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spk00: Thank you for standing by, and welcome to the Duck Creek Technology's first quarter fiscal 2022 earnings conference call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question at that time, please put a star then one when you text on telephone. As a reminder, today's conference call is being recorded. I would now like to turn the conference to the host, Mr. Brian Dinu from ICR.
spk06: Good afternoon, and welcome to Duck Creek's earnings conference call for the first quarter of fiscal year 2022. which ended on November 30th. On the call with me today is Mike Joukowsky, Duck Creek's Chief Executive Officer, and Vinny Chapari, Duck Creek's Chief Financial Officer. A complete disclosure of our results can be found in our press release issued today, which is available on the Investor Relations section of our website. Today's call is being recorded, and a replay will be available from the conclusion of the call. Statements made on 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 of any subsequent date. You should not rely on forelooking statements as predictions of future events as actual results and events may differ from any forelooking statements that management will make today. Additional information regarding the risks, uncertainties, and other factors that cause such differences appear in our press release and Duck Creek's latest Form 10-K and other subsequent reports filed by Duck Creek with the Securities and Exchange Commission. We will also refer to certain non-GAAP financial measures to provide additional information to investors. A reconciliation of non-GAAP to GAAP measures is provided in our press release 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.
spk09: Thank you, Brian, and good afternoon, everyone. Let me start by wishing all of you and your families a happy new year. We are off to a great start to the year, and I'm pleased to report that Duck Creek delivered on strong first quarter performance that reflects our continued success as a cloud platform of choice for the P&C insurance industry. We're pleased with our ability to add new logos and drive greater adoption from our install base of on-demand customers, which now exceeds 75 insurers. Let me start with a quick overview of our financial results for the first quarter. We reported total revenue of $73.4 million, up 25% year-over-year, and this was underpinned by our subscription revenue of which is our revenue derived from SAS of $35.7 million, up 28% year over year. Our annual recurring revenue, or ARR, was $145.5 million, which resulted in 40% growth over the prior year. And we are also profitable in the quarter with adjusted EBITDA of $7.8 million. During the quarter, we signed more than 10 SaaS deals across new customers and with existing customers who either expanded their usage of Duck Creek On Demand or adopted new SaaS solutions from us. This is a healthy mix of activity that reflects our powerful land and expand selling model and the continued investments we are making in our SaaS solutions. Our success in the quarter is just the latest indication that insurers are embracing the superior scalability, flexibility, and time to value that a true cloud platform like Duck Creek On Demand can provide to their businesses. Insurers are operating in markets that are evolving rapidly and are more dynamic than ever before. They need core systems that enable them to innovate more quickly and enhance their overall customer experience so that they can thrive in these market conditions. We are continuing to demonstrate success with insurers of all sizes who have chosen Duck Creek On Demand, which highlights the value and competitive advantage that we provide to our customers. In the first quarter, we signed an exciting new Duck Creek on-demand deal with Secura, a leading North American PNC insurer with operations in 13 states. Secura will be deploying our Duck Creek policy, rating, billing, claims, and insights on-demand solutions, as well as several of our Anywhere managed integrations to power the next generation of its specialty lines business. We are selected after a lengthy and rigorous technical evaluation. where Secura evaluated several competing platforms. Secura ultimately selected Duck Creek for several reasons. The first was the strength of the Duck Creek platform, and most notably, our low-code configuration and open API architecture. Secura recognized that our platform was best positioned to increase their time to value and streamline their overall operations. The second was the ability of Secura's team to leverage our platform to access our InsureTech partner ecosystem. which now includes 65 partners, to improve how Secura configures its products and expands into new markets. Finally, as our CIO noted, Secura viewed Duck Creek as a true partner, not just a vendor. This is exactly the type of relationship we strive to build with each of our customers, and we're excited to be partnering with Secura on their digital transformations. We also made significant progress on our efforts to build out our international presence, which includes multiple new customer wins and expanding our ecosystem. While still very early, the success we had in the first quarter is an important validation of the opportunity outside of the United States. In the quarter, we signed two deals with international customers. First, Adiona, a UK-based startup insure tech provider, that will be launching a unique motor insurance offering in 2022, recently signed an agreement with us to deploy their new innovative usage-based product on Duck Creek on-demand policy, billing, and claims. Ediona needed a true cloud partner that it could count on to scale with its growth ambitions and help deliver on their mission to provide a compelling end-to-end digital experience for their customers. We believe this is a great example of how Duck Creek can play an important role in powering the tremendous innovation we are seeing across the insurance ecosystem. We also signed an important win in Australia with Argyle Insurance, a newly established innovative small commercial carrier who is focused on redefining how insurance is simplified and streamlined for small-medium enterprises. Overall, we have been pleased with the early success that we are having in the Australian market, which is why we recently announced a number of product investments for Australia, including localized workers' compensation packages and a claims benefit calculator for New South Wales, Australia's largest state. Ediona and Argyle are positive early examples of the progress we are making internationally, even as we continue to deal with the impact of the pandemic. We are incredibly excited about the long-term opportunity outside of the United States, And wins like these are important for establishing the Duck Creek brand and referenceable customers in local markets. As I mentioned on our last earnings call, we will continue to invest in our international capabilities in fiscal 2022, with a particular focus on large global carriers. An important part of building out our international presence are partnerships that expand the value we can deliver. To that end, we're pleased to announce multiple partnerships that enhance our capabilities in specific markets, For example, we recently signed an agreement with Experian that will directly integrate their iCash data set into Duck Creek On Demand to better serve the UK insurance market. This will provide insurance with pre-built consumer data integrations that they can use to improve their operational efficiency and user experience. We also recently signed a collaborative agreement with TDEA, an organization in charge of offering value-added IT services to insurers, and UNESPA, the Association for Insurance Companies Operating in the Spanish Market. This agreement will facilitate the integration of Duck Creek Solutions into the Spanish market and allow Spanish insurers to design, test, and deploy new products faster than ever before. The alliances with Experian and Tadea are great examples of the type of local relationships we are looking to build as we continue to develop our international go-to-market efforts. In addition to these new wins, we also expanded our engagement with several existing customers, including Core Specialty, Builders Mutual, Distinguished Partners, and Great American Insurance, among others. And now to focus on customer success, we had several notable product deployments in the quarter as well. including Distinguished Partners, where they are able to go live with their commercial property program in 14 states in approximately 150 days from the inception of the project. Great American Insurance, a highly respected Tier 1 insurer known for their innovative and specialty commercial products, deployed their package policy on Duck Creek On Demand in all 50 states. And finally, Axis Insurance. who brought a new insurance offering to market for home-based businesses comprised of four key coverage lines, professional liability, cyber, crime, and contents, and they deployed the solution to their brokers in under five months. We also continue to invest and enhance our leading SaaS solutions on an ongoing basis and at helping our customers continue to be more agile, efficient, and make smarter decisions through data intelligence. Here are just a few highlights of our product updates this past quarter. We enhanced our policy and billing user experience platform to incorporate two new capabilities. First, mobile native presentation. This provides a more consistent experience for end users across various form factors, allowing insurers to reuse Duck Creek and customized page designs across multiple channels and devices. Second, we added data visualization, which presents data in new informational and visual ways, allowing a user's attention to be drawn to important key areas of a page or a screen. In Duck Creek Claims, we launch a series of updates that will help improve overall systems integration, operations, and speed deployments. Some examples include, first, international enhancements, a series of in-depth enhancements that improves configuration to support multiple geographies on a single platform, such as managing tax and VAT, time zone, and localized embedded logic. Second, our claims migration service, a productized solution that enables carriers to quickly and efficiently migrate data from multiple legacy and existing systems into our Duck Creek on-demand environment, which dramatically reduces conversion timeframes and improves data quality. And third, our enhanced open APIs. We added over 200 new RESTful APIs to our claims solution. which expands the openness of our platform. Our new APIs can also provide programmatic ways to integrate both development and operations architecture with the carrier's customized DevOps processes. Finally, we also launched Duck Creek On Demand's consumer access offering, which extends Duck Creek's core functionality to the consumer channel, providing tools and a secure infrastructure that allows carriers to expose applications to policyholders and anonymous shoppers without the need to deploy redundant solutions or infrastructure. As we look ahead to the remainder of the year, we are focused on executing on the incredible opportunity in front of us. We continue to see significant growth in our pipeline with both new and existing customers across all tiers. As we mentioned last quarter, we are particularly focused on some important Tier 1 accounts, We have seen some great success in recent quarters. We are very encouraged by the strategic conversations we are having with these carriers and the progress they are making in developing long-term digital transformation roadmaps. Before I turn the call over to Vinny, I just want to reiterate that we are pleased with the start to the fiscal 2022, and we are incredibly optimistic about the future for Duck Creek. Customer interest in Duck Creek On Demand continues to grow as insurers fully appreciate how we can improve their operational performance across multiple dimensions while providing significant financial benefits. We're in the early stages of the P&C insurance industry moving to the cloud, and Duck Creek is in a terrific position to be a primary beneficiary as insurers continue to look first to the cloud for solutions as they embark upon their technology strategies. I'd like to finish by thanking all of our employees, partners, and our customers for the incredible work they do each and every day to modernize the insurance industry and position Duck Creek to fully capitalize on this incredible opportunity. With that, let me turn the call over to Vinny to walk you through the numbers. Vinny, over to you.
spk08: Thanks, Mike. Today I'll review our first quarter fiscal 2022 results in detail and provide guidance for the second quarter and full year of fiscal 2022. Total revenue in the first quarter was $73.4 million, up 25% from the prior year period. Within total revenue, subscription revenue, which is comprised solely of subscriptions to our SaaS products, was $35.7 million, up 28% year over year. In Q1, subscriptions represented 81% of our software revenue and 49% of our total revenue. Revenues from on-premise software licenses of $1.9 million and maintenance of $6.3 million are 11% of total revenue. We expect these line items to continue decreasing as a percentage of revenue given the strong growth in our subscription revenue. Services revenue was $29.5 million, up 26% year-over-year, driven by continued high demand for implementation services and strong utilization rates. SAS ARR, which we calculate by annualizing recurring subscription revenue recognized in the last month of the period, was $145.5 million as of November 30, 2021, up 40% from the prior year. As a reminder, SAS ARR is a snapshot in time of subscription contracts that are generating revenue during the last month of a period and can be impacted by timing. SAS Net Dollar Retention, as of November 30, 2021, was approximately 122%. This is another strong result, which reflects our continued success upselling and cross-selling our customer base. As a reminder, our net retention is 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. We continue to believe that a SAS dollar net retention rate in the 110 to 120 percent range is a good long-term target for our business. Now, let's review the income statement in more detail. These metrics are non-GAAP, unless otherwise noted, and we provided a reconciliation of GAAP to non-GAAP financials in our earnings press release. First, on a GAAP basis, our gross profit for the quarter was $42.5 million, and we had income from operations of $1.9 million. We had net income in the quarter of $692,000, or one cent per share, based on weighted average basic shares outstanding of $134.2 million. Turning to our non-GAAP results, gross margin in the quarter was $44.1 million, or 60.1%, compared to 61.6% in the first quarter of fiscal 2021. Subscription margin in the quarter was 63.3%. As we've noted each quarter, there can be quarterly variation due to timing of when revenue recognition begins for certain contracts and the timing of expenses at various stages of new deployments. As indicated previously, we were benefiting from favorable timing in fiscal 2021 and expected gross margins to move back into the mid-60s in fiscal 2022. While we have experienced increased hosting costs in support of significant growth of written premium running on our platform, We do expect the remaining quarters of fiscal 2022 to show improvement in subscription gross margins. Professional service margin of 48% in a quarter was notably strong and well above our target range, driven by robust demand and high utilization rates. Our services margin in Q1 was higher than we wanted, and we're committed to bringing them down throughout fiscal 2022 to more sustainable levels. Our goal is to bring them down several points through the fiscal year and longer term into the high 30s. Seasonally, Q2 has been historically below Q1 in both revenue and gross margin terms, and we expect that trend to continue this fiscal year. Turning to operating expenses, R&D costs were $12.7 million, or 17% of revenue, down year-over-year as a percentage of revenue. R&D expense growth of 14% compared to Q1 of fiscal 2021 was a bit below targeted levels based on the timing of new hires. We currently expect R&D spend as a percent of revenue to increase slightly through the remainder of the fiscal year, but still remain slightly lower than fiscal 2021 for the full fiscal year. We continue to balance the scale benefits of our R&D organization with increasing investments in our products and SaaS platform. Sales and marketing expenses were $10.7 million, or 15% of revenue, consistent with the prior year as a percent of revenue. Expense growth from the prior year reflects continued expansion of our go-to-market resourcing in both U.S. and international markets, while travel-related costs continue to run below normal levels due to COVID-19 impacts. G&A expense was $13.7 million, or 19% of revenue, down from 22% of revenue in the prior year period. As noted previously, G&A is our most leverageable cost area and is declining as a percent of revenue in line with our expectations. Adjusted EBITDA for the first quarter was $7.8 million, which was ahead of our guidance due to the better-than-expected revenue and lower expenses I just referenced. Adjusted EBITDA margin was 11% for the quarter, up from 6% in the prior year period. This represents our 12th consecutive quarter of adjusted EBITDA profitability, which we believe is an important indication of our ability to generate high levels of subscription revenue growth on a profitable basis. Non-GAAP net income per share for the quarter was 4 cents, based on approximately 135.7 million fully diluted weighted average shares outstanding. Turning to the balance sheet and cash flow, we ended the quarter with $348 million in cash, cash equivalents, and short-term investments, and we remained debt-free. Free cash flow was negative 25.5 million in the quarter, compared to negative 22.9 million in the prior year period. As a reminder, the first quarter is typically our low point for cash flow in the year due to the timing of working capital. I'd now like to finish with guidance beginning with the second fiscal quarter. We expect total revenue of $71.5 to $73.5 million, subscription revenue of $37 million to $38 million, adjusted gross margins are projected at 57 to 58%, We expect adjusted EBITDA of 1.5 to 2.5 million. And our non-GAAP net income is expected to range from 500,000 to 1.5 million or zero to one cent per fully diluted share. For full year fiscal 2022, we are increasing our guidance to total revenue of 298 to 304 million, subscription revenue of 152.5 to 155.5 million, Adjusted gross margins are projected at 58 to 59 percent. We expect adjusted EBITDA of 19 million to 21 million, and our non-GAAP net income is expected to range from 11 million to 13 million, or 8 to 10 cents per fully diluted share. To wrap up, we got off to a strong start in the first quarter. We're seeing strong demand activity from new prospects and existing customers who are embracing the opportunity for better business performance from running their business on Duck Creek On Demand. We remain confident in our ability to continue generating strong levels of growth and increasing profitability in the years to come. And with that, we'd like to open up the call to Q&A. Operator?
spk00: Thank you. Again, ladies and gentlemen, if you'd like to ask a question, please press star then one on your touchtone telephone. Again, to ask a question, please press star then one. Our first question comes from Sakit Kalia, Barclays. Your line is open.
spk12: Okay, great. Hey, Mike. Hey, Vinny. Happy New Year, and thanks for taking my questions here. Happy New Year. Hey, Mike. You know, maybe just starting with you, you know, you touched on this a little bit in the prepared remarks, but maybe if you just go one level deeper, can you just maybe qualitatively talk about, you know, the number of opportunities you're seeing and maybe how win rates have trended through the quarter? You know, I think last quarter's results maybe drove some investor questions on, you know, whether other competitors were getting more competitive in SaaS opportunities. How do you sort of think about those things with another quarter under your belt here?
spk09: Yeah, thanks, Zach. I would say that we have a healthy number of opportunities in the pipeline. In fact, our pipeline continues to strengthen quarter over quarter, so we're pleased to see that. And in terms of our win rates, we're not going to talk specifically about win rates, but I'll say that going through the past two quarters, we don't see them as changing in any material manner. So I think we're set up very well as we start the fiscal year, as I stated in the prepared remarks. And in terms of our competitive positioning, I think we're really pleased with where we're at. In fact, we've had several exciting wins, you know, last quarter and this quarter, that we know that those opportunities were very, very well vetted against competition. And we got feedback, really positive feedback on our platform, really our superior low-code platform and our differentiator with our SaaS solution. And I think our win at Secura is one great example of that. They did a very intensive evaluation process and looked at many vendors across the landscape. And we're really pleased with the outcome, as I said in the opening remarks.
spk12: Got it. Got it. That makes a ton of sense. Vinny, maybe for my follow-up for you, I was wondering if you could just talk a little bit about just the pace of implementations you know, clearly the pipeline here sounds good in the coming quarters, but, you know, you spoke about the seasonality of revenue and gross margin here in Q2. I know we don't talk about ARR specifically, but is there anything that you could give us just in terms of how to think about ARR sort of trending in Q2 or kind of through the rest of the year qualitatively, of course?
spk08: Yeah, sure. Hey, Saqib. So, the thing I'd say is, in fiscal 21, we kind of had, you know, an unusual trend in ARR growth, where the second quarter was our largest sequential growth quarter, and the third was our lowest. I think last year was the aberration. If you look back to, say, fiscal 20, you know, the second quarter was our lowest sequential ARR growth quarter of the year, and that's more typical. And the reason that's more typical is really tied to seasonality. is generally not our strongest bookings quarter. Even though Q2 is generally a strong bookings quarter, and we expect it to be again this year, most of that doesn't make it into ARR during the quarter. So I think just qualitatively, you could expect to see kind of a return to more normalized trends, where Q2 won't be our strongest ARR growth quarter this sequentially, and I think you'll see more like, you know, the trend of two years ago where Q2 is a bit lower and Q3 is a bit higher. Got it. But that's going to come off what we expect to be, you know, a really strong Q2 bookings quarter, which would translate into more ARR growth in the second half of the year. Yep, absolutely. Very helpful, guys. Thanks very much.
spk12: Thanks.
spk00: Thank you. Our next question comes from Baban Suri. William Blair, your line is open.
spk04: Hey, gents. Happy New Year and congrats. It's a solid quarter there. I guess, Mike, I want to touch on cybersecurity here a little bit. You know, when we talk to carriers, there's this kind of focus on cyber, sort of, you know, they're trying to figure out how to do it, how to price it. You're seeing some of the kind of emerging players, like these native clouds and players like CyberCube and others coming out there, How are you guys seeing that market evolve, and how do you think about that market in terms of partnering, acquiring? I'd love to get some sense of that, especially as cyber and ransomware and everything becomes more critical.
spk09: Yeah, thanks, Yvonne. Yeah, well, obviously you're asking the question because cyber is one of the faster-growing product lines in the industry for good reason. You know, there's a lot of carriers that need to provide protection. What we do see out there, though, is how carriers go after cyber and how they price it varies greatly in the industry. Some bring in solutions that look at the topology or look at the inside of their customer and what's going to happen. Others just look at the overall landscape. So they're bringing a variety and a vast variety of technology to go evaluate cyber. So our strategy to date is, first, A lot of cyber that you do see is an add-on coverage, not a standalone product. So we do support the ISO add-on coverages right out of the box. So I think that helps so we can attach cyber to other products. And then secondly, in terms of technology, you know, we've really been partnering with leading insure tech, some of them, you know, that you've mentioned. to make sure that we can integrate out of the box and bring some of those solutions to bear because, you know, there isn't a one-size-fits-all for carriers, and we want to make sure that we're very well positioned to adapt to the way that they're going to view cyber. And, you know, that's been our approach to date. You know, we're always actively looking for new companies to go acquire or, you know, kind of partner with, and we're going to continue to do that to make sure we perform well with cyber insurance.
spk04: Gotcha. Gotcha. And then, and then one more sort of more near term one, for both of you guys, you know, there's obviously this labor shortage. And it's in every industry. But I wonder, as you think about implementations, which despite the low code environment, you have still requires people because this process changing everything else. And between a shortage at say, your partners, Accenture, whomever, and then potentially a shortage at your customers in terms of headcount, and then potentially even your services group, which is running ultra hot right now, as you can see from gross margins. And then you have to hire salespeople, and you have to hire R&D because you're doing innovation. Is there any sort of risk as you guys see this playing out for slower implementations or you not being able to hire enough sales headcounts or R&D headcounts, for example, like what you did in New South Wales? Like how should we think about what this labor environment means for you and then for your customers and implementations? I'd love to get a sense of how you would think about that strategically as kind of the leader of the firm.
spk09: Yeah, and obviously with the great resignation and a lot of, I'm going to say, higher attrition that, you know, I'm going to say broadly in the industry, across the technology industry, everyone's paying attention to it. I will say that I'm pleased with where Duck Creek is at. You know, we've invested quite heavily in our employee engagement, in our culture, many dimensions. And I think we've handled the pandemic very well. And that's resulted in us having, you know, more favorable retention rates, I think, others are seeing as technology companies. So I think that's helping. But to your point, it's still a watch item for us. You know, as Vinny and I have spoke about, even on prior earnings calls, you know, keeping up with hiring and getting people onboarded is something I think we're doing well. We're growing in our headcount. quite a bit, but we, you know, are falling a little bit short of some of those expectations. Now, it's nothing at alarming levels, and we're working well with our partners, but I would say it's a watch item for us, and right now we're not seeing a material impact on it. You know, you can have an impact on any given project as you try to shift some resources around or work with different partners, but I think the way we're really addressing it is continuing to work with our leading systems integrators that are out there. You know, we've added a new one with Hexaware this quarter. We're now up to 20, and I think we have an enormous amount of capacity through that ecosystem, and that's helping us quite a bit as well.
spk04: That's super helpful. Thanks for taking my questions, guys. Really appreciate the color.
spk00: Thank you. Our next question comes from Rishi Deloria of RBC. Your line is open.
spk11: Hey, guys, thanks so much for taking my questions. Good to see some upside in the numbers. Maybe I wanted to drill into that first. I appreciate all the commentary on what you're seeing with your customers. But if we run the tape back, you know, three months, you kind of gave us outlook and clearly came ahead of it. What would you, you know, maybe attribute the upside of the quarter and the better outlook to? Was it, you know, better execution? Was it a better, you know, improving environment? Anything else you could pinpoint on that would be helpful and then I have a follow-up.
spk09: Well, Rishi, I'll start with that, and I don't know if Vinny wants to add. You know, I'll just say that I think this quarter has lined up with our expectations and what we stated coming out of the quarter. You know, we continue to see some great activity with Tier 1s and many opportunities through the pipeline. We closed, you know, some nice deals in the quarter, as we talked about, and I think it sets us up very well for the year. Vinny, I don't know if you want to add.
spk08: Yeah, the one thing I'd point out is, like, I think, you know, where we had indicated we'd be coming out on subscriptions, we beat by a little bit. You know, we're feeling good about the sales pipeline and where we stand. But actually in Q1, you know, the larger revenue outperformance was in the services where demand has really been fairly off the charts and our utilization rates are running really high. So, you know, I do think on the services side that will back off a little bit, a bit in Q2, you know, from a margin perspective probably noticeably. But we're just, you know, we're pleased with the momentum kind of across the board in Q1.
spk11: Got it. That's helpful. And then, Vinny, for you, as we think about the SaaS gross margin line, you know, obviously there are some maybe one-time-ish benefits in the, you know, Q1 through Q3 of last year. Just how should we be thinking about that line going forward? Can you remind us of some of the puts and takes of why it's dropped and then maybe the glide path to get to that long-term model you laid out at IPO of, you know, 70% to 72% SaaS gross margins?
spk08: Yeah, sure. Look, as you pointed out, we knew we were benefiting from some timing of just how product was going onto the platform last year, and we weren't sustainable in the high 60s where we were performing. We did know we'd come back into the mid-60s, and we did. And, you know, that dynamic is fueled, you know, partly by headcount, but also by infrastructure costs, and the infrastructure costs are hosting on the Azure platform. And the hosting costs came in actually just a little bit higher than we expected as we're putting a lot of DWP on the system. So we do think Q1 kind of will be the annual bottom of margin for the subscription line. But I think that, you know, the kind of climb back out is going to be gradual. So I think we'll see small increments of progress through the balance of this fiscal year. The full fiscal year should still come in in the mid-60s. And then I think you'll see, you know, over the next few years, a progression up into the low 70s. And, you know, we don't think the long-term target has changed in terms of what the number is or when it's achievable. It's probably into the low 70s over the course of the next few years.
spk11: All right. Wonderful. Thank you so much, guys. Sure.
spk00: Thank you. Our next question comes from Alex Zukin of Wolf Research. Your line is open.
spk13: Hey, guys. Thanks for taking the question. Mike, maybe just the first one for you. Coming out of last quarter, we talked about sales cycles being a little longer because the kinds of value and the kinds of deals that you're negotiating with customers now are for even greater amounts of value. I wanted to ask, given the really strong net retention rate you guys put up this quarter, just give us a sense for... that selling environment, those selling cycles, particularly as we're, you know, kind of now in 22, uh, you know, another year removed hopefully from, from, you know, what, what definitely likely extended sales cycles globally for, for many firms doing complex deals. Just would love to get your sense for, uh, kind of where we are at this point.
spk09: Yeah. Thanks, Alex. Um, You know, I would say when you referred back to last quarter's comments in the sales cycles, you know, we made a comment on some of the Tier 1 activity and some of that stretching out. But, you know, I just want to say that we continue to see great activity with our Tier 1 prospects and existing customers. And obviously, you know, we always want to sign up a new Tier 1. And then also selling back into our customer base is obviously, you know – yielding, you know, favorable net dollar retention numbers for us. But we're excited about the strategic conversations that we're having with these carriers and their long-term move to the cloud. You know, they're really looking at it maybe by a line of business or a product line basis. But, you know, anytime we can establish a new relationship with a tier one, that's really strong for us. And, you know, some of these opportunities are taking shape, and, you know, we do expect some to occur in the second half of the year. So I think that's good, and I think it's unfolding as we indicated last quarter, and we're pleased with the results that we have right now.
spk13: Perfect. And then, Vinny, I want to go back to the first question. I think you gave some great color around the shape of net new ARR in terms of how we should think about the modeling process. for the next two quarters. I wanted to ask if you think about the, uh, the linearity of these, of the bookings, um, both from last quarter and maybe even what you talked to for next quarter as a percentage of the full year, should we think about the seasonality in kind of Q1 to be closer to kind of the last two years and that low twenties, uh, percentage, uh, or is there, You know, something given the linearity with what Mike just described around those sales cycles, the second half concentration, is there something else that we should kind of keep in mind as we sync our models for the year?
spk08: Well, I think I don't want to cite specific percentages. That's always hard to do. I think, you know, our expectation is that this year, from a bookings perspective first, not from when it makes a day or our perspective, But from a booking perspective, I think we're going to return to our historical norm of, on a percentage basis, Q2 and Q4 being noticeably higher than Q1 and Q3. And typically, it would not be atypical for Q1 to be our lowest percent of the year in terms of percent of bookings. And that is likely to hold up again this year. I, you know, what the exact number is, I don't want to disclose right now, but we do think it'll probably be on the, you know, more on the normal historical side. So I think, you know, in terms of a first half, second half blend, again, I think that hasn't varied all that much year to year other than individual deals, and we think that's probably pacing towards a normal kind of outlook also.
spk13: Okay, perfect. Thank you, guys.
spk08: Yeah.
spk00: Thank you. Our next question comes from Jackson Adder of AP Morgan. Your line is open.
spk02: Great, thanks. Actually, Vinny, just to follow up on that, there was a lot of discussion in the first quarter about that, you know, being a little bit more conservative, I guess, in the outlook for the Tier 1 activity. What is our new level of confidence here in terms of that Tier 1 activity, you know, closing in that second half of the year?
spk08: Yeah. Hey, Jackson. I don't think our view on really bookings trends nor tier one activity levels has changed from what we indicated coming out of the last quarter. I think we're still taking a relatively conservative view on a couple of specific tier one opportunities that are kind of framework kind of deals. We do think those come later in the year and don't have a huge revenue contribution for this year, but that we're still positioned really well in those accounts. So I think the You know, from an overall perspective, I think, you know, we think the situation is consistent with what we laid out coming out of Q4.
spk02: Okay. Okay, cool. And then, Mike, as a follow-up, the international deals that you mentioned, I think, you know, if I'm characterizing them correctly, they were more startups in nature, right? Like kind of brand-new type of venture tech companies. And I'm curious, are you – beginning to position yourself to maybe win deals with existing insurance carriers that have significant amounts of DWP? Or should we still think about the international expansion being mostly startups and new launches and that sort of business model?
spk09: No, I would say that, Jackson, we – are positioning ourselves as usual to sell to carriers of all sizes and all tiers, even in international markets. You know, these were two opportunities where They're new formed companies that had an innovation, an innovative value proposition. And but we're also in some very advanced discussions with other carriers in some of those markets that are actually quite large. So I think, you know, the strategy hasn't changed, which is, you know, to pursue opportunities, tiers one through fours. And then even within existing carriers, sometimes we'll target a new startup book of business and maybe help a carrier get something to market. At the same time, we can focus on replacing a book. So I think some of that is just the timing of the deals that came through, but I don't think it's any shift in our philosophy of how we're selling into carriers.
spk02: Right. Okay, great. Thank you.
spk00: Thank you. Our next question comes from Brad Fields of Bank of America. Your line is open.
spk07: Yeah, hi. It's Michael Funk on for Brad. I appreciate you taking the question. So a couple if I could. So going back to your guidance for the full year and the increase, it looks like about 100% of that change at the midpoint is simply the one Q beat. It would actually imply a deceleration in the rate of absolute revenue growth quarter of a quarter throughout the year. Is that just conservatism, or does that go back to your comment about expectation for service revenue trailing off throughout the rest of the year?
spk08: Yeah, I think the bulk of it is tied to the services revenue assumption. Although, you know, again, we're not getting more aggressive on our assumptions on, you know, on subscription revenue. So I think our approach was, you know, we're happy with the Q1 overperformance. And we're going to see how we pace going into Q2 and coming out of Q2.
spk07: Got it. Thank you. And just thinking about international and the opportunity there, historically we've seen, over in Europe specifically, they're a little bit slower to adopt technology, SaaS in general. But when they do, they generally ramp at a similar pace to the U.S. as a whole. Is that your expectation? Do you see opportunity for greater growth, greater adoption out of the non-U.S. markets as they ramp up the technology?
spk09: Michael, I would say that we have an opportunity – for greater adoption over there relative to our current install base just because the size of our business over there is smaller. I don't know if it's going to be because they're going to adopt faster or behave differently than what we see in North America. We do see European companies being more conservative when it comes to cloud and SaaS today. There are carriers asking us more often, if we would sell an on-premise solution, which we won't. So that's not available for us as a winning proposition over there. Now, we are seeing that trend turn, and we're seeing the uptake of SaaS adoption in Europe, but I think it's a little bit slower. But I don't think that what's going to drive our numbers is because there's a higher pace of adoption. I really think it's just as we open up markets and get reference points then we have a chance to start to parlay additional deals and grow from there.
spk07: Great. I appreciate the time. Thank you.
spk00: Thank you. Again, ladies and gentlemen, if you'd like to ask a question, please press star then 1. Our next question comes from Parker Lane of Speedway. Your line is open.
spk01: Yeah. Hi, guys. Thanks for taking my question. Obviously, a big opportunity with core solutions, but I was hoping you could touch on the non-core for a second and particularly the when you think about Tier 1 and Tier 2 accounts, the new account activity, how often is non-core serving as that initial hook into an account versus core? And I guess just more broadly, what's the demand been like there for the non-core solutions for customers that are not currently using Duck Creek's platform? Thanks.
spk09: Sure. Thanks, Parker. I would say that You know, we're continuing to see adoption of our non-core solutions. In fact, a number of deals, you know, where we had our distribution management solution bought through or insights solution added on. And then also where we've had some relationships with carriers because we were in there with, you know, a product called Turnstile, which is a product that allows carriers to adopt accord forms and move that data into a quoting experience. So, you know, we think this strategy of landing with smaller assets into accounts is is helping. But what it is going to do is from an ACV or bookings point of view, it's going to lean, you know, our new bookings in a quarter more towards expand because our land deals will be smaller. So, you know, we're continue to see success in the overall strategy.
spk01: Got it. And then going back to international, obviously some nice wins there. Can you give us a sense of how those deals were sourced in the first place? Was that you know, your new salespeople going directly to those accounts, figuring out what their challenges were. Were they partner-driven, maybe inbound RFPs? And then what is the build-out of the sales force look like internationally today, and what does that look like throughout 2022 from a hiring standpoint? Thanks.
spk09: Yeah, great. What I would say is that those deals were sourced from the local sales team who are pursuing ideas. I don't know if they were an initial inbound of RFP or originated in some other manner, but we got into a favorable position. We can demonstrate our capabilities and really bring line of sight of how they can get up and running very, very quickly. So we're really pleased with the outcome. But again, it wasn't partner-driven. It was really our local team on the ground. And then in terms of hiring, I think we've talked about this a bit in the past, but our model is to go to market direct with local sales force in those markets. And I think building out not only your sales function, but your pre-sales, sales consulting, and solution architecture functions so that you have the team on the ground They can build the right demos. They can be there for answering the complex questions and put together high-level estimates in terms of cost and what it's going to take to put a solution in. So we continue to build out those teams in continental Europe. Obviously, we made those investments in Australia a couple years back, so just pleased to see the momentum on that. And, you know, we saw a nice win in the U.K. because of that team. So, you know, we continue to build that out. But, again, I think that's a disproportionate amount of our investment in sales and marketing year over year that's going to those international markets.
spk01: Yeah. Appreciate all the feedback, Mike.
spk00: Great. Thank you. Our next question comes from Alex Galler of Raymond James, Atlanta Filters.
spk10: Thanks. Mike, I wanted to follow up on your answer to Parker's first question in terms of the percentage of growth coming from the existing pace having picked up. Can you just talk about, has that been a structural change kind of for your go-to-market that's driven that? And is that any color on how your pipeline breaks down from a new logo versus expansion perspective? Thanks.
spk09: Yeah, Alex, and I'm assuming you're asking that question in terms of our land versus expand. Is that right?
spk10: Yeah, that's right.
spk09: Okay. Yeah, and I think, you know, we continue to see signs of success on that. Now, I'm pleased with the new logos, you know, that we've seen. You know, last quarter, I talked about Arbella and Star, you know, two, you know, competitive wins. And this quarter, three new SaaS customers have come on. So, from a logo perspective, you know, we are seeing, you know, just us add new customers onto the base. That's nice. Yeah. But as we've indicated earlier, in a couple of accounts, we've been able to land with smaller assets like distribution management or our turnstile product or something else and then cross-sell that into a core solution. And what ends up happening is that ends up getting accounted as expand revenue. So I think that strategy is working just because any time that we have an opportunity to build a relationship with a carrier, that just allows us to be in essence on the inside, if you will, or just in a favorable position for a new upcoming opportunity. So I think that is intentional on the strategy. So I think to answer your question, your last question on the pipeline, When we look at the pipeline, it looks like it really has a nice balance between new customer and prospect opportunities versus selling into the base. I just think the bookings number, as it all unfolds, is going to lean still a little bit more favorable to the expand. And that's, you know, resulting in high net dollar retention, although we still think we're running higher than expected, and those numbers at some point will likely come down a bit.
spk10: Okay, got it. Very helpful. And then just following up on the Tier 1 activity commentary, can you provide an update on how those conversations are progressing? I appreciate the conservatism, but what are the key factors to get those deals across the finish line from here?
spk09: You know, when we're talking to Tier 1, it's really about their strategy and, you know, what do they want to get done this year? And do they have, through their governance, those budgets approved for and those projects ready to move forward. So most of those conversations tend to be along the lines of something that they want to get done, whether it's launching a new geography or if it's bringing a new line of business to market. And I think they're progressing well. We're working with some carriers that want to get some things done and perhaps aren't quite ready to move forward, but we think we have a good opportunity to do so. So, again, we're encouraged by the discussions that we're having today And as Vinnie indicated earlier, you know, I don't think our point of view is unchanged of what we communicated from Q4.
spk10: Thank you.
spk00: Thank you. Our next question comes from Suki Kalia of Marclays. Your line is open.
spk12: Hey, guys. Thanks for having me back here. I just wanted to ask one question for both of you, kind of interrelated. So, Mike, I was wondering if you could just talk a little bit about your existing customers and what they're saying about potentially converting to Duck Creek On Demand. You know, I know that that's not something that Duck Creek actively pushes customers to. I think you've been very clear about that in the past. But I just wonder what the customer appetite is for those existing customers that aren't on Duck Creek On Demand. And the related question there for you, Vinny, is Can you remind us if you've assumed any conversions in your guide? Because if I remember correctly, those can be nicely revenue accretive. So, sorry, there was a lot there, but does that all make sense?
spk09: It does, Zach. And I would say that, you know, we continue to advance conversations with our on-premise base, and we're talking to a number of them around, you know, what's the right timeframe for them to convert. As I've indicated earlier, with our low-code platform, if they're running our ISO templates and running some of these capabilities that we deliver on top of the low-code platform, we can push out those circulars and those changes even in their on-prem environment. And so many of them are in a good place. And we haven't created a forcing function, if you will, to force them into Duck Creek on demand. And then finally, we really like to rally with our customers or work with them on a strategic priority because it's not just about a lift and shift. It's about, you know, something else that they want to get done or take advantage of some of our more advanced features that we've launched over the last couple of years. And we've advanced many of those conversations. But I think for us, instead of having a whole stockpile of them, you're going to see kind of a cadence of several of these conversions, you know, throughout the year. But we're encouraged about the advanced conversations we're having with them.
spk08: Yeah, and, Zach, just to jump in on the last part of your question, when we, you know, do guidance and project out our results, you know, if we have a known event, we will factor it in, but we don't, you know, we don't project any number of conversions that kind of aren't, like, you know, kind of deep pipeline, you know, late-stage pipeline known events. So I think we might have one or two conversions built into this forecast. But those are kind of known customer events. And we don't generally give ourselves a target to go out and get X number included inside the forecast.
spk12: Got it. That's what I thought. Thanks very much, guys.
spk00: Thank you. Our next question comes from Joe Goodwin of JMP Security. Your line is open.
spk03: Great. Thank you so much for taking the question. Can you just give us an update on what you're seeing from customers opting into multi-tenant deployments?
spk09: Sure. You know, in terms of our multi-tenant solution, I'll say that, you know, pleased with the overall adoption of it. You know, we're not getting into the numbers and the counts because, you know, driving customers or mandating multi-tenant versus single-tenant is not what we're – doing. Um, we're not going to lose a deal because of lack of choice, but I will say that over the past couple of quarters, you know, not only have we had, uh, more adoption of our multi-tenant solution, we've had multiple customers go live on it. Some, and I'm very happy with the diversity of those carriers, you know, some that are tier ones with very large books and some that are, uh, tier fours and small books. Um, So I think it's a proof point that a single platform and a single multi-tenant backplane can support multiple complex carriers. So, you know, we're very happy with the progress that we're making. But, again, it's still early in our lifecycle, and we're going to be running in mixed mode for many years to come. So, again, it's not a major focus point in terms of the counts and where we are with multi-tenancy right now.
spk03: Understood. Thank you. And then – Can you provide an update on the CFO search and how it's going?
spk09: Yeah, I sure can. I would say that it's going well. And, you know, I'm really happy with the progress that we've made, and I'm really pleased with the interest and the response that we've had from the market. You know, it's a great response with some leading candidates, and I think that is just a validation of the strength of our company, our reputation, and certainly the incredible opportunity that we have out in front of us. But I will say that we'll announce a new hire when we can, but it's our priority right now just to find the right person. But I will say we have somebody that has big shoes to fill because I think everyone knows that Vinny is just a terrific CFO, but we're excited about the prospects that we're seeing right now.
spk03: Absolutely. Thank you.
spk00: Thank you. This does conclude today's conference call. I will turn the call over to Mike Patowski for any closing remarks.
spk09: Okay. Thank you, everyone, for joining us on our fiscal year 22 Q1 earnings call. And, again, I'd like to highlight that we're off to a great start to our fiscal year as we continue to grow our SaaS ARR by signing multiple Duck Creek on-demand customers and deepening our relationships with existing customers. We're encouraged by some of the wins that we've had outside of the U.S., showing some early signs of success of our international growth. And, again, I want to emphasize that we're still in the early stages as the industry migrates core platforms to the cloud, and we see our success this quarter as continued evidence that we are well-positioned to take advantage of this significant opportunity. Again, I appreciate everyone joining us today. Thank you, and please be safe, healthy, and well. Take care.
spk00: Thank you. Ladies and gentlemen, this does conclude today's conference. If you all participated, you may now disconnect.
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