Awesome. Perfect. Thank you. Thank you all for being here. This is always such an amazing event. For me, it always hits home just to see the impact that Guidewire has in the industry. It's super humbling for me. I joined Guidewire in 2017 and had moved into the CFO role in 2020 and had the opportunity to help the business navigate through this cloud transition. It really has been the honor of my professional career to be here to help with all this hard work. This hard work is amazing because it sets us up so well for what the future has. I will jump into it. I'll start with some key financial highlights. We have a very durable ARR growth engine, and that's supported by the core work that we're doing on cloud migrations and the modernization cycle that we're enabling for core insurance processing systems.
You know us all, and you love, like I love, these very meaningful customer relationships that last in decades and result in some of the best retention rates in enterprise software. We have a real opportunity now ahead of us to infuse much more organic innovation based on the hard work that we've done on the Guidewire Cloud Platform, but also do more inorganic activities. I'm super excited about the announcement with ProNavigator. We're thinking more about those types of opportunities. For a while, you all know that we were pretty thoughtful and introspective as we were working through the cloud transition. Now we're kind of looking up a little bit more. The model is playing out the way we'd hoped it would and kind of in line with how we set our expectations. You're seeing the gross margin expansion, which is leveraging the platform investments that we have made. We look forward to continue to driving profitable growth.
This is a slide of our durable ARR growth. As you know, this growth engine is being driven by the cloud business. This is particularly exciting because over the last two years, we've seen that growth rate tick up into the upper teens. On the last earnings call, we talked about how that upper teens growth profile will be more durable for us as we look ahead. It's super exciting to be able to say those words in a forum like this. Moving off of our historical ambition of being a long, very durable mid-teens grower and thinking about how we move into an upper teens grower and the progress we're seeing in the cloud is driving that confidence that we have to be able to say that. This is a slide that we've shown over the years.
I think you all understand that the cloud ARR is driving our overall ARR growth. The InsuranceSuite Cloud customers are driving our cloud ARR. The chart on the right looks at our InsuranceSuite Cloud cohort and how they are growing. It has just been tremendous to see the progress that we've made there over the last six years. This is a slide that we've now shown a number of years. One of the things that's important to understand in terms of how we engage with our customers is that these are long and very strategic engagements. We typically sign five-year initial terms. We have certainly examples where we sign longer durated contracts than that. Typically, we sign five-year initial terms. It is very common for those contracts to ramp over that five-year period. That is spelled out in a fee table in the contract.
This is a view of those cohorts by fiscal year and how the ramps have progressed. You may remember back in FY 2023, we spent some time talking about that kind of acceleration in year three. Last year was a little bit more linear. The other thing that's really exciting when you look at this page, clearly something changed about three years ago where we saw all of these curves just move up on the page. That is just a reflection of the platform maturing and the referenceability that we're getting out in the market that is allowing for customers and prospects to feel more confident in the destination and make bigger commitments. Coming out of last year, it was not certain that we would see this level of step up with respect to the FY 2025 cohort. The team has just done a tremendous job executing on this opportunity. It is great to see customers' willingness to make some large commitments.
Those cohorts and those ramped agreements are very important in terms of how we think about the visibility of our model. ARR is the primary metric that we focus on internally. The components of building ARR are pretty simple. How much ARR is going to come from deals that we're going to sell in the year? That includes things like true ups and CPI, but all the kind of sales activity that we have in the year that will translate into ARR in the period. Then we have the ARR that comes off of the backlog. This is all the hard work we did in prior years, the realization of that ARR. You have to account for the attrition events that occur. We have very, very low attrition.
Last year, we talked about having the lowest attrition rate on record since we released ARR as a metric. Just tremendous to see that progress. All of those things together yield a pretty predictable model and give us a lot of confidence in how we think about the growth rates as we look ahead. This is a new slide. One of the things that I wanted to bring into this room, we always tend to orient on the annual numbers and think about the longer- term. We understand that you all have to build quarterly models. It can be difficult at times to model some of the quarterly seasonality. A key driver into the quarterly seasonality is the ARR coming off of the backlog. I was going to say we're not in a six-month reporting cadence quite yet. I'm going to provide a little bit of quarterly disclosure here.
What this looks at is it looks like this is the ARR that's coming off of the backlog this year and our expectation for the ARR that's coming off of the backlog and where we expect it to fall in the quarter. Takeaway is for the year, we're seeing very healthy growth of ARR coming off of the backlog. Q1, Q2, and Q4 are all going to see a nice tick up on a year-over-year basis. Q3 this year actually has a year-over-year decline. That is just a function of how those particular cohorts that were in Q3 fell. It turns out last year, we had a couple of deals that we signed where the ramping event doesn't really happen until year three. Nothing to read into that dynamic.
Just to note that when we looked at those cohorts, that jumped off the page as something that you all should be aware of as you build your models. Last year, I think we saw a little bit more volatility around quarterly earnings around some of these dynamics. This is our attempt to bring some of that into this room and to allow us to talk about this a little bit more. This is some kind of new view into the seasonality of the business this year. As we look at the overall gross margin, this has just been tremendous to watch and tremendous to be a part of. Many of you remember about three years ago, we came in here and said, hey, look, we've invested ahead of the demand curve. We've built out a cloud operations function. These early cloud cohorts are absolutely critical to our long-term success. We've invested ahead of that demand curve.
Now we've built the organization to support a billion dollars of ARR. We need to grow into that billion dollars of ARR. We have executed to that in a tremendous fashion. I think the platform investments were improving efficiency behind the scenes. The team did a really good job around discipline, around hiring, and how we think about cloud operations and the needs there. There was a lot of focus into how we manage our AWS environments and how we manage our cloud infrastructure to realize this page. As we look ahead, we'll see a little bit more growth in terms of headcount. We'll see a little bit more growth on the other costs and the infrastructure costs to support our cloud business. We will still be delivering very, very healthy incremental margins. We'll talk about that a little bit more on a coming slide.
We've talked about this a lot over the years. As we approach this transition, think about this as chapter two and how Mike thought about the cloud transition and unlocking the cloud transition. There were really three things that we had to manage through. The first is, can you build this? This is a very difficult use case. Establishing this cloud architecture was absolutely critical to our strategy and investing to make sure that we capture that platform to support our growth into the future. The second is, can we sell it? Can we continue to sell it at a high level? Can we have those win rates that we saw in the on-prem world, in the cloud world? The win rates that John showed today were just tremendous. The team has done a great job executing on that part of it. Then can we scale it? Can we deliver a software margin? I'm very proud of the progress that we have made there.
This is probably the last time I will show this slide because this is very much kind of the orientation around how we thought about the cloud transition. Maybe a little bit of a pat on the back. We feel very good about what we've accomplished. What is most exciting about this slide is really what it unlocks for us. When we think about the growth pillars, and this mirrors what John talked about. Many of these growth pillars are what John talked about. We still have a number of very exciting growth pillars ahead of the company. There's still a lot of work to do on migrations. We have approximately 150 on-prem customers.
There's a long runway there. We hope to continue to accelerate that. There's meaningful work to do there as we continue to migrate our on-prem customer base to the cloud. Modernizations, there's still way too much of this industry running on antiquated systems. That is just the bread and butter of what we do, is kind of waking up every day to try to modernize this industry. New products, this has been the connections where we've really featured a lot of new products and new innovations. Very excited about the potential that that creates and the growth that that will afford us over time. The marketplace is something that continues to grow in a meaningful way. That ecosystem is very exciting. We have some interesting revenue share partners in there, and there's opportunity to grow that base as well.
Finally, M&A is, you should expect us to be thoughtful and measured. This is an industry that there are interesting opportunities, but there's also a lot of horizontal opportunities that we tend to steer away from. You'll think about us looking more at adjacencies rather than consolidation plays. There's some really exciting stuff here, and this will be part of our strategy as we look ahead. Okay, I'll pause and let you all kind of consume this slide, as this is a slide that we update every year. I know there's a lot of focus on this, so maybe I'll give you a second to digest it. Then I wanted to walk through a couple of things. Okay, first off, the FY 2026 targets are the same as the Q4 call. We'll obviously address the full-year guide on the Q1 earnings call.
We're super happy with the momentum we're seeing this quarter, but want to focus this conversation on the longer-term opportunity. The FY 2026 targets are the same. For the FY 2028 targets, we put some thought into these targets as we kind of approach today. Clearly, we were going to be above the $1.5 billion ARR goal that we had previously. I think all of you were expecting that, and all of you knew that we were going to be above that number. These new growth rates, we've shifted towards a growth rate range rather than $1 target, which I think is more appropriate. We originally established $1 target when we said, hey, what will the business look like at $1 billion, and what will the business look like at $1.5 billion?
Now, kind of as we get closer to some of these targets, moving that to a growth orientation makes more sense. These new growth rates would imply around $1.7 billion of ARR, which is a material upward adjustment off of the $1.5 billion that we talked about previously. Very excited to see that. This elevated growth also impacts our revenue growth expectations. We put 15% - 16% CAGR for total revenue, and then revenue ex-services. If you remove services from that equation, it's about 17% - 18%. The revenue ex-services should grow roughly in line with ARR. Gross margin expectations are largely the same, with a slight uptick in total gross margins as a result of the higher software mix associated with our new growth rates.
However, the gross profit dollar, while the gross margin numbers are largely the same, the gross profit dollars are elevated given the higher revenue base that this model assumes. As we see numerous opportunities for growth, we do see opportunities to invest more. As a result, we've adjusted our operating cash flow. Our operating and cash flow margin targets are down a bit in this model. In this plan, much of the incremental gross profit dollars are being reinvested in the business. Just doing some simple math for you all, if you look at the midpoints of these ranges, our updated numbers project a little bit over $100 million in incremental gross profit dollars in FY 2028, but our plan shows about $30 million of incremental operating cash flow dollars in FY 2028. We're going to be reinvesting some of these elevated growth rates, reinvesting back in the business.
We think that there's tremendous potential right now with everything that's going on in the world to invest more in this business. That's a reflection of the opportunity that we believe exists to keep this upper teens growth rate over a fairly long durated period. Those are the primary changes and adjustments that we've made to the FY 2028 targets. We still believe very strongly in the 80/40 plan. We released this plan last year. This is still a guiding light for us. This is the right framework to think about how we will eventually evolve Guidewire. We're going to lean towards focusing on growth over accelerating the timeline to this right now with all the opportunity that exists. We will always kind of have this in the back of our minds as our framework. You'll see us calibrate a little bit more towards growth than rushing towards this plan. We still think this is the right way to think about the long-term terminal margins for Guidewire.
I will touch quickly on capital allocation. We maintain a very strong balance sheet, so about $1.5 billion in cash and cash equivalents on the balance sheet today. In FY 2026, we expect about $360 million in cash flow from operations, about $28 million in CapEx and capitalized software development costs. It puts us in a very healthy position with respect to our overall capitalization. This is important for us right now. I think where we are as a business, for a long time, M&A wasn't a focus. With the investments we've made in the platform, it's the right time for us to make sure that we're keeping those strategic avenues open for us. I think you will see us maintain a strong balance sheet this year.
We always do have regular conversations with our board, think about capital return options. We will continue to do that. Unlikely to have a meaningful stock share repurchase program this year. As we look ahead, ultimately, I expect us to get to a place where we have a programmatic approach to how we think about capital return and stock repurchases. That's kind of it for me. I wanted to just quickly finish on the highlights. We're really thrilled about how this business has progressed over the last four years as we've worked through this cloud transition. There are all these new opportunities for us that even at the start of this transition that we had no idea that would be presenting themselves. A tremendous time at Guidewire and super excited about the future and what's to come. I will tick quickly through the GAAP to non-GAAP reconciliations and t hen I will invite the rest of the management team up on the stage for Q&A. Come on up. Thank you. We'll get that.
Hey, Rishi.
I'm in charge.
All right. Perfect. You can hear me loud and clear?
Hey, it's new.
All right.
Thank you. Thanks so much for this. Really appreciate all the details. Great to see the momentum of the business. Maybe I want to ask just a deeper dive in thinking about AI and the longer-term implications on the business. Mike, I know you've been taking AI seriously since day one. It's clearly resonating with customers and partners that we've been talking to with connections. Really great to see that. Obviously, the keynote yesterday outlined that. Maybe just a two-parter. Number one, as we think about the priority of investments in AI, can you outline what does that look like and picking and choosing your spots where you want Guidewire Software to be the one doing it versus allowing partners to do it and other vendors and working with them and having that interoperability?
Now maybe taking it to the financial model, Jeff, a ppreciate the raised ARR targets and obviously investing for growth. As we think about the cost of inferencing, layering that into the model, how do we even think about that impact on gross margins and maybe some of the incremental engineering dollars you need to put to work on AI to productize this and really kind of transform yourselves into more of an AI-first company over the next couple of years? I know there's a lot there. Any color there would be helpful. Thank you.
Okay, great question. I think you asked me to prioritize this. I don't know if I'm going to get it exactly right, but I'll try. From a product perspective, there is a very clear opportunity in underwriting and commercial lines underwriting. This space is just materializing right in front of us. We want to attack that in two ways. One is just outside of AI, we think that there's a real opportunity for UnderwritingCenter to be the backbone for how this should work in the industry with our Advanced Product Designer, insurance products, do what we've done for ClaimCenter and PolicyCenter for underwriting, and then really create what I'd like to say in hindsight will be our first AI-native application that without AI doesn't make any sense. There's a very clear opportunity there for us.
Second, I want to make sure we are doing exactly what our customers need us to do in terms of facilitating their use of AI inside their enterprise. That doesn't necessarily create a direct product opportunity for us, but it helps us, I hope, sell more core systems. I think that is the second most important thing we can do. That's all the things that we talked about in the keynote the other day. We like to take this platform-first approach to building product. We say, hey, we need an underwriting product. What platform services do we need? Okay, let's build those platform services. Let's make those platform services available to partners, available to customers. That's the second most important thing we could do. Maybe the third most important thing we could do is use AI ourselves for our development organization. If we do that and we execute that and we get Diego should comment on this. If we get the unlock that we think might be possible, the entirety of our company will accelerate. I think we do all those things, and we're going to create a lot of shareholder value.
Yeah. I mean, just on the modeling side, it's very early. I would say right now our approach to AI, as Mike hinted at, is more on an investment side, rolling it out to the development organization, ensuring we're investing in those tools and capabilities before we see the productivity gains. Right now, we're more on the investment cycle. As we think about how it's going to impact the revenue and gross margin model into the future, it's still too early for me to comment on that yet.
Great. Thank you very much. Adam Hotchkiss with Goldman Sachs. I'd love to tag on to the last question and ask it in a little bit of a different way. You're launching a significant number of new products. This is obviously a completely new time for the company. Your win rates continue to be really impressive and improving. When we think about that part of the market that is still living on these legacy and antiquated systems, and you bring all of these new products to market, and that innovation gap relative to those legacy systems seemingly is accelerating, what have you been observing in your prospect conversations around their willingness to move into the cloud and be with Guidewire today, maybe versus where we were one to two years ago?
One of the things that I've noticed definitely in a lot of prospect conversations, because of some of the new capabilities that we're talking about, like PricingCenter as an example, it's a much easier entry point for them to work with us rather than thinking about the totality of moving all the way to PolicyCenter, which I don't mean for that to sound truly as massive as it might. It really is a significant lift for them to think about even for perhaps a small line of business. Just that alone is a major decision for a carrier to make, and it's a decision point that doesn't come up terribly frequently.
The thing that I like so much about PricingCenter and UnderwritingCenter, people can start to work with us around much smaller and more narrow use cases, perhaps starting out with particular lines of business, and then start to see what that experience is like. Of course, Paige was mentioning, we have spoken about it on Mainstage too. PricingCenter and UnderwritingCenter don't require InsuranceSuite to sit under them. We think that it's a significantly better experience, and there's a lot more that we can do leveraging the entire capabilities of InsuranceSuite. I think those, to me, are some really interesting ways about starting to think about working with carriers in smaller steps rather than expecting them to make a full decision to move straight away from a mainframe as an example.
I'll add one thing to that. If we zoom out from the product set for a second and think about the seat that the decision makers are sitting in inside of carriers, the pressure on them has amplified quite a bit. Some of it's very unstructured in the way it's come at them from a get a hurry up and go after agentic architecture, hurry up and deploy agents. What I'll say is in the conversations driving the customers and the very real condition right now is the distance between winners and losers is both increasing in the gap. The pace at which that gap is created is very real. Pricing is probably first and foremost amongst those. The idea of sweating the asset and kicking the can down the road, that's really still very much a conversation we have to have and navigate for business case and prioritization and sequence. The pressure to act is increasing more so than I've seen in the past 20 years.
Thanks, everyone. Ken Wong, Oppenheimer. Question for Diego, one for John. Mike, both you and Diego characterize this Connections as being one of the biggest product focus Connections you guys have had in a while. Yet on stage earlier today, Diego, you mentioned how this was just an appetizer. As you look towards the announcements next year, it's going to be much bigger. I guess are you able to elaborate on that? For John, you mentioned more financial progress with expansions than migrations. I guess how much of that is just a lot of the migrations are kind of recent big wins and there's a lag in terms of the financial impact? Or is it just the expansion activity has just been so good?
Of course, we're going to tell you now everything we're launching next year. It's exactly how these things work. What I was trying to convey is that we've been working for many years in enabling the infrastructure. There is a lot of work that you do under the water that you don't see, and that is critical, especially when you think in terms of digital. Digital as an aspect of a library, as an aspect of infrastructure to deploy, as an aspect of infrastructure to monitor the deployment, infrastructure to monitor the service of the deployment. There are all those kinds of things that you do once, and you need to do it in a way that is resilient for scale.
When you work on that at the beginning, it doesn't really show because at the same time, you need to build the first app or the first capability on top of this infrastructure. Typically, when you do that as a project, you can cut a lot of corners and just focus on delivering quickly the capability. When you do that as a platform, you basically need to make sure that you do all the things that, as I said, they are not as sexy, but they are the things that then enable you to grow from or grow or stay, grow the cogs or grow the percentage of the cogs. All those things have been done across a few years, and you didn't see it, but now all these are coming to fruition.
In the last year, when we started to build new stuff, we started to get all the benefit of the infrastructure serving us. Even the acquisition of Quanti, John made it a point that it was running on GWCP almost on the point of acquisition, and that was because GWCP had, we had to build some infrastructure and some capability that then becomes very useful to kind of do something fairly different than what it was originally, how to say, envisioned for. When I laugh today and say this is just the beginning, it's because depending on the decision that Jeff was alluding to, we can invest more. If we make a decision of investing more, assuming that we have the right target on investing more, that we have good ideas, assuming we have good ideas, now we start to have the financial support, and we have an infrastructure that will enable us to accelerate in that direction. My comment was on a readiness of everything that we've done is unlocking an opportunity that we didn't have before because before, we needed to make sure that the infrastructure was, first of all, capable to support what we needed to support.
I'll make a quick comment on that. Then I'll get to the other questions. The other one is underwriting in itself. The comment around the appetizer was really around UnderwritingCenter. UnderwritingCenter, there are going to be multiple pathways to get to the capabilities that make up UnderwritingCenter. There are going to be some people like me who might skip straight to dessert. Some people might actually just eat the salad. For commercial carriers, there are going to be multiple ways to consume UnderwritingCenter. If we think about between now and next year, us making all those components thread thoughtfully together and open those pathways, as Christina Colby said, some more bite-sized chunks or some more one course at a time type chunks to get on the pattern.
Back to the expansion piece, the math around it really is more around pure expansion, not having anything to do with the large migrations. If you look at the number of customers around the world that are really on the larger end of the market and think about how many of them are single X centers, ClaimCenter or PolicyCenter, a few just BillingCenter, but Policy and Billing oftentimes in concert, but where there's still a lot of estate to go by either line of business, geography, or X center. The thing that is becoming more and more true in these conversations, two things, sorry. The first thing that's becoming more and more true is because of the platform and data and things like ProNavigator, the ability to thread decisions through the enterprise and run the enterprise estate on the platform. Putting more freight on the platform is really starting to prove out in the business case. That idea of a customer being full suite rather than singular product is starting to make more sense in that conversation. Sometimes it's a migration, Ken, that opens up that expansion. Sometimes it's expansion to cloud and then the migration later. All of those really are kind of really truly new estate for us. I'm excited to continue to go after that because I think that's still yet a relatively large estate.
Thank you. Dylan Becker with William Blair. Maybe for Diego or John to start. Obviously, we're layering on more product. We're talking about kind of more value accruing to the customer base. On the implementation side, how are you thinking about automating more components of that process, creating and tailoring maybe a standardized roadmap to make that easier where customers realize value faster? That's one. Mike, for you on the slide around kind of the aggregate mix or share of the dollar and spend, I think it's like 25% that goes to administrative cost. Within that, where do you see kind of the biggest segments of opportunities if we're looking at it in a $3 trillion overall base? Minor improvements can be massively valuable.
OK. I'll take a product angle or a technology angle. When we talk about APD, when we talk about digital, when we talk about all those things, you have to go back and look at what was the bigger cost of implementing Guidewire in general before cloud. The biggest cost was implementing integration, big chunk. There was, of course, implementing the product model. Then it was implementing digital. If you look at these three things, we came with APD. We came with a new integration framework that does not require GOSTO anymore. We came with the JDP and the Jutro digital platform. Those three things have reduced a lot the cost of implementation, a lot of the sort of success that you've seen Guidewire having, especially on the net new deal.
At some point, if you really look at our history in the last five years, the model initially was expecting us to be faster in migration and not so, how to say, successful on net new deal. The net new deal started to come kind of at some point even surprise us a little bit. The reason they surprised us was because of those innovations on digital, on APD, and on the integration. We have today a product that is way more efficient to be implemented compared to what it was. With that said, with Gen AI and with the technology that is coming, we think that we're just scratching the surface on that, especially on things that typically require a lot of manpower for things that are fairly, fairly pedestrian. Like, oh, you need to refactor X, Y, Z.
You need to adjust this implementation to modernize it in some aspect and so on. I think that it's a huge opportunity for us to continue to eventually evolve a product that will also have the ambition to go downstream. You saw the initial slide from Mike on Tier 1 to the product was originally kind of conceived for Tier 1, 2/ 3. Now we start to have some economy of scale that we can start to consider some of the specific configuration to go to Tier 4 and even further down. 100% what you're saying, we have seen improvement. The last thing I want to close is what we talked on yesterday about Jutro Studio is one more of this evolution of saying, hey, you don't need to implement InsuranceSuite and then implement digital. We're going to go into a direction in which you do one implementation and that implementation serves both master. That, again, is in the direction of speeding up and accelerating implementation.
I'll just add to that maybe from a project standpoint. I think if you look at a number of the migration, well, the majority of the migration projects to cloud that have happened in the past few years, a lot of the time is spent truly in heavy lifting. A lot of the things that Diego was talking about, you're not necessarily even scratching the surface. It could be sort of removing a lot of the habits of the past and creating a meaningful test harness that helps you to be able to take advantage of things going forward. I would say very similar to the patterns when someone would have actually been migrating from one version of on-prem to another version of on-prem, but it's the last one. People put the effort into that.
In addition to a lot of the things that Diego was describing relative to now being able to take advantage of the new features, we have been investing to take out a lot of that just effort and the heavy lifting, which caused things to be more emphasized around sort of this concept of lift and shift. The idea we're going to move it to cloud, then we can start to adopt the new features later, specifically by being able to take out a lot of the testing effort, which in some cases I think can take maybe 30% to even 40% of a project's time and perhaps not even necessarily get to the full surface of all of the application capability. Being able to do that now means that you can start to think about the adoption of all of the capabilities that Diego was describing.
Historically, those have been things that people did as sort of a fast follow-on, if you will. That presents the question that you also asked, which is, is there a standard value map that talks about how do you prioritize those things? We put a lot of work into identifying what we think those can be potentially for any carrier. There genuinely is no standard that we've been able to determine, which I think is actually a great thing. It allows us to be able to decide those aspects that we're going to transform are going to deliver the most immediate business value based upon that specific carrier's priorities. It could be, as Diego was describing with Jutro, much better digital experiences and something that helps them to get closer to their customer so much faster. It could be something that they're looking to actually improve bottom line and looking at loss ratio instead. At least by having maybe some consistent possibilities for measures, we can start to talk about benchmarks that we've seen elsewhere. It really does need to be something that we tailor. It's actually a huge advantage that we get to tailor it. I know you had then a.
Yeah. I'll give you a quick answer to the second half of your question. Think about it like, and this is super high level, but let's get 100 basis points out of claims processing without degrading customer experience, maybe even improving it. Let's get 100 basis points out of the expenses associated with underwriting and accepting and managing submissions and choosing which risks to take. Hopefully, we do a better job selecting the right risks. Both of those things are completely reasonable given the state of the platform and the state of the technology that we see right now. It's not going to happen next week. If you get 200 basis points out of that slide, it's pretty impactful.
Aaron Kimson with Citizens. Thank you guys for the question. On UnderwritingCenter, is it something where you envision you'll start down market and then prove it out like the cloud? Or something where there are 10 - 12 other vendors in that space today all saying they have a workbench, whether they really do or they don't? You're going to go straight to your larger customers there.
We're going to go to the customers that want to work with us there. I think we're not going to have any trouble finding one or two or three or 10. There's probably 100 that are all looking at this in one way or another. I want to be clear. Our goal isn't to say we're going to deliver the workbench because people think of that as the structure. Our goal is to find the right customers to work with to deliver the agentic system that facilitates underwriting in the insurance industry. In the process, I want to establish UnderwritingCenter as the backbone for doing that. I think up market, down market, we're going to find the sweet spot. We've got so many people interested in talking to us already. It's been less than 24 hours. We're going to find some good customers to work with here.
I think line of business and interaction with the brokerage community is going to be much more of a driver than size.
Thanks, team. Mohit Gogia with Jefferies. I wanted to just unpack the growth algorithm for you over the next few years. I think expansion seems like obviously will be a major part of that. As you think about expanding your share of the customer wallet, I was speaking to one of your customers on the show floor. I was reminded that you are fortunate to have an end market that is flush with cash. I was told that if a strategic partner.
Who is that?
I was told that if a strategic partner like Guidewire can create value, there is always cash that can be spent. That will drive your growth. Cloud was a big piece of expanding that customer share of the wallet. As you look towards the next few years, how you're thinking about new products, organic or inorganic, I'm assuming there is an organic price increase that is part of the equation too. There is AI monetization, which as software investors, there is some sort of skepticism around how much can different software vendors monetize AI. Just help me understand as to how you think about expanding that share of the wallet.
I'll talk about expansion of share just for a second, and then monetization of AI, you guys can talk about it. On the expansion of wallet, this is something that in the slide that I showed that we're moving up the strategic roadmapping agenda and the strategic intention agenda from applications to CIO to COO to CFO to CEO to board. Right at the time when that pressure is coming in the exact reverse order at a very nice time for us, we think working with customers in a way to unlock some of these, the beauty of some of these more ambiguous problems to solve, like UnderwritingCenter, is if we can solve them, there's a lot more value to create, and there is a lot more value to capture. This is not an intensely competed procurement-driven price speed-up conversation. There's one pathway to PolicyCenter.
Pathway to PolicyCenter is we're replacing a policy admin system. This is a really big thing to solve for, and it has its kind of own cycle. When we start to solve for how do we enter and exit markets better, what's the risk selection and pricing and underwriting capabilities, you need to do that to unlock value from expert underwriting and pathways to market. That's a whole different conversation. Yes, it will be price. There will be a price discovery. Yes, there will be a negotiation on it. We're solving for the very large side of that dollar that Mike talked about, which is the indemnity and exposure conversation. That's a conversation that we have to learn to navigate better, but we have pathways now to capture far more value. I'd like to know who's flush with cash. The simple fact is one of the things we will go after on this is there are a lot of categories that they're already spending in, and we're in a very unique spot to go after those in a very efficient way, efficient for us from a capture perspective, but also efficient for them from a standpoint of not satisfying a dozen different companies to solve 12 different problems.
I should rehearse my answer to this. I have to be pretty, I don't know, you guys can judge me, I guess, how artful I am in responding to this. I think outside of AI, we have a tremendous growth opportunity ahead of us at Guidewire . We have to, and I think we will, successfully migrate 100% of our on-premises customer base to our cloud. We are completely committed to doing that. You saw, we're all excited about the AI features and everything else. We also develop these systems to provision them an environment, test their code base, move their code base to the cloud, help them migrate from their old product model to advanced product models. We're doing all of this work to get those customers to our cloud system. That's a growth opportunity. We have the baseline growth opportunity and the modernization potential in the industry.
Now we have this potential in PricingCenter. We have this potential in UnderwritingCenter, even if the agentic AI comes from somebody else. I think that there is a tremendous opportunity for us to grow the company. Even underwriting investment thesis for the company right now, the AI, it is unclear. Let's say, how do we monetize that? I say basically before, I think I very logically said, hey, what if we get 100 basis points here and 100 basis points there? That kind of triples the addressable market for us. We're going after another component of the value chain in the industry that we serve that is far beyond the IT spend currently allocated to core systems. That's how I think about it. That's how we're trying to run the company. We're going to do our job. We're going to move our customer base to the cloud. We're going to win the modernization opportunity at the same win rates that we've been winning up till now, maintain 100% reference-ability, earn the trust, as Daniel said, every single time. I think that the AI potential will manifest over time.
The only thing I want to add here is as we think about the targets and the financial model underpinning that, to get to the targets we outlined in FY 2028, that is still very much primarily the cloud transition story playing out and the increased acceleration that we're seeing in modernization and the fat part of the migration curve that is still very much ahead of us over the next three years. How we make that upper teens durable for a decade is kind of as PricingCenter, as UnderwritingCenter, as some of these new capabilities come into the fray. There are multiple ways that we can get to those targets in FY 2028. One of them could include none of this stuff that we're talking about today. Obviously, we're going to execute, and we believe that that will show up in the financial model before FY 2028. I just wanted to make sure that that was understood in those targets.
Going back to my point of work that is under the water that you don't see immediately, but you will see a little bit later, we've been working a lot to make the product more, how to say, extensible in different countries. Mike did show a slide into which as long as there is one customer, the country was yellow. That is kind of a good way to mark a lot of country yellow. There is a difference between you have one customer and you own the country, so to speak. A huge direction for us of growth is still in some of those countries to sort of penetrate to a point of owning the entire country, and not in every yellow country we are in that place. Historically, the product was trustable, and it was capable to deliver what needed to be delivered.
You cannot scale horizontally across all the customers. Going back to the question about cost of implementation, there was a cost of implementation that was maybe prohibitive for many customers. Now everything that we're doing from an extensibility perspective, implementation perspective, and also the fact that the pressure top-down CIO and so on is opening up doors in countries that is going to be part of our strategy. On top of that, there are a few countries that are not even yellow yet that is kind of creating that extra angle. Keep in mind, we have the best product on the market. That is sort of still a gigantic runway to sort of penetrate independently from anything else that we've been discussing in new product.
Hey, it's Parker Lane from Stifel here. Jeff, maybe on the financial targets you have, you talked about the investment you're going to make of the incremental gross profit dollars through 2028. Maybe zoom in on what the key priorities are there. I know Mike talked about development velocity picking up in an AI world. How do we reconcile development velocity picking up with maybe also increased investment? Is it just a matter of delivering more innovation than you ever have before? Are you going to start seeing some of those efficiencies in your R&D process as well?
Yeah. I mean, I think right now some of the tooling and capabilities we're rolling out to the development organization is more in the investment cycle phase rather than the realization of some of those gains that we expect to take. The investment is now that we have this cloud platform, now that we've done all the work kind of underneath the layer of water that was invisible that allows us to infuse more innovation into the industry, that's where the investment is going to be going. It's primarily in R&D. I wish Diego Devalle wasn't on the stage and hearing all this. I have to constrain him a little bit. A lot of it will be going towards the R&D efforts. There will be some sales and marketing investments, like new personas, some new motions that we have to support. We benefit from operating in a vertical where we know our customers very, very well. We should see some nice leverage on that side. Then G&A, you've got the finance guys. You need to be paid too a little bit. There's not a lot of growth going into the G&A function. We can continue to scale that. We generally have the structure in place that we need.
This is not a scientific comment. It kind of connects what Jeff said to what Diego said. I want you to understand we have a backlog of functional insurance requirements by country, by line of business. There are many lines of business and countries where in the old world, it did not make economic sense for us to invest and build out that product feature because we would only sell it to one customer. If we can get these models to work and facilitate an increase in velocity for creating those solutions, suddenly those things are going to be logical for us to deliver. That is going to unlock those countries. That is going to unlock those lines of business. That is going to accelerate the implementations. I give this speech all the time to our developers. If we can make our developers more productive, I do not want to make the company more efficient. I want to build more insurance product. That is going to help us accelerate.
Thanks. Joe up there. To predict out to FY 2028, there's a bookings assumption therein. The best I can estimate, it doesn't seem like you need anywhere close to the type of fully ramped ARR growth you've been doing to get to the 17%, 18% CAGR endpoint. Without getting too exact, is that directionally fair?
Yeah. I mean, look, the fully ramped number and growth rates on the fully ramped number is one that always makes me a little bit uncomfortable. We had a huge deal with Liberty Mutual that drives a fully ramped outcome. You're going to see that number bounce around a little bit. I think you're picking up on the point that I was just making. Those targets are very realizable in just the core motion that we're going through today and allowing for some of this new innovation that we're talking about to provide upside to some of those numbers. I think you're thinking about it directionally right. I haven't done that math, but it sounds directionally right.
Just as a follow-up, since you're winning almost 100% of DWP decisions, what does that say about the pipeline, not just over the next year, I suppose, but over years? Is there maybe an argument that the movement off mainframe to modernize, if you can show that AI improves speed to value, customers are talking about accelerating their growth by adopting your solutions quicker? Does that pick up the pace? That's actually a bigger feeder of pipeline than maybe you've been seeing?
On a qualitative basis, that's the conversation, getting the conversation around what does it take to win in tomorrow's market rather than the avoidance of potential risk in a longstanding mainframe environment. On a qualitative basis, absolutely. On a quantitative basis, I'll say that in the very near- term, we feel really good about the pipeline coverage that we have. Some of that's traditional, and some of that is really kind of the longstanding mainframe dislocation of the mainframe entrenchment. If we think about that, it really ties very closely to the geographic component. As you go from North America around the world, there are some geographies that just have a larger footprint and more entrenched mainframe footprint.
As we continue to develop the things that Mike just mentioned, that gives us more ability to talk about really predictability of programs and then the value of being on the cloud in Germany and in Japan, t hat is precisely important for operating in the context of those countries. In the long measure of time, yes, mathematically in the very near- term and for a long time forward, qualitatively, that's the story that we want to continue to make true.
Hey, [Mike] . Great. Thank you, everybody. I think we'll wrap it up there. It's been a great dialogue. We'll head outside for a cocktail hour.
OK. Super. Thanks, everybody, very much.
Thank you.