Duck Creek Technologies, Inc.

Q4 2020 Earnings Conference Call

10/20/2020

spk11: Ladies and gentlemen, thank you for standing by, and welcome to the Duck Creek Technologies' fourth quarter and fiscal year 2020 earnings conference call. At this time, all participants are in listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star 0. It is now my pleasure to introduce Brian Denue from ICR.
spk04: Thanks, Andrew. Good afternoon and welcome to Duck Creek's earnings conference call for the fourth quarter of fiscal year 2020, which ended on August 31st. On the call with me today is Mike Joukowsky, Duck Creek's Chief Executive Officer, and Vinny Chapari, Duck Creek's CFO. A complete disclosure of our results can be found on our press release issue today, which is available on the investor relations section of our website. Today's call is being recorded, and a replay will be available upon the conclusion of the call. Statements made in this call may include forward-looking statements regarding our financial results, products, customer demand, operations, the impact of COVID-19 on our business, and other matters. These statements are subject to risks, uncertainties, and assumptions and are based on management's current expectations as of today and may not be updated in the future. Therefore, these statements should not be relied upon as representing our views as of any subsequent date. We 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 with the primary differences being stock-based compensation expenses, amortization of intangibles, change in fair value of contingent earn-out liability, and the related tax effects of these adjustments. With that, let me turn the call over to Mike.
spk06: Thank you, Brian, and good afternoon, everyone. I want to thank all of you for joining us today for our first earnings call as a public company. Successfully completing our IPO was an important milestone for Duck Creek as we execute on our mission to transform the global property and casualty insurance market with our modern low-code SaaS platform. I'd like to also thank our new shareholders for their support and their belief in our ability to lead the insurance industry's transition of running core systems in the cloud. I'm excited to start by quickly reviewing our financial results for the fourth quarter, which were very strong across the board. We reported total revenue of $58.3 million, up 22% year-over-year. And this was underpinned by subscription revenue, which is the revenue derived from SAS of $24.6 million, up 54% year-over-year. And we were profitable in the quarter with adjusted EBITDA of $3 million. On today's call, our CFO, Vinny Japari, and I will spend some time providing a few recent highlights on Duck Creek, review our full year and fourth quarter 2020 performance, and give some insight into how we're thinking about fiscal 21. But first, let me begin by saying we hope that all of you and your families are safe and healthy. In light of COVID-19, the past six months have certainly been an unprecedented time for all of us. I'm incredibly proud of the strength of Duck Creek's culture, the resiliency of our people, and their willingness to give and support those in need. Despite the health crisis and many related economic challenges, we have delivered two of the best quarters in the company's history since the onset of the COVID pandemic in March. Our strong performance is due to both the robust and increasing market demand for our technology, as well as the diligent execution of our Duck Creek team. We seamlessly shifted over 1,300 employees to work from home over the course of two days, and have continued to deliver on our sales targets, our project and services goals, and supporting our customers during these challenging times. In addition, we had many team members engage in their communities through volunteer efforts and through our Duck Creek Gives Back program, where we have a focused partnership with the Red Cross through donations, our matching program, and also providing employees paid time off to volunteer. Since this is our first call as a public company, I want to spend a few minutes providing an overview of Duck Creek, our product offerings, and our market opportunity. By way of background on me personally, I've devoted most of my near 30-year career to the application of technology in the insurance industry. This started with the creation of the insurance software business within Accenture, after which I spent more than seven years at Allstate Insurance, leading large technology and business transformation programs. And since then, I've been leading Duck Creek for the past nine years, and it's a privilege to be the CEO of this incredible company as we continue our march to lead the insurance industry to modern SaaS solutions. For those that know me, you know I'm very passionate about how technology can transform insurance. However, I'm always grounded in the realities of the industry that we serve, including the challenges caused by P&C carriers having highly complex insurance products, varying service models, and the highly regulated nature of our industry. The global P&C sector is a massive industry that represents more than $2 trillion in annual premiums. Insurance carriers are reliant on core system software to manage the essential aspects of creating, quoting, and selling insurance products, billing and servicing customers, and importantly, responding to what I call the true moment of truth when they have to process claims. P&C carriers currently spend more than $80 billion on IT systems annually, of which approximately $15 billion is our addressable market opportunity for running and operating core systems and related digital services on Duck Creek On Demand. Historically, these core systems have been largely on-premise, code-driven applications that are highly customized, and ill-suited for the rapid pace of change required to thrive in today's P&C industry. To successfully compete in today's market, carriers of all sizes are recognizing the need for a software platform that provides greater agility, faster speed to market, and greater flexibility. Carriers innovate faster than ever before, whether by creating new business models, launching new insurance products, expanding into new regions, or digitizing and streamlining customer experiences. And traditional solutions often cannot support these needs, a fact that became readily apparent to many carriers as they struggled to adapt their operations in response to COVID-19. We believe the global P&C industry is just at the beginning of a generational shift to new technology platforms. We have led the way on this transformation since 2015 when our first customer went live on Duck Creek On Demand, which is our comprehensive software-as-a-service platform. Duck Creek On Demand enables our customers to drive profitable growth by helping them accelerate product innovation, reduce costs to greater efficiency, and dramatically improve their engagement with their customers. We believe Duck Creek On Demand is far and away the most robust, mature SaaS solution for the global P&C industry, and this is reinforced by our success in the market. Fiscal 2020 was a milestone year for Duck Creek. We exceeded over $200 million in revenue, driven by tremendous growth in our SaaS revenues. We are now clearly past the early adopter phase of the market, and we are seeing SaaS to be the default choice for the vast majority of sales discussions and RFPs with prospects and clients. To be clear, this was very evident in the market prior to the onset of COVID, but we believe the pandemic has reinforced this trend. Duck Creek's primary focus is to accelerate an insurance carrier's digital transformation by providing a SaaS platform that is purpose-built to deliver superior business performance and value to customers. Today, over 60 carriers have deployed Duck Creek On Demand, 30 of which are running their core systems on our On Demand platform. Our On Demand customers range from large Tier 1s who have over $5 billion of written premium to Tier 4 regional insurers. We are proud to be partnering with these customers on their digital transformations and revolutionizing the way that core systems are run. We had significant success during the first three quarters of our fiscal 2020, including a win with AIG, who chose Duck Creek On Demand as part of their AIG 200 program, a multi-year enterprise-wide effort focused on the long-term strategic positioning of AIG for the next 100 years. We believe this is one of the most significant SaaS decisions ever made in the industry. This follows other significant tier one customers who have selected Duck Creek on demand, such as the Hartford and Liberty Mutual. We have also seen excellent momentum in tiers two through four, where we signed new on-demand deals with carriers, including The Doctors Company, Munich Re specialty insurance, and Mutual Benefit Group, among others. We are particularly proud of our implementation at Munich Reef Specialty Insurance, where we partnered with them and Accenture to launch a new product line for policy, billing, and claims in just 90 days, something that is unprecedented in our industry. Our success across the entire continuum of carriers speaks to the power and flexibility of our low-code SaaS platform. In addition to these core system highlights, we also saw good traction with our standalone products, which can add tremendous value for carriers without requiring a core system replacement. One example is Incova Insurance, a Tier 2 carrier who selected Duck Creek Distribution Management to streamline their onboarding, compensation, and relationship management processes for their agent channel. We carried this great momentum into the fourth quarter, where we saw very strong activity across our business. During the quarter, We signed eight Duck Creek on-demand deals, four of which were with new customers. Many of these wins were also multi-product contracts, continuing our trend to increase share of wallet within our customer base. I'm excited to provide a little more detail on a few of our key wins this quarter, as well as some of our customer successes. First, a significant win in the quarter was Manitoba Public Insurance. a nonprofit provincial crown corporation in Canada who had selected the full Duck Creek on-demand suite to power digital transformation. Manitoba chose to standardize on Duck Creek with our policy, billing, claims, rating, and insight solutions to replace their homegrown systems. The combination of Duck Creek's on-demand maturity, security, and breadth of capabilities were key differentiators for Manitoba. Another exciting win was for our full suite of Duck Creek On Demand at a large tier two specialty insurer. The carrier conducted an exhaustive evaluation of the market to support their wide range of business lines. The decision to utilize Duck Creek On Demand will anchor their digital transformation initiative that is focused on reducing costs and streamlining operations. And in Australia, LawCover, a provider of professional indemnity insurance to law firms that selected the full Duck Creek on-demand suite for their system modernization effort. LawCover will accelerate their digital transformation, leveraging Duck Creek to improve the service they provide the legal community. This is a competitive win, and it showcases our ability to compete globally. We also saw continued momentum in selling our non-core standalone solutions to both new and existing customers over public insurance. one of the 50 largest public insurers in North America, selected Duck Creek Reinsurance Management to automate critical financial and administrative functions required to manage their reinsurance processes. We also expanded our relationship with MedPro Group, a Berkshire Hathaway company and the national leader in medical professional liability insurance. During the quarter, MedPro selected Duck Creek Distribution Management as an add-on to their Duck Creek suite deployment. In addition to these new deals, our Duck Creek service and delivery teams, aided by our vast partner ecosystem, remain focused on delivering on new innovative projects in partnership with our customers, all while continuing to successfully execute in a remote model due to COVID-19. During the quarter, Westfield Insurance, a leading Tier 2 personal and commercial lines insurer, brought a new agent portal and core system to market, utilizing Duck Creek on-demand policy, billing, and digital engagement. Their modern world-class system dramatically improves their aging experience and builds on Westfield's strong reputation in the market. Free insurance is a new kind of small business insurance brought to market by Berkshire Hathaway. Using Duck Creek On Demand, they launch into a number of new states with a new innovative approach that holistically protects small businesses with one single comprehensive policy that ensures a company's people, property, and operations. And in Europe, AGS Portugal completed an important project where they are leveraging Duck Creek policy, billing, and insights to modernize their core operations. We delivered this program in partnership with Deloitte, which showcases both our platform and our partners' capabilities in continental Europe. We have also seen great progress with distribution management, with recent production launches of both NJM Insurance Group and Gainesville Auto Insurance. We believe Duck Creek is differentiated in our ability to harness the full depth and complexity of insurance via our low-code platform and then deliver these capabilities as a SaaS solution. We continue to invest in our platform to push the pace of innovation and the bounds of what's possible with the most advanced configuration tools available in the P&C market. Some notable examples include the release of our page builder configuration capability, the latest enhancement to our industry low-code configuration tools, This new capability allows non-technical designers to develop mobile responsive user interfaces with a drag and drop configuration approach, building beautifully designed user experiences to meet the growing customer expectations. We also announced the release of our partner development portal, duckcreek.dev, which accelerates the ability of leading insurer tech providers to build meaningful integration to the Duck Creek platform using established patterns. In the quarter, We saw several partners take advantage of this new paradigm to dramatically reduce time to market for integrations to Duck Creek on demand. A great example was Prompt.io, who integrated their transactional text messaging solution to fully text-enable the Duck Creek platform. We have also extended our ready-built integrations with key industry providers like Verisk and Hyland. All of these partnerships help customers deliver solutions faster with greater confidence, Our robust ecosystem now has 50 partners and continues to grow. During the quarter, we also debuted our virtual formation website, VFormation, which houses dozens of demonstrations, customer stories, and content to keep our customers current with the latest from Duck Creek. Developed in response to the cancellation of our annual customer event, Formation, due to COVID, VFormation has been a huge success, reaching five times the number of participants of our typical in-person event. As we look ahead to the fiscal 2021 and beyond, we believe the future is incredibly bright for Duck Creek. We have by far the most robust and configurable SaaS platform for the P&C market, and we have a rapidly growing SaaS business approaching 100 million in ARR with subscription gross margins in excess of 60%, which we believe is a clear indication of our leadership in the SaaS market. We are confident we will continue to achieve high levels of SaaS growth as well as improve our subscription gross margins as we continue to scale on demand and take advantage of the significant investments we have made in our SaaS platform. Our strategy to build upon this success is straightforward. First, expand our customer footprint by signing new customer new customers to our on-demand platform. As mentioned earlier, the digital transformation of the P&C insurance industry is in its early stages, and most carriers have yet to begin the move to the cloud. Second, continue to successfully expand within the customer base, either by extending Duck Creek's footprint into new lines of businesses or selling additional solutions across the enterprise. This has been a consistent source of growth for our business as evidenced by our SaaS net dollar retention rate that is consistently above 110%. Finally, we will continue to expand and strengthen our partner network. The open architecture of our on-demand platform has enabled us to establish a vibrant, highly engaged ecosystem of partners that dramatically extends our sales and implementation reach. To sum it up, Duck Creek delivered terrific fourth quarter results to finish what was a transformational year for the company. We believe we have established ourselves as a SaaS platform of choice in the global P&C industry, which puts Duck Creek in a great position to be one of the primary beneficiaries as this complex, highly regulated, multi-billion dollar market undertakes a generational replatforming of its core systems. We have never been more excited about the opportunities ahead of us, and we're confident we can build upon our current success to create a much larger, profitable, and highly successful public company that generates significant value for shareholders. We look forward to getting to know many of you better in the upcoming quarters and years and updating you on Duck Creek's success and progress. I will now turn over to our CFO, Vinny Chapari. Hey, Vinny, over to you.
spk03: All right, thanks, Mike. Today, I'll review our fourth quarter fiscal 2020 results in detail and provide guidance for the first quarter and full year of fiscal 2021. Since this is our first earnings call, I'd like to briefly review our financial model. We've successfully transitioned the business from a historical license model to a subscription model over the past several years. In fiscal 2020, approximately 96% of our bookings related to our on-demand SaaS platform, with on-premise license sales generally limited to honoring existing contractual obligations. This transition has impacted total revenue growth in recent years, but with licensed revenue now representing under 5% of total revenue and subscriptions being our fastest growing revenue area, revenue growth rates are accelerating. Our initial SAS contracts are multi-year commitments and are billed monthly. Initial sales are often for a specific line of business within the insurance company or for particular solutions on our on-demand platform. We have a land and expand model and a long track record of successfully increasing spend with our customers. We also have a professional services revenue stream that is derived almost solely from implementation work related to our core products and generally build on a time and materials basis. Turning now to our operating results, we're pleased with the performance of the business, both in Q4 and fiscal 2020 overall. Total revenue for the fourth quarter was $58.3 million, up 22% from the prior year period. Within total revenue, Subscription revenue, which is comprised solely of subscriptions to our SaaS products, was $24.6 million, up 54% year-over-year. In Q4, subscriptions represented 70% of our software revenue and 42% of our total revenue. License revenue was $4.5 million, up 6% year-over-year, due primarily to an add-on sale to an existing on-premise customer. Maintenance revenue, our revenue tied to on-premise maintenance contracts, was $5.9 million and, as expected, was essentially flat year-over-year as we concentrate efforts to grow our SaaS business. Services revenue was $23.3 million, up 6% year-over-year. Services revenue reflected strong demand for implementation services and high utilization rates. We'll be reporting on two key metrics related to our subscription revenue on an ongoing basis, SaaS ARR and SaaS Net Dollar Retention. SAS ARR, which we calculate by annualizing subscription revenue recognized in the last month of the period, was $95.6 million as of August 31, 2020, up 85% from the prior year. SAS ARR growth has exceeded 75% in each quarter of fiscal 2020 based on the strength of both new sales and net dollar retention. SAS net dollar retention as of August 31, 2020, was 117%. Over the past four quarters, our net dollar retention has consistently exceeded 113 percent, driven by a combination of high gross retention rates, sales of new products to existing customers, and growth of DWP for products already operating on our SaaS platform. Now, let's review the income statement in a bit more detail. As a reminder, unless otherwise noted, all metrics are non-GAAP, and we have provided a reconciliation of GAAP to non-GAAP financials in our press release. Adjusted gross profit in the quarter was $35.4 million, or a gross margin of 61%, compared to a gross margin of 60% in the fourth quarter of fiscal 2019. Subscription margins in the quarter were 66.5%, driven primarily by scale benefits as we continue to generate strong subscription revenue growth. The gross margin exceeded our expectations and did benefit from favorable timing of when we began recognizing revenue from certain contracts. As we move into fiscal 2021, margins may decrease slightly from this level. Professional services margin was 41.4% in the quarter. While it has come down during fiscal 2020, it continues to track slightly above our long-term expectations. We believe the current level of utilization is unsustainably high for our services organization, and as they moderate, services margins will be decreasing towards a range of high 30s to approximately 40%. Turning to operating expenses, R&D costs were $11.3 million, or 19% of revenue, roughly in line with the prior year period. R&D costs increased 19% from the prior year due to higher bonus funding levels and continued investment in product technologies. Sales and marketing expenses were $8.9 million, or 15% of revenue, also in line with the year-ago period. This was below expected levels due primarily to COVID-19-related variances as expenses related to marketing events and T&E were lower than the prior year period. We remain in investment mode currently and expect to continue expanding our global sales footprint and engagement efforts to ensure we're properly covering all opportunities in the market. G&A expense was $13 million, or 22% of revenue, compared to 19% in the prior year period. During the fourth quarter, we chose to downsize two of our office locations, resulting in a non-recurring charge of $2.8 million. Excluding this charge, G&A expenses decreased as a percentage of revenue compared to the prior year, based on scale efficiencies, partly offset by higher bonus funding levels. Adjusted EBITDA for the quarter was $3 million, or a 5% adjusted EBITDA margin. Non-GAAP EPS for the quarter was 2 cents per share based on 129.3 million weighted average shares outstanding. This share count was calculated using a consistent exchange ratio for all pre-IPO partnership interests and assuming that all common stocks sold in the IPO was outstanding for the full fiscal year. Our ending share count as of August 31, 2020, was 130.7 million shares. On a GAAP basis, our gross profit for the quarter was $28.7 million, and we had a loss from operations of $21.6 million. We had a net loss in the quarter of $21.5 million. GAAP earnings per share for Q4 2020 and fiscal 2020 are not being presented because they produce results that would not be meaningful to investors as they represent results for the 17-day period following the IPO. During the fourth quarter, the company recorded $19.7 million of share-based compensation, virtually all of which was related to the conversion of employee partnership interest in the IPO, as further described in the financial tables of our press release. Based on the amount of vested partnership interest at the time of the IPO, future charges associated with this conversion will be significantly lower, currently expected to be low to mid single-digit millions over each of the next two years. Turning to the balance sheet and cash flow, we ended the year with $390 million in cash equivalents and no debt. Our cash balance reflects approximately $321 million of net proceeds from the closing of our initial public offering in August. Free cash flow in the quarter was $16.3 million compared to $12.8 million in the year-ago period. The increase in free cash flow is primarily related to improved working capital due to increased accrued expenses strong cash collections in the quarter, and improved positions in unbilled receivables and deferred revenue tied to the transition away from on-premise licensing. Free cash flow for the year was $19 million compared to $6.6 million in the year-ago period. We believe our ability to generate cash while continuing to invest in our growth initiatives reflects the inherent scalability of our platform and our business model. And now I'd like to kind of finish with guidance, beginning with the first fiscal statement. First fiscal quarter, we expect total revenue of $55 to $56 million. Subscription revenue is expected to be $25.5 to $26 million. Adjusted gross margins in the quarter are projected at 58.5 percent, and we expect adjusted EBITDA between zero and $1.5 million. Non-GAAP net loss is expected at approximately breakeven to $1 million, or a bit under one cent per share. For the full fiscal year of 2021, we expect total revenue of $244 to $249 million. Subscription revenue is expected to be $114.5 to $116.5 million. Adjusted gross margins for the year are projected at 58 percent, and we expect adjusted EBITDA of $3 to $5 million. Non-GAAP net loss is expected to be between $3 and $5 million for fiscal 2021, or a non-GAAP loss per share of approximately 2 to 4 cents. In summary, I would say we are pleased with our financial performance in fiscal 2020 and our positioning as we enter fiscal 2021. Fueled by continued good sales momentum, a scalable cost structure, and a strong balance sheet, we're confident in our ability to generate long-term growth and shareholder value. And with that, we'd like to open up the call to Q&A. Operator?
spk11: Thank you. As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. And our first question comes from the line of Sterling Otte with J.P. Morgan.
spk10: Yeah, thanks. Hi, guys. I think one of the biggest questions on investors' minds that we're getting is just kind of the tone of demand that for system modernization within tier one companies for their core systems. We see a lot of interest in maybe some ancillary new digital go-to-market initiatives, but how would you characterize the appetite outside of the big AIG win, which will be my follow-up question, but outside of that, what would you say the overall tone looks like for those core system replacements to move to the cloud at this point?
spk06: Hi, Sterling. It's Mike. Thanks for your question, and thanks for joining us. Your question is specific to Tier 1s and the demand that they're showing for core system replacement. And I would say, at large, we see that demand strong. We're actually pleasantly surprised with how many Tier 1s are looking for cloud-based solutions for their core system replacement. Now, what I will say in the Tier 1 space is these carriers aren't rushing to market to say that they want to replatform, in essence, the entirety of their book. What they're doing is they're perhaps bootstrapping a new business line. Perhaps they're taking a smaller line and saying, you know what, this would be a good opportunity to replatform it and run it into the cloud. So they're really starting with smaller books of business as an entry point. And then we know upon that success, improving the model, that we have a great opportunity to expand from there. So, you know, I think even in light of COVID, we're seeing Tier 1s, you know, continue to show interest and actually really start to set strategies to run core systems in the cloud.
spk10: That makes sense. And then one quick follow-up. On the AIG win, How should investors think about how that rollout will kind of come into the financials in the coming years? Obviously, an organization that big, it's going to take time. So how should investors set their expectations on what that business opportunity will look like for you as it rolls out?
spk06: Sure. Well, let me just comment at a high level, and maybe Vinnie could add some insight on it. But, you know, in terms of the work that we're doing with AIG, there's a couple of areas in their business that have begun their operations. So we are already starting to, those contracts are in place with provision environments, and we're already recognizing revenue on those arrangements. And then in terms of AIG, we know that we have a broader opportunity in the overall account. You know, it's a very large organization. We're working across, as I said, their broad strategy of AIG 200, and we're excited about the opportunity to help them on an enterprise basis. So we're going to continue to work with their leaders and look for opportunities to expand within the overall account.
spk10: Makes sense.
spk11: Thank you. And our next question comes from the line of Chris Merwin with Goldman Sachs.
spk13: All right. Thanks very much for taking my question, and congrats to you all on a great first quarter out of the gate here. So I wanted to ask about the partner ecosystem. Obviously, eight wins in the quarter is a lot of deals. I'm curious if any of those were partner-influenced, and at a high level, how should we be thinking about further investments in that ecosystem? potentially driving new wins over time and maybe in particular in international geographies? Thanks.
spk06: Thank you, Chris, for the question. Of course, you know, I'll just start out and say that investing in the partner ecosystem was a key strategic pillar of Duck Creek after we carved out from Accenture. Of course, we have a very, very strong relationship with Accenture. on a global basis, and we work very closely with them. But we've been investing quite heavily in terms of training, skilling, some of the core ecosystem providers, the systems integrators that are helping us along the way. In fact, several of our partners in the past, like Capgemini and Mindtree, bought prior boutique Duck Creek implementers to really, in essence, scale their practices very, very quickly And then as I mentioned in the prepared comments, we're thrilled about, you know, the implementation with Deloitte over at Egea. So we're starting to get some traction with our partners globally as well. So, you know, we think it's an important dimension to continue to grow our business, and we continue to invest in training and skilling resources within the respective practices that are helping us with those go-to-market motions.
spk13: Great. Thank you. And maybe just one follow-up for Vinny. It looks like SAS gross margins increased nicely year and year. I think you said in the prepared remarks there are some scale benefits there from some of the deals that you closed. But curious if you can add any more detail on the gross margin improvement. And then as a related question, are you seeing any more adoption of the multi-tenant SAS offering that you have? Thanks.
spk03: Well, I'll start on the margin profile, and Mike can jump in on multi-tenancy. So subscription margins in the quarter were 66.5%. That's kind of above even where we targeted for next year. The timing element of that is we did start revenue on a couple of large deals that were recently signed that aren't incurring a lot of cost yet. So, you know, I think if you want to look kind of to a more normalized level, I think we'd expect, you know, a bit of a continual improvement But that's going to be a gradual improvement quarter by quarter. And Q3, for example, was 64.5%. So we would have expected to move up a little from there, but obviously not two points. So it may come back down a little bit in the first quarter. But we think it's still, you know, overall scalable from where the year ended, which was at 64%.
spk06: And then, Chris, to follow up on your question on multi-tenancy, and of course, it's a great question as it relates to overall subscription or SaaS gross margins. As we stated previously, we've been investing heavily in our multi-tenant architecture, which we launched last year. And we've made progress where several customers are installed on our multi-tenant platform and some handling production claims on the platform as well. However, it's still very early for us. We have had several customers also launch in multi-tenant this past quarter, so we're enthusiastic about that. But I'll also say that it's very early for us, and I'd like to highlight that the benefits of multi-tenancy are not required for us to hit our overall projections. We know that Today we have to run in a hybrid mode. We have some customers and the majority of our customers in single tenant installations. And then we are launching new customers on our multi-tenant platform. And I just want to emphasize that we are not required to scale on multi-tenancy to hit our economic profile. We've invested quite heavily. in DevOps, our overall SaaS architecture, and a lot of automation. So we feel that with that automation, we're getting a lot of efficiency out of our single-tenant architecture. And the reason why I bring that up is adoption and multi-tenancy, from a business perspective, it's functional parity. So the carriers don't really see a difference. But from a technology perspective, you know, IT has to implement using some different techniques, and we're also looking at our customers' readiness to adopt the overall platform. So depending on their maturity and where they're at, it might drive us to whether we go single or multi-tenant. But we know as we continue to expand, we're looking forward to getting higher utilization of our multi-tenant backbone.
spk13: Okay, great. Thanks so much.
spk06: Okay.
spk11: Thank you. And our next question comes from the line of Brad Sills with Bank of America.
spk05: Oh, great. Hey, guys. Thanks and congratulations on your first quarter here. Nice quarter to start. I wanted to ask about the partner channel. We saw some decrease in your services mix, and I know there's been an effort there to kind of build out that channel for the global SIs to take on more of the implementation work. How's that going? Are you happy with the result this quarter? Am I right to look at that services revenue mix coming down as a result of those efforts?
spk06: Yes, Brad, thanks for the question. And the short answer is yes. We've been kind of restraining a bit some of our services growth. We certainly want to enable our partners to take on the work. But I also want to emphasize that our model is not to own and take on all of these implementations ourselves. You know, we really just seed each project with an expert model where we put in core architects, core business architects, and configuration architects to really help with the overall solution. So we feel great about our core partners and how they're scaling their practices. They, you know, continue to report to us that their depth creek practices within their firms, their respective firms, are among the highest growing areas of their businesses. And we know we're going to continue to grow that footprint as time goes on. So, you know, that's why you're going to see us temper services growth moving forward as, you know, the ecosystem continues to thrive and help us with these installations.
spk05: Got it. Great. Thanks, Mike. And then one more on the multi-tenancy comments you made earlier. What have the conversations been like, not just kind of for today, but when customers are kind of describing their roadmap for Duck Creek over time, are they more open to moving more workloads into the multi-tenant option over time? What are some of the puts and takes and some of the barriers that you might be hearing from customers' willingness to adopt, or are they getting more and more comfortable with the first step being single tenant, and that's a logical next step. So it's more of a foregone conclusion. Just any kind of color on just qualitatively how customers are viewing that. Thank you.
spk06: You bet. Great question, by the way. And here's what I'll say is I would say largely that some past objections of both SAS and perhaps even multi-tenancy around security and data isolation and some of those capabilities are behind us. And obviously, you know, us implementing and winning contracts at large carriers, tier one carriers like AIG and like Liberty Mutual, you know, we have to go through a very, very detailed process in terms of, you know, how do we run and operate our SaaS platform. I think what's happened now in terms of multi-tenancy is the conversation shifted a bit, and it shifted around this concept of what we call in the industry of continuous integration and continuous deployment. And this is about the adoption of updates and change. We certainly have an aspiration, if you will, to have much more continuous updates of our technology on a much more frequent basis. And we are moving there with our multi-tenant environment. The issue we have is on the customer side, you know, customers are at varying levels of maturity. their ability to behave with CI CD continuous integration continuous deployment processes because some of their integration points need to follow the same pipeline and patterns and this is where we're thrilled to be working with our SI channel who's working with our customers to modernize some of their processes on their side in fact cognizant of is an SI player that we're working with in lockstep in terms of these mechanisms, and they're doing a very, very nice job with that. So we know that carriers are embracing this discussion. They're enthusiastic about it. But as I said, they're in varying places in terms of their level of maturity and how fast they want to move to that environment. Most CIOs want to move there. So they're very encouraged about the conversation. The real question is at what pace. So we're excited about the opportunity, and we think it represents a great opportunity for us to continue and thrive and grow.
spk05: That's great. Thanks so much, Mike.
spk06: Thank you.
spk11: And our next question comes from the line of Saqib Khalia with Barclays.
spk02: Okay, great. Hey, guys, thanks for taking my questions here. You know, maybe to start with you, Mike, a few nice examples of international wins there in your prepared commentary. Can you just give us an update about how you feel about your international presence and maybe relatedly how the competitive environment is looks internationally versus the, for example, broad brushes?
spk06: Yeah, great question, Zach. And obviously, international represents a very large opportunity for Duck Creek. The majority of the global premium is outside of the United States. About 37% of the premium is in the U.S., about 45% in North America. But with that, you know, we know that we need to make more investments to expand internationally. We feel very good about our track record of expanding in the UK and down in Australia and a landing point for Asia Pacific. So we already have presence and we have customers and some notable wins. And then now, you know, continuing to have that expansion in continental Europe. Here's what I'll say, Zach, is I would say it's a great opportunity. We're making investments. I'm a little bit guarded in terms of how fast some of those investments in continental Europe are going to take hold, especially a bit in light of COVID-19. You know, the one advantage that we have in our industry is we have these very intimate relationships with current customers. And I think that's one reason why we've been able to close so many deals, even in a COVID environment, because they know who we are, they know our brand, and they are very, very open to doing business with. As we're expanding in Europe, obviously, we're a little bit less known. So in some countries, we've landed some feet on the ground, and we're building up our capabilities to But I think we're keeping a close eye in terms of how the market responds, especially in this COVID environment. But we know that our software has been successful. We have it proven out. And now it's about scaling the go-to-market operations, and we're keeping a close read on it.
spk02: Makes sense. Makes sense. Maybe for my follow-up for you, Vinny, actually I want to talk about a metric we haven't talked about as much, which is ARR. You know, I think that net new ARR contribution this quarter is was about 20 million, probably one of the bigger ones that we've seen in the last couple of years. You know, are there any anomalies in there that you'd call out or anything to keep in mind about that number or sort of that ARR growth going out into, you know, into fiscal 21 and the future?
spk03: Yeah, I'll second. So Q4 was a bit of an anomaly just as it related to the timing of when deals got provisioned. And just you know, to reiterate how we calculate ARR, we're just annualizing revenue recognized in the last month of the period. We start recognizing revenue once a contract is sold and the customer has access to the system. That generally takes, you know, usually it happens within about 30 days. So if we sign a deal, a large deal, in the last month of a quarter, it may fall in one quarter or another. The way the timing worked out in Q4 is we got a very large Q3 deal that actually got provisioned early in Q4, and we got a very large Q4 deal that came late in the quarter that got provisioned within the quarter. So we probably had unusually favorable timing. The way it worked out, about half our ARR growth hit in Q4. That's not our expectation, but we can vary quarter to quarter based on when a deal gets provisioned. So I think we'll will tend to be a little back-end loaded, not a lot back-end loaded. And, you know, it could be, you know, an individual quarter could move a little bit one way or another based on an individual deal. But we did have two large deals in the quarter that bumped up that fourth quarter ARR. Got it. Very helpful. Thanks, guys.
spk11: Thank you. And our next question comes from the line of Alex Zukin with RBC.
spk09: Hey, guys, thanks for taking my question. Congratulations again for a really strong first quarter out of the box. Maybe just the first one for you, Mike. You know, a lot of investors are asking this about how do pipelines for new deals look, how, you know, both at the top of the funnel, at the mid-stage, and, you know, if you think about your ability to look at sales cycles and how they're developing post-COVID with the opportunity to close those deals, how would you talk about those deals, particularly given and what impact, if any, has the IPO had both on pipelines and sales cycles.
spk06: Yeah. Thanks for the question, Alex. And when we look at our overall pipeline, we classify the entire pipeline over five stages. So we have a very disciplined process of how we look at it. And what we really refer to as the more mature side of the pipeline is the final three stages. And we know that we're really in an evaluation or all the way through a contracting process when we're in those final three stages of the pipeline. And under the timeframe of COVID, Alice, what I will say is that we're very pleased with the expansion of the pipeline that we've seen since March. So we've seen strengthening of the overall pipeline. We do believe that, obviously, the aftermath of COVID where carriers had to work virtually and, you know, send their workers home and be remote, that many carriers are evaluating their technology needs. And we think that is serving as, you know, some kind of strengthening, if you will, of the overall pipeline. So, you know, we're just pleased with the overall outcome and what the results look like today.
spk09: Perfect. And then maybe just to follow up for Vinny, I wanted to ask about two metrics. Obviously, you talked a little bit about SAS ARR and the puts and takes in a given quarter, which were very strong this quarter particularly. And you've now had two kind of straight quarters of accelerating growth there. Remind us what we should think about, you know, from a SAS ARR tying it to forward SAS revenue perspective. And then also just remind us where – I know you're not guiding to this metric, but how should – you know, we think about dollar-based net retention trending, is it something that can bounce around, or is it something where, you know, you expect to be above a certain metric over the course of time?
spk03: Yeah, good questions, and I'll take the second one first, and I'll go back to the ARR question. Net dollar retention, we've been pretty consistently, you know, if I went to the widest range, we're probably, you know, in the 110 to 120 kind of range, and You know, we've been averaging between that range over the course of this year. I don't expect any near-term significant variation away from, you know, 113, 115, 117 kind of numbers. You know, any individual quarter could move on a single deal. So, you know, an existing customer like an AIG or somebody like that who is rolling out a new product or has an add-on sale, that could impact a quarter if it's a sizable individual deal. But I think the average net retention rates, we don't see anything happening in the way sales cycles are running, the way the pipeline mix looks. That would indicate that it's not going to be reasonably consistent for the foreseeable future. On ARR, I think our ARR number is sufficiently transparent that you can assume that the exit point that we are showing you is pretty close to the entry point for the next quarter, but for deals that signed in the last month of the period. So what I mean by that is if we did a $2 million ACV deal on the last week of August, it's unlikely to have been provisioned to recognize any revenue in August. That would start in September. But that tends to roll year to year if sales cycles are reasonably consistent. So I think you can expect that the entry point going into a period is the ARR from the prior period plus maybe a little bit from a sale that might not have been provisioned.
spk09: Perfect. Thanks so much.
spk11: Thank you. And our next question comes from the line of Bob and Suri with William Blair.
spk07: Hey, Mike, Vinnie. Congrats. Really good quarter out of the game. Let me echo what Alex just said. Nice job. And then Maybe I'll start at a high level, Mike, for you. You know, as you look at the new customers and you land in certain departments, I'd love to understand sort of whether that's more on the personal side or the commercial side. My sense, and I'd love some color of clarification on this, is that a lot of the personal digital transformation, much of it has happened because of consumer-like behavior driving that. Like, I want to get a quote on my phone immediately or price of policy. And commercial is still kind of agent-led and not as modernized. Is that where you're seeing opportunity more on the commercial side when you land? How do you think about that? And where are the premiums bigger? My feeling would be commercial, but I'd love to get some call on that.
spk06: Great question. And I would say at large, we continue to see almost a 50-50 split, a very consistent split between commercial and personal lines. In fact, in my prepared remarks earlier, I talked about two tier two carrier wins that are implementing the full suite of Duck Creek. One of them is predominantly in all personal lines, predominantly auto carrier. The other one is predominantly in all commercial lines carrier. So I think even in the wins in the quarter, running our full suite, you're seeing a balance of that. And I think there are a lot of carriers that across the globe that are even in the Tier 2, 3, and 4 space on personal lines that have not modernized their technology. They're looking to have straight-through processing and more direct access and digital engagement for their customers. So there's demand out there. In terms of overall premium, if you look broadly across the North American market, The majority of the premium or a big, large, the largest chunk of premium is personalized auto. And then that is closely followed by homeowners and property. And then from there in the commercial segment is workers' compensation and then a whole plethora of commercial lines. So you really do see quite a bit of balance that's out there across the industry, across both commercial and personal.
spk07: Got it. Got it. That's really helpful. All right. A quick question, a little more tactical, I guess, on the new Duck Creek On Demand platform. You talk about some of the wins and some of the customers, but when I look at the base, and you've got a large base, and you think about that conversion, I'd love to understand sort of what is their adoption and view, because at some point they're going to have to upgrade if they want all the functionality. How do you view that? And then the skill sets that both your partners and your customers need to kind of move? I know it's low code, no code, which is great, but the whole skill set that goes into sort of thinking about this a whole new way. How do you think about that? So sort of what does that cloud opportunity look like for guys for the existing base moving onto that? And is there a driver for that? And do they need to retool? Thanks.
spk06: Yeah, yeah, yeah, terrific, terrific question. I'm going to start with the second question first, and then I'll come back to the on-premise base. But on the second question, investing in the SIs, you know, the beauty of the Duck Creek platform is our low-code platform, and that is really what differentiates Duck Creek. And the strength of that is the way that you configure product rules, rating rules, product hierarchy, and all of the business rules around, like, risk appetite, is the same type of approach and the same tooling that you would use on-prem as well as on-demand. In fact, we believe it's our low-code platform that allowed us to accelerate into the cloud much, much more rapidly. So the good news is a lot of the core skills that our SI partners have are very, very transferable, as well as our customers, which is great. The real work now is how you integrate with the platform and how does a customer – obviously, when they install Duck Creek, they have to integrate the core suite to their downstream financial systems or general ledgers and then many different – you know, systems within their overall organization, as well as third-party vendors, which is why we're investing so much in the ecosystem. And the techniques that are used on the multi-tenant SaaS platform certainly are very different. So what we've done is we've created in Duck Creek University a whole set of coursework that really trains our partners to on how to do those proper integrations and how to do it in a manner that has our platform more readily and easily updated on a more continuous basis. So you are already going through that process of all of our SIs. In fact, we expect it because to be trained on Duck Creek means you have to be trained on those processes. And then going back to your first question on the on-premise base, You know, a couple things. We do have some very, very good proof points. You know, we've taken carriers like West Bend, Proveris, and Mutual Benefit Group, lifted them up from on-prem, and all three of those carriers are not only undertaking migration, they are running in production in Duck Creek on demand today. So we know we have the proof points. When we look at the on-prem install base at large, okay, We know it is a future opportunity for DuckCrete to migrate those customers to on-premise. The one thing that we do see with those customers is because we have a low-code platform and we can push out changes in what we call our content layer, so these are changes like we see in our bureau products, keeping them current on ISO circulars things like commercial auto and workers' compensation for NCCI, they can still adopt those changes even as an on-premise customer. So they tend to be quite happy, and what we're doing is working with that install base to find the right inflection point, and usually that's around a business value project for them to migrate into Duck Creek On Demand over time. So, you know, we've been in discussions with many of those customers. The one thing that we do know is on that migration is we're not always in control. When you do a customer has an on-premise install, you know, we as a software vendor lose some sense of control. They could be querying the database directly. They could be integrating using different techniques, and they might have built a lot of complexity around that core. And somebody has to pay the bill around simplifying that complexity. And what we want to do is work with our customers when they have business value projects and a position of strength to perform that migration. So we're in discussions with many of them, and we know it's a future growth opportunity for Duck Creek.
spk07: That was really helpful. Thanks, guys. Thank you very much for taking my questions, and congrats.
spk11: Thank you. And going forward, we ask that you please limit yourself to one question. Our next question comes from the line of Tom Roderick with Stiefel.
spk08: Hey, gentlemen, thank you for taking my questions. I'll echo the sentiments on congratulations for a successful first quarter. I wanted to kind of put a finer point there on Bhavan's question, Mike, regarding digital transformation. I mean, we've all been kind of beat over the head with this term over the last, you know, six, seven months. And in particular, I'd love to hear how your customers, you know, are talking about that. And in particular, what does it really mean to them? How are they leaning into cloud with digital transformation and, and specifically what offerings are they leaning on. And then from a go-to-market perspective, Vinny, the follow-on there would be how much faster do you think you need to ramp up your sales team, or perhaps you could just talk about the growth by which you'd like to ramp that up this year. That would be really helpful. Thank you.
spk06: Thanks, Tom, for the question. Regarding digital transformation, I will admit that lots of carriers may look at their particular digital transformation a little bit different based on their strategic objectives. For carriers that are personalized and are really focused on customer service, they will think of a digital transformation around specifically the customer experience. So it's about providing immediate access and immediate access to the bill, to changing the policy. And a simple example would be if you were to add perhaps your 16-year-old child daughter to your auto policy, that changes the whole terms of the policy as well as the whole billing plan behind it. And doing that real time and making that transaction that at the surface level seems very easy, I'm adding my daughter to the policy, underneath the waterline is very, very complex because you're recalculating premium, you're changing the overall billing sequence in terms of the terms moving forward. So they'll think about it more from that customer point of view. But when you look at perhaps a commercial carrier, it's really about the relationship with their brokers and agents and the efficiency of their underwriters. So streamlining the underwriting process. You know, sometimes when we talk to underwriters, there's a bit of frustration because so much of their time is not spent on really value-added activities that that are really controlling the risk of the outcome. But sometimes it's generating documents or it's doing things on the overall policy that need to be done. So a digital transformation would be putting much, much more automation in. So taking those routine things and automating them, perhaps using artificial intelligence and AI to automate decision-making, and then making sure that the things that have to be looked at by an underwriter are the right things that need to be looked at. So, again, it depends on the overall objectives of the carrier, but those are a couple of the themes that we're seeing in terms of an overall digital transformation.
spk03: And just to hit your other question, the – characterize it as, you know, we spent the last couple years largely focused on building the North American go-to-market organization. And, you know, we've scaled the sales force largely in North America to the point where it's starting to become, you know, more efficient. I think sales and marketing actually would have been, you know, scalable for here were it not for the fact that we want to try to take advantage and make sure we're covering opportunities outside the U.S. So we're probably going to add, you know, it would be in single digits, but we'll add some more direct sales resources, primarily international. There's some support functions that go along with them that will be added too. So headcount will continue to grow, largely in support of international. So I've said before, I don't think I would expect sales and marketing as a percent of revenue to start going down within the next year or so. But after we've scaled international, which is largely a this year effort, I actually think it will start coming down a little bit as a percent of revenue in the future.
spk11: Thank you. And our next question comes from the line of Pat Walravens with J&P Securities. Oh, great. Thank you, and congratulations.
spk12: So, Mike, last week one of your – competitors made what I thought was a fascinating disclosure, that 85% of their insurance suite customers were stuck on version 7, 8, or 9, even though the most recent version, version 10, has been out since 2018. So just with that backdrop, I'd love to hear your perspective on what that tells us about the nature of this industry that you're competing in and what it might tell us about the opportunity for Duck Creek.
spk06: Well, Pat, I think that's very insightful, and I'm glad you raised really that overall metric, and I think what it does say is that given the complexity of core transaction processing here, that upgrades have just been too expensive, and I think that is why customers and prospects today are looking for cloud technologies, and I think it's why cloud has been so rapidly adopted in other industries because as much as it's about compelling and new capabilities, which I think cloud technology accelerates. I love the fact that we can do things today with 10 lines of code that used to take thousands of lines of code before. This is much about staying current. And even though this on-premise installation of applications has helped the insurance industry modernize, I think at large the industry is a bit frustrated because once they're done with an implementation, they're finding a cost to do an upgrade or they're finding that their system is completely outdated. So I think this new model is about staying current, and it's about a better economic means of staying current. And we're watching this unfold. and many, many other industries. And we have some great industry leaders that are doing that. So I think that's really what's driving a lot of the demand to get the majority of new core system decisions to be SaaS-based decisions. And I think it's really about modernizing as well as staying current. So I think it's a great indication for our future prospects.
spk11: Thank you. And our last question for the day comes from Mayank Tandon with Needham.
spk01: Thank you. Good evening. Vinny, I'll just focus on margins for a second here. I think on the IPO, you laid out a long-term target model, something close to a 25% EBITDA margin. I just want to get a sense, what type of revenue level would you have to achieve to get to that margin level? And can you remind us of what the levers are, both on the gross margin front and on the operating margin front, to get to that type of target long-term? Thank you.
spk03: Yeah, I don't think I want to go into the exact specifics of the revenue balance we need to hit 25%. That was kind of a five- to seven-year target using organic growth rates kind of comparable to what we've got now. The key levers we need to get there are really continued leverage of the on-demand platform, so the subscription margins, which we do expect to move up from their current 64%. And besides that, we're not looking for more margin out of services. We actually expected to move down a little bit from there. But with the mixed shifts, we think that, you know, overall margins will move up, gross margins will move up a little bit. But for some international expansion, largely in sales and marketing, this fiscal year, fiscal 21, all of our operating expense areas are, you know, pretty highly leverageable. So, you know, coming out of fiscal 21, we'd expect decreases as a percent of revenue across each of R&D, sales and marketing, and G&A, probably a little less in sales and marketing than the other areas, but we'll see leverageability in all of the operating expense areas, and it should be pretty consistent as we grow the business.
spk11: Thank you. I will now turn the call back over to CEO Mike Dekowski for closing remarks.
spk06: Okay. Thank you everybody for participating in our first earnings call as a public company. We certainly appreciate you investing your time with us. And let me wrap by again highlighting the fact that we ended our first fiscal year 2020 with a record quarter in spite of the many challenges as a result of COVID-19 and the related effects of the economic environment. We're obviously very excited about Duck Creek's growth opportunity as the industry continues to transition to run core systems in the cloud. Again, I appreciate everyone joining today. Thank you, and please be safe, healthy, and well. Take care.
spk11: Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.
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