Earnings Call: Q3 2018

Jun 5, 2018

Good day, and welcome to Guidewire's Third Quarter Fiscal 2018 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, CFO. Please go ahead. Good afternoon, and welcome to Guidewire Software's earnings call for the Q3 of fiscal year 2018, which ended on April 30, 2018. 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, including additional information related to our recent acquisition activity. 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 ks 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 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 Q3 results before providing our outlook for Q4 and fiscal 2018. Marcus and I will then take your questions. Thank you, Curtis. Our 3rd quarter financial results exceeded our revenue and non GAAP profitability guidance ranges with total revenue of 140 $500,000 and non GAAP earnings of $0.05 per share. Momentum with cloud based solutions continued in the Q3. Almost 50% of our year to date new sales are subscriptions, and we continue to be at the high end of our prior communicated range of 30% to 40%, with nearly all of the remainder coming in the form of traditional recurring term licenses. The transition to cloud based solutions continues for both the P and C industry and for Guidewire. Cloud based core systems and a delivery model in which the solution is delivered by the vendor in production are still relatively new concepts for P&C insurers, but we are seeing broad interest in all regions and from all segments of our markets. Smaller insurers have been earlier adopters of CloudCore Systems, but the benefits of simplification and risk transfer are just as compelling to large and midsized insurers. Cloud implementations should enable us over time to reduce the total cost of ownership for our customers through more standard implementations and integrations and the leverage of cloud native architectures. Our market experience strongly suggests that lowering TCO combined with transfer of risk and complexity away from our customers' operations to a trusted partner will increase the rate of market adoption. Cloud adoption comes at a time when insurers and their CIOs are challenged with managing extremely ambitious technology project agendas with finite resources and management bandwidth. By transferring non differentiating core operations to Guidewire, our clients can focus their resources on driving value for policyholders by delivering new products and digital engagement. Cloud economics are also compelling for Guidewire because we are compensated for bearing that additional discount complexity with annual subscription fees that are substantially greater than comparable annual term licenses. Although we're still in the early stages of price discovery, we expect cloud deployments to drive a material expansion of our TAM as both existing and new customers are attracted to the convenience, efficiency and value the cloud based core systems offer. The shift to cloud deployments also enables us to ensure that customers are on the latest release of our software, which avails them as the full benefit of our R and D investments and reduces our maintenance burden. So we're very excited about the opportunity and customers are excited as well as reflected by the adoption of InsuranceSuite cloud in the 3rd quarter by 2 existing customers. 1 of these is a Tier 1 insurer who will be using InsuranceSuite cloud to drive premium growth in a new line of business. The other is Grinnell Mutual, a regional insurer based in the Midwest, which had already licensed InsuranceSuite and has now opted for Guidewire to implement and manage it as a cloud delivered solution. Looking at sales activity beyond InsuranceSuite cloud for the quarter, we again enjoyed a mix of activities from new and existing customers. In the quarter, we added 5 new insurers to our customer community, 4 of whom collected InsuranceSuite, including an international business unit of Travelers, the 2nd largest writer of U. S. Commercial property and casualty insurance and also a leading provider of auto home and business insurance. A. R. Farm Mutual based in Ontario, Canada, a provider of auto home, farm and commercial insurance selected a broad set of products including InsuranceSuite, DataHub, InfoCentre and our digital products. Argentina's La Segundo Coop, a group of companies offering P&C, Group Life and Retirement selected InsuranceSuite, Business Intelligence for InsuranceSuite and Client Data Rating and Reinsurance Management products. Also in North America, IAT Insurance Group, a specialty insurance company based in Texas, licensed Policy Center and Rating Management. In addition to these 4, we added an InsuranceNow customer, Farmers Union Insurance, a mutual insurance company serving farmers, ranchers, homeowners and businesses across North Dakota who selected our all in one cloud based solution InsuranceNow to replace their current core solution. We also continue to gain traction with our digital and data products. 13 existing customers selected 1 or more of these in the quarter. In addition to sales momentum, we had an active quarter for implementations with 9 customers going live with InsuranceSuite, InsuranceNow, data or digital products during the quarter and for customers having major version core upgrades. Turning to products, last month we announced the latest release of Guidewire Insurance platform. This release includes enhancements to our core data and digital and all in one product families, along with more than 80 ready for Guidewire validated accelerators. Collectively, these product enhancements and 3rd party solution additions enabled insurers to reinvent customer agent and employee experiences. We also announced availability of our 1st P and C Insurance CRM applications for Salesforce Financial Services Cloud. These applications will be natively integrated to FSC and enable P and C insurers to unify their core digital and CRM strategies with much less complexity. Finally, our leadership continues to be recognized by the industry as demonstrated by our winning 2 awards for policy administration by industry analyst Sellant. In summary, our Q3 performance reflects continued momentum in the marketplace, including continued adoption of products across the Guidewire Insurance platform and notable successes with the selection and implementation of InsuranceSuite Cloud. Adoption of our cloud service as well as the robust attach rates of our digital and data products continue to validate our platform value proposition and contribute to our growth. We look forward to our customers and prospects reception of the many products we are releasing this year as well as celebrating the great progress many of them are making in their transformation initiatives relying on Guidewire. With that, I'll turn it over to Curtis to detail the financial results of our Q3. Thank you, Marcus. We had an active Q3. We exceeded our guidance ranges on both the top and bottom line. We successfully completed a capital raise and we closed 2 new InsuranceSuite cloud customers. As a result of this cloud momentum, and as noted by Marcus, almost 50% of our new sales year to date were subscription, and we continue to expect to be at the high end of our prior communicated range of 30% to 40% of this year's new sales as subscriptions. We note that seasonally high Q4 activity will have a large impact on the final percentage. We are also on track to add 4 to 5 InsuranceSuite cloud deals this year with 3 closed year to date. Total revenue for the quarter increased 14% from a year ago to $140,500,000 Within revenue, license and other revenue of $50,400,000 represent a decrease of 15% from a year ago. As a reminder, the very sizable recurring payment from one of our Tier 1 customers was recognized in Q3 last year, but will be invoiced for payment and therefore recognized in Q4 in this and subsequent years. In addition, approximately $4,600,000 of revenue that was expected in Q3 was recognized in Q2 due to earlier payments last quarter. Perpetual revenue in the Q3 was $5,700,000 Maintenance revenue was $18,700,000 representing 11% year over year increase and at the midpoint of our guidance range. As we shift toward cloud subscription services, we do expect maintenance growth rates to moderate, as ongoing maintenance activities are included in the subscription fees. Our rolling 4 quarter recurring revenue consisting of term license, subscription and maintenance revenue totaled $334,400,000 in the 3rd quarter, up 10% from a year ago. In Q3, this metric was significantly impacted by the quarter shift in invoicing for the customer I just referenced. Additionally, as we have mentioned previously, our ongoing transition to subscription and the eventual adoption of ASC 606 in fiscal year 2019 make this metric less relevant to our business. After this fiscal year, we will no longer highlight rolling 4 quarter recurring revenue as a key metric. Services revenue was $71,400,000 a 50% increase from a year ago and also above our guidance range. Faster services growth in the quarter was driven by 3 primary factors. Greater demands for Guidewire Services personnel and in some of our initial InsuranceSuite cloud implementations inclusion of and growth in InsuranceNow implementation and hosting services following the acquisition of ISCS, which did not incur until partway through Q3 of last year and recognition this year of previously deferred services revenue. 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 difference 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. Non GAAP gross profit of $77,500,000 decreased 4% from a year ago and represented a non GAAP gross margin of 55.2% compared to 65.1 percent a year ago. The expected decrease in margin was due primarily to the previously mentioned payment shift of a Tier 1 term customer, as well as the increase in our services revenue and investments in our cloud operations. Total non GAAP operating expenses were $75,200,000 in the 3rd quarter, an increase of 19% compared to a year ago. This increase was primarily driven by continued investments in R and D and sales. The impact of our recent acquisition of Cyence and to a lesser extent, the work associated with several large infrastructure projects, including new ARP and configured to price quote systems and related implementation expenses. This resulted in non GAAP operating income of $2,300,000 which was above our guidance range, primarily due to higher than anticipated revenue and modestly lower than anticipated expenses in the current period. Non GAAP net income was $3,900,000 or $0.05 per diluted share compared to non GAAP net income of $12,300,000 or $0.16 per diluted share a year ago. Turning to our balance sheet. We ended the quarter with $1,200,000,000 in cash, cash equivalents and investments, up from $569,500,000 at the end of our 2nd quarter, primarily due to $571,000,000 in net proceeds adjusted for the cost of the cap call from the financing we completed in the Q3. In addition, operating cash flow in the Q3 was 20,200,000 and free cash flow was $19,000,000 Total deferred revenue was $134,600,000 at the end of the 3rd quarter, an increase from $130,900,000 at the end of the second quarter. As a reminder, our deferred revenue balance can vary widely from quarter to quarter and has not been a meaningful indicator of business activity since we typically bill term license contracts annually and recognize the full annual payment upon the due date. However, deferred revenues will likely sustain higher levels as we increase sales of subscriptions, though we expect deferred revenues to continue to be highly variable. The growth of deferred revenue in the quarter was in part attributed to higher license deferred revenues generated by subscription sales. Now turning to guidance. First, let me address our expectations for the full year. I will then speak to Q4. And finally, I will make some high level comments on fiscal year 2019. For the full year, we now anticipate total revenue to be in the range of $647,000,000 to $653,000,000 an increase of 26% to 27% from fiscal 2017. We expect annual license and other revenue to be in the range of $306,000,000 to 312,000,000 dollars an increase of 13% to 15% from fiscal 2017. Our license and other revenue is being impacted by our transition to cloud based subscription sales, which as noted earlier, we expect to be at the high end of our previously communicated 30% to 40% range. Compared to term and perpetual licenses, we can recognize only a portion of the annual subscription invoices in the initial year due to ratable revenue recognition. Additionally, we expect perpetual license revenue between $9,000,000 $10,000,000 for the year, a decrease from $13,000,000 last year. Our outlook for maintenance revenue is $76,000,000 to 77,000,000 dollars Services revenue continues to be elevated in fiscal 2018. In particular, cloud implementations and our work for new European customers currently require greater Guidewire participation. Our outlook for services revenue is $262,000,000 to 266,000,000 dollars Required build out of services, processes and best practices to support the cloud will require increased services support that cannot all be passed on to the customer. As a result, we expect services margin to be between 18% 19% this fiscal year. Due to higher profitability in Q3 and our higher revenue outlook, we are raising our non GAAP operating income guidance for fiscal 2018 to $104,000,000 to 110,000,000 dollars We're also increasing our free cash flow guidance for the year to $115,000,000 to 125,000,000 dollars In addition, we are raising our outlook for non GAAP net income to $83,300,000 to 87,700,000 dollars or $1.05 to $1.11 per diluted share based on approximately 79,300,000 diluted shares. Turning to Q4, we anticipate total revenue to be in the range of $234,000,000 to 240,000,000 dollars Within revenue, we expect license and other revenue to be in the range of $141,000,000 to $147,000,000 maintenance revenue of $19,000,000 to 20,000,000 and services revenue of $71,000,000 to $75,000,000 For the Q4, we anticipate a non GAAP operating income of between $78,000,000 to $84,000,000 and non GAAP net income of between $58,800,000 $63,200,000 or $0.72 per share to $0.77 per share based on approximately 82,000,000 diluted shares. Looking ahead now to fiscal 2019, we want to provide some preliminary qualitative commentary. Unless otherwise stated, all of our commentary is based on our adoption of ASC 606 on August 1, 2018. As we have discussed in the past, the transition to subscription contracts and the adoption of 606 have an impact on our outlook for 2019. And this outlook is very much evolving. We will spend more time discussing this on our Q4 call and during our Analyst Day in September. With respect to top line, fiscal 2019 will be impacted by a number of factors. 2 primary factors positively impacting growth: Subscription revenue associated with contracts sold in fiscal 'eighteen will increase in fiscal 'nineteen since we will be able to capture the full annual value of these contracts when compared to a partial year amount in fiscal 'eighteen. And new term license contracts will recognize 2 years of annual license amount due to our standard contracts being 2 years of duration at signing, coupled with annual auto renewals. Under 606, we will typically recognize the full 2 year contract value upfront. These positive factors will be offset by growth in new subscription sales, which will result in lower revenue recognized in fiscal 2019 due to ratable revenue recognition, as well as 2 accounting effects associated with our adoption of 606. The first, amounts due in fiscal 2019 for 2 year licenses sold in fiscal 2018 will not be recognized as revenue and will be accounted for as retained earnings and 2, revenue lost to retained earnings due to existing long term customer contracts that we are not able to modify to annual auto renewals. Netting these factors, we expect license and other revenue to grow modestly faster than in fiscal 2018. This assumes subscription contracts will be approximately 40% to 60% of new sales. At this mix and assuming the successful modification of remaining long term contracts, we expect 606 will have a net neutral impact on license and other revenue. With respect to total revenue, we expect growth to taper slightly as services revenue growth begins to normalize in 2019. Turning to profitability. There are 3 primary factors putting pressure on operating income and operating margin in fiscal year 'nineteen. First, gross margin will be lower due to transition to the cloud and continued elevated services revenue as a percent of the total mix. 2nd, we previously indicated that 2018 would be a year of investment as we migrate to the cloud and invest in R and D and cloud operations to support this transition. We have spent less than initially anticipated year to date in 2018, largely due to headcount additions being slightly back end weighted in 2018. In 2019, we expect to slow our hiring and digest the investments made. However, the full impact of the investments made this year will be reflected in operating expenses in 2019. 3rd, we continue to expect science to be diluted to our operating income in fiscal 2019. As a result of these factors, we do not expect to see operating margin expansion in 2019. As we have mentioned in the past, cash flow and other metrics will be key indicators of progress moving forward and further discussed at our Analyst Day. In summary, we executed well in the Q3 to deliver revenue and profitability that exceeded our guidance levels. We are optimistic that we will see a seasonally strong Q4 and that we remain well positioned to continue capturing a meaningful share of the multibillion dollar opportunity ahead of us. Thank you. Operator, can you now open the call for questions? Thank And we'll take our first question today from Monika Garg with KeyBanc. Hi. Thanks for taking my question. First is I just want to confirm, I remember last time you gave us a metric like each 10% higher mix of subscription is about $3,000,000 to $4,000,000 negative impact to license revenue. Given that mix is almost 10% higher than your previous guidance, is that the right way to think about negative impact on the license? I think that's one way to look at it. We have done some sensitivity around that, looking at different ranges. And we are currently expecting to be at the high end of the previously announced range of the 30% to 40%. And as we have that as we move to the higher end of that range and have more subscription, we do then see less revenue come in given that it's ratably recognized. Got it. And then Curtis, the ASC 606 impact for next year, what you talked about, could you share how much is the negative impact on the license because of ASC 606 change, like a dollar amount, like 10 any metrics you can share quantitatively? Yes. So we did do some preliminary analysis of that and we're not sharing those numbers here, but we'll spend some more time on that when we get to our Q4 earnings call and when we talk about metrics going forward and impact of 606 going forward in our Analyst Day. One thing we did note though when we provided the preliminary commentary on 2019 is when we take both the puts and the takes from 606, both the positive and the negative, along with the subscription as a percent of revenue range we're expecting in fiscal 2019, which is now the 40% to 60%. We believe that taking that all into account that there is a net neutral impact from 606 on license and other revenue. Got it. Thank you so much. That's all for me. Next we'll hear from Jesse Holstein with Goldman Sachs. Yes. Thank you. Marcus, it seems like you're seeing a pretty big step up in interest from new customers and existing customers on expansions for your cloud product. I'm wondering if you've given much thought to extending cloud beyond just new business and migrating the base. And if that were to happen, what would the timing of that look like? Absolutely. Migrating the base is an important expected portion of the demand that we have ahead of us. And some of the acceleration in demand has come from has been stimulated by us because we actively have been initiating these conversations, not necessarily with the minds transacting on them in the near term, but so that our customers understand our strategic direction and can start thinking about their overall deployment strategy as they roll out the current projects they may be involved in or future products they may license from us. It's very early in the transition. We're at a low single digit number of Insurance cloud customers out of a customer base of 100 of insurers. But our expectation is that over time, a very large portion, quite possibly a majority or even a significant majority of our customers want the kind of division of labor that's involved in our cloud deployments as preferable to them. I think we have quite a few degrees of freedom in modulating the speed at which that happens. And obviously, we would never make commitments that we could not follow through with confidence. But I think we'll be much more I think if anything we will be constrained by our own appetite to follow through on that well than it will be by customer demand. Yes. And Curtis, a question for you. Given the multiple puts and takes next year on growth with the subscription transition and ASC 606 and just the lumpiness of your contracts already playing into that. Have you given thought to any metrics beyond what's being provided? You mentioned retiring trailing 12 months recurring revenue. I'm wondering if you've given any thought to ARR or some sort of metric to replace that to give us a little bit more visibility into demand quarter to quarter? Yes. And thanks for that question. We spent some time in the past quarter talking to investors and analysts about what metrics might be helpful from their standpoint to better understand the progress we're making, as we transition to a cloud business. And some of the things we've provided already, just as a reminder, the number of IS cloud deals. And so, we confirmed that number this quarter that we're expecting 4 to 5 IS cloud deals this year and added 2 in the quarter. Another metric that we've been sharing is subscription as a percent of new sales in the quarter. We confirmed that 30% to 40% range with the expectation for us to land at the high end of that range this year. In the past, we've also talked about breaking out and talking to subscription as a percent of license and other revenue and we pointed to at the end of the year that getting pretty close to 10% when that happens that we intend to break that out in fiscal year 2019. To your question on the other key metric, the ARR ACV, it's clearly one that is at the top of our list to be thinking about and to be potentially adding to the mix to give you a better idea of how the progress we're making in the transition to cloud. And so our expectation is to talk about that more during Analyst Day and potentially on the Q4 call. Fantastic. Thank you both. Next we'll hear from Sterling Auty with JPMorgan. Yes, thanks. Hi, guys. First one for you, Marcus. For an InsuranceSuite cloud customer, what do the implementation times that you expect to be like for a brand new customer? And what is the implementation time for an existing customer shifting into the cloud? I think I appreciate the question, Sterling, because it's a chance to remind those listening that at least at this stage, there is no meaningful acceleration in implementation time for a cloud based project versus our traditional on premise ones. And that's because the main drivers of implementation effort are our configuration and integration. And those are not meaningfully different in the cloud world. But what we do we do believe that we have a lot of levers to drive higher standardization. That's something that we've been working on earnestly for years now and we're doubling our effort every year to urge customers and to give them strong professional guidance about the importance of conforming to a more standard solution. And of course, we're evolving our platforms to be ever more complete. And in the cloud modality, we think that we'll have that that will be able to advance that further, as well as make certain architectural advances in the product that will really leverage cloud scalability and serverless architecture and so forth. So over time, it's not only our expectation, it's our mission to significantly reduce the cost of ownership and to simplify and standardize projects. But that will take time to evolve. And for the time being, programs are really very comparable in duration to what they are now. And we talked about this many times in the past. There's a lot of variation between our customers depending on what product they're implementing and with what scope and so forth. But typically, we want our core system our significant core system transformation programs to go live something like 12 to 18 months from the start. Okay. That's great. And as we think about the significant increase in revenue that you would get from an existing customer moving into the cloud, how should we think about how that layers in? And what I mean is, if you have an existing full InsuranceSuite customer, are they going to move claims and then once claims is in the cloud move policy or would they do the entire insurance suite, insurance line by insurance line or geography by geography? Just so we can understand how we might see the increase in the revenue associated with the customer moving into the cloud? Yes, that's a thoughtful question. I think that the sort of minimum unit of transition will be one of the core applications, policy claims or billing. It really wouldn't make sense to migrate slices of claims of a claims implementation over a slight or slices of a policy implementation. But it is quite possible that they would that a customer would opt to do, one core application at a time versus the entirety. Though there may be cases where they would try to shift multiple at the same time. And of course, we have large complex customers that may have more than one instance of our core applications because their businesses are disparate and may even operate semi independently of each other. So there's going to be it's very case by case, but I think again the minimum unit will be a transition of 1 of the core applications to the cloud. And as we've talked about in the past, something somewhere between 2x, 2.5x to 3x kind of improvement or increase in the annual recurring revenue to Guidewire, but now coming in subscription form would be our expectation from where we sit today. Got it. Thank you. Our next question comes from Alex Zukin with Piper Jaffray. Hi, this is Taylor Reiners on for Alex. I had a question for Marcus. I wanted to dig in on the sales force announcement from a couple of weeks ago that you now have 2 applications for their Financial Services Cloud. So wondering if you could speak to any early indications, the tractions that you've seen in that area? And then maybe any updates that you have for us from a go to market standpoint and any potential joint early customer wins? Thanks. Sure. So the Salesforce partnership is a highly strategic one for Guidewire. We are not in the habit of announcing lots of partnerships with other technology companies. They tend to be very difficult to implement successfully at a product level and then of course there's go to market complexities. The Salesforce is a very notable exception to that because of their obviously their tremendous market traction and the awakening of interest over the last few years in the P and C industry to rethinking sometimes dramatically their whole approach to CRM. And then quickly following that is a recognition that any kind of CRM initiative they undertake has to be deeply integrated with the transactional and operational core, which is of course what we do. So it's a very natural complementarity between our businesses and our value propositions, though it did take us a few years to mutually persuade each other of that. But now I think we're completely on the same page and are working together in stride. And there has been very encouraging level of interest across the industry, including internationally for this connection. And I think the expectation of a lot of insurers is that they would that we would productize this integration and solve that complexity for them rather than them doing it as themselves. And at a go to market level, it's they're a great organization to work with. They're enormously successful and professional sales teams that we can complement with our deeper industry understanding, as well as now a very coherent complementarity of value proposition. Got it. Thank you. Next we'll hear from Justin Furby with William Blair and Company. Thanks, guys. Marcus, I thought the Travelers announcement, I think in international markets in Europe was interesting because I don't think you have a relationship with them at least here in the U. S. And I guess I'm just wondering more broadly speaking what the cloud does for you in terms of just strengthening your Tier 1 pipeline? And then second to that, can you just give some sort of update on overall bookings versus kind of your expectations in the quarter, I guess, with all the moving parts, it's sort of hard to get a sense here. And then I've got one quick follow-up for Curtis. Sure. So with respect to the relationship between the market in disburdening themselves with some of the complexities of their core environments. And some Tier 1 insurers are really an aggregation of multiple smaller businesses that work under 1 corporate umbrella. And it's very we think it's extremely light. In fact, we're already seeing this happening that some of those individual divisions will who kind of think of themselves actually as smaller insurers will be motivated to transition more quickly to the cloud for the same reasons that a completely standalone smaller insurer would be, namely that they just don't have the bandwidth to undertake all the different transformation programs that they want to do in data and analytics and digital engagement, etcetera. And so the cloud becomes the cloud delivery model becomes increasingly appealing to them. So I think it will I think as we mature this model and as we have references show for it, and especially as we reduce total cost of ownership, I think we're going to see acceleration across all segments motivated by the cloud improving the Tier 1. There was another portion of your question, I just forgot. Yes, just around overall bookings in the quarter and kind of how they came in versus what you expect? Yes. As you know, we think of bookings very much on an annual cycle, which is also I think explains some of our reticence around bookings metrics because it's challenging enough to corral that on an annual basis and it's kind of daunting to think about doing so and reporting on it on a quarterly basis. So that's some of the hesitation you hear from Curtis and me on that score. But specifically with respect to this year, on an annual basis, I think we feel really good about how things have gone and across the board, across InsuranceSuite, InsuranceNow, the data products, the digital products, active conversations around some of the newer things we're doing like science and the sales force partnership, which will be a licensable addition to the which is a licensable addition to our product portfolio. And it's the breadth as well as the quantitative aggregate of the demand that's been really encouraging. That said, we have a lot of work ahead of us still in the remaining 2 months of the year and sales execution will be extremely important if we're going to fulfill our commitment. Got it. Thanks for that. And then maybe just quickly for Curtis, really appreciate the initial read for next year. I guess just wondering on the services line though, if you could, because it's such a big number for you guys, just wondering if there's any high level commentary. I think The Street is sort of a 20% growth number. Is that a reasonable way of thinking about next year for now or any other framework would be helpful? Thanks. Yes. So we commented that the subscription growth level this year was unusually high and we expect that to begin coming back down to normal levels next year in the coming year. So that's part of the guidance that we provided around the services line. And we'll be able to talk in more detail about that too in the Q4 call and in the analyst call as well. Okay, got it. Thanks very much guys. Next we'll hear from Rishi Jaluria with D. A. Davidson. Hey guys. Thanks for taking my question. I guess, Marcus, starting with you, as you look at the potential M and A landscape here, be it larger acquisitions like science or smaller tech and technological acquisitions. I mean, no secret that we've seen some very elevated multiples in software and technology in general. Just wanted to kind of get your viewpoint on what you're seeing out there, how that sort of M and A pipeline looks and if there's how you're thinking about maybe valuation and where there's opportunities? And then I have a follow-up for Curtis. Sure. As you know, if you've followed all the InsurTech phenomena over the last few years, it's certainly a very target rich environment, far more opportunities, and of early stage technology companies than I would personally have ever imagined, serving and even explicitly focusing exclusively on the P and C industry. It's an utterly different landscape than when the company was started some decade and a half ago. So that's it's a very interesting vector of exploration for us that we had not put a lot of mind share towards in previous years, but now through the very natural partnerships that we have for lots of analytics and digital offerings that naturally complement our transactional and operational platform in InsuranceSuite, as well as just our location here in Silicon Valley where the preponderance of the insurtech phenomenon is happening. And kind of the our if it does, if it goes to modest I think in an advantaged position for these conversations and allow us to be very patient in making the right choices and not overpaying to the degree that's possible in this environment. One individual on my team that's well known to most of the community on this call, Richard Hart, leads that whole evaluation and management of the pipeline and he's very busy with a lot of conversations, but he's also extremely disciplined about valuations and I think that's served us very well so far in the deals that we've consummated to date. Okay. Thanks. That's helpful. And then Curtis, I appreciate the color on next year and kind of helping us break down all the moving parts with subscription ASC 606. In terms of 606, I mean, I understand revenue impact is basically awash. From an OpEx standpoint, should we expect some benefit from 606 on the OpEx side, which is maybe offset from increased subscription deals and higher services mix shifting a drag on gross margins? Yes. So with more subscription, right, and we guided preliminarily to 40% to 60% of new sales of subscription, that will have an adverse impact on So that's part of what we were factoring in when So that's part of what we were factoring in when we provided the guidance around our operating margin that we did not expect to see operating margin expansion in 2019. And then we noted some other things. Obviously, we continue to invest in the cloud and the cloud transition. We noted that some of the investments we made this year were to some extent back end loaded. We'll see the full year impact of that in 2019 that we didn't necessarily see in 2018. And so those are some of the things that we preliminary took a look at when we gave guidance that we don't expect to see operating margin expansion in 2019 from sort of the guidance we're providing today for the full year. Okay. Thanks. Sorry, just to clarify. So from just 606 alone, is there any benefit on the OpEx side from the adoption of 606 or is there no change there? Modest, but potentially modest. We'll move on to Tom Roderick with Stifel. Hey, gentlemen, thanks for taking my question. So, Marcus, I wanted to just build on the earlier question about salesforce.com. Given that in your prepared remarks, you highlighted the transformation journeys that a lot of your customers are undertaking to the cloud and really updating their offerings. We heard very similar remarks from Salesforce, which highlighted some very big deals in insurance just recently. If we think about what's driving some of these transformation journeys, particularly for your bigger customers and thinking about sort of 2 choices that drive this, one sort of being inside out, starting with policy and claims and billing sort of inward facing functions as opposed to outside in, the digital functions that face the consumer. Which of those two options are driving that? And with respect to that, can you talk a little bit more about the integration points with Salesforce's FSC? Sure. I think the motivations for core system replacement and undertaking digital transformation, there are many and varied, but they're also kind of consistent across companies. So what I mean by that is, there are lots of frustrations that can vary from organization to organization with specific deficiencies of their specific frustrations they may have with their current system environment, I. E. They cannot, they can't instantiate the product that they want to sell or there's limitation in their system environment that prevents them from selling in a particular market or adjusting their pricing with the frequency that they think they need to be competitive or their customer engagement value proposition is eroding because the bar has been rising so much faster than they're able to keep up with. And so the specifics of which concern is the most urgent will definitely vary, but it's a menu of maybe 5 to 8 themes that we hear over and over again across our entire customer and prospect base that are strikingly similar and they are very positively for us. They continue to grow in urgency. Now where CRM fits into that is, I think, a recognition by insurers that they need to think about their policyholders not just as units of risk, which insurers are actually excellent at doing, modeling what financial exposure each customer might represent in underwriting carefully, but also as customers, as consumers and who want to be catered to, who have life events, who have different preferences about how they want to be sold to and serviced, etcetera. And that need to have a much more customer friendlier, omni channel like experience that the customers now expect from a retail or other financial services world has really come with conviction to the industry. And that requires marrying 2 quite disparate domains, the very horizontal CRM and SSA like functionality that you have in the sales force and then the transactional and operational platform that we have in InsuranceSuite, which really need to intersect at the moment that you don't just want to look for information, but actually want to transact on either an existing customer or potentially new customer. So that transactional intersection is where we have where our customers want us to build productized integration between us and Salesforce. And so what we're doing is natively embedding Guidewire data entities and transactional flows into Salesforce Financial Services Cloud, so that natively in Salesforce screens, you can you are seeing Guidewire data. And we think that that will be compelling to a very large array of the very large segment of the industry, I should say. But it requires some fairly heavy lifting at the product level, so that it's a true native integration and not just punching out into different screens. Makes perfect sense. That's really helpful detail. Thank you. Curtis, follow-up question just around the numbers. So targeting now on the subscription side, sort of high end of the 30% to 40% range for new sales for the year. Can you break out and apologies if you've done this before, I don't think you have. If we think about sort of the InsuranceSuite cloud versus InsuranceNow, so the 4 to 5 high end customers you hope to win on ISC as opposed to the myriad of Tier 3 and lower customers that you might see on InsuranceNow. How should we think about the rough split that drives that high end of the 30% to 40%? And maybe a better way to look at it is what's a typical average deal size for InsuranceSuite cloud as opposed to InsuranceNow? Just any direction you can give us on the split there would be really helpful. Thank you. Yes. Thanks for the question, Tom. We haven't broken that out or provided detail around sort of where the segmentation around that 40% to 50% among peers or Tier 1 to Tier 4 or InsuranceSuite now versus other. And so that's not something we've historically talked to. It's something that we consider going forward as we continue to evaluate some of the different metrics that might be helpful for the investor community to better understand our progress in the cloud and that's one that we can consider when we start to prepare for IONOS Day in September in our Q4 call. I'll ask again in September. Perfect. Thank you. Next, we'll hear from Brad Sills with Bank of America. Hey guys, thanks for taking my question. One please on digital and data, just if you could illustrate for us us maybe some scenarios or use cases where customers have gone really deep there. What does the deployment look like over time? And what are some of the scenarios that they're using digital and data for? And then would the move to the cloud represent a potential catalyst for adoption of those offerings? Thanks so much. Thanks for the question, Brad. So you can think of digital as externalizing all of the data, all of the products, the pricing, the underwriting business logic, the transactional flows, everything that happens at the heart of the core systems that we build, but externalizing all of that to participants outside of the four walls of an insurer. Of course, you can extend that also to your own employees, but the primary use cases are to the distribution channel, namely brokers and agents that are still a hugely important part of how insurance is distributed. And then also directly to policyholders, either for point of sale or equally importantly for customer service, which can mean policy maintenance or it can mean claims. And really what you're trying to do is enable a much more contemporary potentially human or human involved process, but one that is as self-service and intuitive as possible to actually transact much more efficiently. And insurers are have a sense of being behind the curve in delivering the kind of contemporary consumer grade experience that people have been trained to expect from the likes of Amazon, Uber, etcetera. And so we divide our digital products into 3 families, ones that support the distribution channel, which we call producer engaged, one for the direct to consumer, the policyholder engaged and then one for vendor partners, such as body shops and others involved in the claims supply chain who have a need to interact with the insurance transactional flow. And these are very broad in appeal and we're experiencing a very high attach rate with them pretty much across all in all geographies and market segments. On the data side, there are data is a huge frontier with many different dimensions to it. There's a portion of it is just managing the operational data and transactional data that's generated by the system and putting it into an operational data store that can be accessed by other enterprise systems. We call that product data hub. Then there is somewhat conventional business intelligence that naturally our customers want using that data. That's a product called InfoCenter. And then we have been mining that data for statistical predictive insight with a different set of machine learning based tools that guide our predictive analytics that increasingly we are embedding directly in the screen flows of the core systems themselves. It's a principle that we call smart insurance. And then there are other data horizons beyond that, namely what we're doing with science, which is to incorporate for the first time data from outside the enterprise that is generally out on the Internet and using it to build potentially build a profile of potential insureds in advance of actually having them as customers or as you're making as insurers are making underwriting decisions. And then there's much more beyond that that we still aspire to. So, we think of data and digital not so much as products, but as product frontiers, where we can do a lot more with the current products we have as well as build a lot of new ones. Your question then was second was about cloud, I think, and everything that we're building today, every major unit of functionality that we will be building going forward is cloud based or cloud native, cloud only. So all of the multiple of the data products are only available in cloud form and we're in the process of transitioning all of our digital products as well to be cloud delivered. And I think just as with the core itself that we expect that that will accelerate adoption. That's great. Thanks, Marcus. We have a follow-up question from Sterling Auty with JPMorgan. Yes, thanks guys. I just want to clarify a couple of items. So as we're all going to modify our models and set estimates, including for fiscal 2019, you mentioned that in respect to total revenue, expect growth to taper slightly in 2019. But against taper off as compared to what growth rate in 2018 because you do have some acquisition related revenue with SCIENCE. I want to make sure we're all level set and thinking about which growth rate do we start with and then paper to come to the 2019 expectation? Yes. And so the growth rate thanks for the follow-up question, Sterling. And so the guidance growth rate that we provided in the call for the full year and that's when we're basing our 2019 growth rate off of is the total revenue range that we provided $647,000,000 to 653,000,000 dollars that's a 26% to 27% growth rate over 2017 and includes all revenue in that number. And so what we talked about in terms of that high level sort of preliminary commentary on our total revenue growth rate for 2019 as we expected it to taper slightly off of that 26% to 27% growth rate that we saw in 2018 over 2017. And that's partly due to we see to us seeing as noted earlier, that services revenue growth begins to normalize. It was a sort of an accelerated level in 2018 and we see that coming back down in 2019. All right, perfect. That really helps. And then I want to take a step back. So when you guys began the work, and I know Curtis predates you, but I'm sure Richard kind of gave you the full download. As you started to work on 606, the discussion was going back to customers. Customers typically, I think, had around a 5 year average first contract length. And with 606, because of the high renewal rates, you go back and rework those deals. But I thought the idea was to get them on to 1 year deals so that with the upfront recognition, you didn't end up with kind of a dramatic impact. So when you talk about the 2 year term, is that did customers want to not go to 1 year, they wanted 2 year for some reason? And for new customers that if they choose term, are they also going with 2 year? Or is there an option to go longer or even shorter with 1 year? Yes. So we've made a lot of progress on modifying the existing customers' contracts to address this potential 606 issue. In many cases though, it ends up being a 2 year term. And that's part of I think what we were evaluating when we were trying to assess the impact of 606 on our 2019 numbers. And then when we looked at that together with some of these other puts and takes we talked about along with now what we're projecting to be our subscription as a percent of new sales mix bumping up to the 40% to 60%. We think overall the impact on 606 will be net neutral to license and other revenue. That being said, we know there's still some work to do between now and the end of the quarter and we intend to fine tune our thinking around that and provide updates in more detail when we get to our Q4 call. Okay. And last question, subscription, because we have several terms being thrown around here. We have subscription, we have term, we have cloud. Does subscription include all of the cloud licensing or maybe flipping it around, is there subscription revenue that is not cloud? And if so, why does that get ratable treatment versus term? That's the simple answer to that, Sterling. All subscription and cloud revenue are synonyms for us. Any all cloud revenue comes in subscription form and there is no subscription revenue that is not cloud based. Perfect. Thank you, guys. I appreciate it. Thank you. That will conclude the question and answer session. I will now turn the call over to Mr. Marcus Ryu for any additional closing comments. No additional comments, but thank you for all participating on our call today. Goodbye. That does conclude today's conference call. Thank you for your participation. You may now disconnect.