since there's just too much work to get done and it's too much burden for any internal IT organization or security operation to cover every risk on their own. And I think we're seeing a very rapid evolution in the thinking on that. And to your point, when often when there are IT leaders in insurance that have come from other industries, other financial services perhaps, other consumer services, they often bring that perspective. That is a pattern that we've noticed. And I think it's all very healthy. All right, great. Thank you for that perspective. Ladies and gentlemen, this does conclude today's question and answer session. At this time, for closing remarks, I would like to turn the conference back to Mr. Marcus Ryu. No other comments. Thank you for participating in our earnings call today. Go on. And ladies and gentlemen, this does conclude today's conference. We appreciate your participation.