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spk05: Hello, thank you for standing by, and welcome to the Duck Creek Technology second quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask a question during the session, you'll 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. I would now like to hand the conference over to your speaker today, Brian Denue.
spk06: Please go ahead. Good afternoon, and welcome to Duck Creek's Earnings Conference Call for the second quarter of fiscal year 2022, which ended on February 28th. 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 following 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 forward-looking statements as predictions of future events as actual results and events may differ from any forward-looking statements that management may 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, 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.
spk04: Thank you, Brian, and good afternoon, everyone. Thank you for joining us today to discuss Duck Creek's second quarter results. We have continued to deliver on our mission to help transform the P&C insurance industry as a leading cloud core systems provider. On today's call, I will review some key trends that we are seeing in the market, outline some key customer wins, and provide some exciting highlights from our recent users conference called Formation. Let me start with a quick overview of our financial results for the second quarter. We reported total revenue of $76.4 million, up 22% year over year. and this was underpinned by our subscription revenue, which is our revenue derived from SAS of $39.6 million, up 29% year over year. Our annual recurring revenue, or ARR, was $151.4 million, which resulted in 28% growth over the prior year, and we delivered another strong quarter of profitability with adjusted EBITDA of $7.3 million. From a new sales perspective, We closed several important and strategic deals in the quarter, one with a notable global tier one insurer. We also continue to see very high levels of interest in the market for our SaaS cloud platform, Duck Creek On Demand. However, new business sign during the quarter was below our expectations due to delays of the signing of several key deals. Specifically, we have seen sales cycles lengthen with some of our larger deals as customers and prospects work through the impact of the current environment. including the availability of IT resources and rising inflation. We expect that this dynamic will be transitory. As I mentioned, our on-demand generation activities continues to be very strong, yielding a robust pipeline of deals, many of which are in the most mature stages of our pipeline development. As we have told investors from the beginning, this is a market that has a relatively low volume of deals, but with high average deal value. so modest changes in buying behavior can drive near-term swings in bookings and SAS ARR. We are very pleased with some of the strategic wins that we had in Q2. First, we recently announced that Philadelphia Insurance Companies, a member of the Tokyo Marine Group, Japan's oldest and leading PNC insurer, has selected Duck Creek Policy and Duck Creek Producer to launch a new line of commercial insurance in North America. After a careful review of multiple industry providers, they chose Duck Creek On Demand for its scalability, extensibility, and ease to launch commercial lines products using Duck Creek's commercial templates and leveraging our low-code configuration. We're delivering a digital-first approach via Duck Creek Producer to optimize customer experience and enhance existing distribution channels. Another exciting 2Q win. was with a California-based startup in SureTech who is using data and telematics intelligence to price drive a risk and offer compelling coverage in a unique, highly personalized way. This startup company selected Duck Creek Policy and Billing and Insights to power their growth. They chose Duck Creek's modern core system because of our flexible, highly scalable, easy-to-configure product inheritance model, which will speed their implementation, and allow them to rapidly deploy their products seamlessly throughout North America and to global markets. This win is another example of how cloud-based, SaaS-delivered, low-code solutions are making Duck Creek the technology provider of choice for many startups and insure techs globally. We also signed our largest-ever distribution management win with EMC, a leading Tier 2 insurer. This transaction will enable EMC to provide a modern, flexible relationship management system to improve engagement and efficiency across their independent agent network around the country. This is an important win for Duck Creek that shows how we have multiple avenues to engage with customers and create value. And we had sizable capacity buy-ups in the quarter with two leading Tier 2 carriers. These types of purchases expand a customer's footprint with Duck Creek and is driven by the underlying growth of their written premium or deployment into a new business line. These wins highlight the differentiation of our on-demand platform, which has been proven to serve insurers of all sizes and help our customers deliver leading capabilities with speed. With our customers' success as a key priority, we had another strong quarter of go-live activity with 19 go-lives occurring in Q2. One important go-live this quarter was with AIG. We are very proud to continue with our contribution to the success of AIG's industry-leading transformation program, AIG 200. After prior deployments of several commercial products on Duck Creek Policy On Demand, AIG successfully went live with Duck Creek Policy and Claims On Demand for their private client group, AIG's insurance division that protects the lifestyles and legacies of high-net-worth individuals and families. We're thrilled that Duck Creek can play a vital role in helping AIG continue to provide leading products, expert guidance, and concierge-level claim services to their distinctive high net worth customers. Another great example of our fast implementation cycles was with Argyle Insurance, a new commercial lines insurer in Australia that I referenced on our last earnings call. During the second quarter, we successfully brought Argyle live on Duck Creek on-demand policy and billing in 59 days. We believe that delivering a new core system in under 60 days is unheard of in the industry. Speed to deployment is critically important to many insurers, and as in this case with Argyle, we're excited to help insurers bring innovative products to market quickly and efficiently. Our ability to bring greater agility and automation to carriers is also evident in on-prem to on-demand transitions. Distinguished Programs has been an on-prem Duck Creek customer for years. In collaboration with one of our partners, EY, we successfully launched Distinguished Programs AutoLine for all 50 states in Q2, along with the deployment of additional transactional capabilities for their primary hospitality GL and property lines of business. Distinguished programs went live with their first line of business in Duck Creek policy in six months, and they continue on a journey to expand their offerings on our evergreen Duck Creek on-demand platform. Another important way we increase value for our customers is by continued expansion of our partner ecosystem. During Q2, we were thrilled to add six new partners to our solutions partner ecosystem, and I'd like to specifically highlight two exciting new partnerships. First, we launched a new strategic alliance with GLIA, Glia provides innovative digital customer service solutions that help the largest financial institutions in the world seamlessly support customers in a digital world. As part of our new strategic partnership, we entered into a new reselling agreement with Glia that embeds its digital customer service solutions as part of the Duck Creek suite and increases our selling leverage. The combination of Glia and Duck Creek will make it easier than ever for carriers to create seamless digital experiences that and drive higher conversion rates and more loyal customers. We also expanded our collaboration with CoreLogic, a leading provider of property intelligence solutions, to provide greater business intelligence to our customers so they can make real-time decisions. Insurers running Duck Creek can access CoreLogic's risk meter to rapidly assess property's flood risk and distance to coast to make smarter insurance decisions. As pleased as we are with these customer wins and the consistently strong feedback we receive from customers on our solutions and partner ecosystem, we're not standing still. We're thrilled to recently host our annual users conference, Formation, live in Orlando with a sold-out audience, nearly 1,300 people who gathered in person and online. Attendance to Formation by prospects was up 200% compared to the last in-person Formation event we held in 2019. and customer attendance was up nearly 40%. It was incredible to be back in person with our customers and partners, to hear their feedback, and to show them what we were working on to deliver even greater value from a product and partnership perspective. During my keynote, I spoke at length on what we view as a new standard for carriers to compete in today's digital marketplace. We believe that in order for carriers to be successful, they need to be agile, intelligent, and evergreen. With a focus on these three capabilities, we enable carriers to create product factories, which allows them to utilize Duck Creek's platform to easily create new insurance products and offerings and get them to market quickly using our low-code configuration tools. This allows an insurer to focus on the value-added steps necessary to provide tailored coverages for specific customer segments and markets. We believe this approach aligns perfectly with the needs of carriers who recognize the expectations for user experiences has never been greater. Carriers know they must create compelling persona-based interactions to delight customers, satisfy agents, and retain expert employees. A common theme for customers throughout formation was that their legacy core systems cannot deliver these experiences, and they are an inhibitor to their business success. On Duck Creek, carriers are able to easily build new products from existing ones. They don't have to start from scratch every time they have a new product opportunity. This inheritance approach reduces errors and simplifies product management under one system. We highlighted the success of this approach at Formation with Axis, who launched more than 30 products in a single year, and with Berkshire Hathaway Specialty, who has now launched more than 200 insurance products since 2014 using this approach. We came away from formation incredibly excited about the future for Duck Creek. The transition to the cloud is in its early innings, and we feel great about our ability to capitalize on this trend. We are incredibly excited at the opportunity Duck Creek has to deliver strong revenue growth and expanding profitability for years to come. Before I turn it over to Vinny, I want to take this opportunity to officially welcome Kevin Rhodes to Duck Creek as our new CFO, starting on April 4th. Kevin is an accomplished finance executive who has previously served as CFO for multiple high-growth SaaS companies, most recently Finvey, or formerly Ontario Systems. He has extensive public company experience from his time as a CFO of Brightcove and Edgewater Consulting and is a great fit to help lead Duck Creek to even greater success in the future. As you know, Vinny will be retiring from Duck Creek next month after an incredibly successful career. He's been instrumental in our ability to rapidly grow and scale this business over the past six years and led our successful IPO process in the midst of the pandemic. On behalf of everyone at Duck Creek and our board of directors, I want to thank Vinny and wish him all the best in his retirement. I would like to end by thanking the incredible team here at Duck Creek for all their hard work. They make our success possible, and I could not be more proud of the culture we have built and the talent we continue to attract to Duck Creek. With that, let me turn the call over to Vinny to walk you through the numbers. Vinny, over to you.
spk10: Thanks, Mike, and thanks for the kind words. Today I'll review our second quarter fiscal 2022 results in detail and provide guidance for the third quarter and full year of fiscal 2022. Total revenue in the second quarter was $76.4 million, up 22% from the prior year period. Within total revenue, subscription revenue, which is comprised solely of subscriptions to our SAS products, was $39.6 million, up 29% year over year. In Q2, subscriptions represented 78% of our software revenue and 52% of our total revenue. I would note that strong subscription revenue in the quarter included low single-digit millions of one-time revenue related to a contract where the customer changed their business model and bought out the full value of their remaining subscriptions. Revenues from on-premise software licenses of $4.6 million and maintenance of $6.2 million are 14% of total revenue. Please note that our second and fourth fiscal quarters are seasonally high for license revenue based on the timing of renewals, but that on an annual basis, we expect these line items to decrease as a percentage of revenue given the strong growth of subscription revenue. Services revenue was $26 million, up 15% year over year. We had another strong services quarter 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 $151.4 million as of February 28th, up 28% from the prior year. Please note that the one-time subscription revenue recognized in the quarter is not reflected in SAS ARR. 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 February 28, 2022, was 115.5%. As we have noted previously, recent quarters that exceeded 120% were unusually high based on a sales mix that had been weighted towards existing customers. This quarter is more in line with our historical average and consistent with our expectations. 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. 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 press release. First, on a GAAP basis, our gross profit for the quarter was $44.3 million, and we had a loss from operations of 0.4 million. We had a net loss in the quarter of 0.9 million, or one cent per share, based on a weighted average basic share outstanding count of 132.1 million. Turning to our non-GAAP results, gross margin in the quarter was 46.5 million, or 60.8%, consistent with the second quarter of fiscal 2021. Subscription margin in the quarter was 67.9%. The improvement from the first quarter was due to the one-time revenue discussed previously, as well as favorable timing of expenses. As we have noted previously, we expect subscription margins for the full year of fiscal 2022 to be in the mid-60s. Professional service margins of 38% in the quarter were in line with our expectations. As discussed in previous quarters, our utilization rates have been running unsustainably high, and we have been adding capacity to meet demand. That said, it's not uncommon for our Q2 to be a seasonally lower services revenue quarter, and we expect higher revenue and gross margins in the second half relative to Q2. Turning to operating expenses, R&D costs increased 15 percent to 13.8 million, or 18 percent of revenue, down one point year-over-year as a percentage of revenue. We currently expect R&D spend as a percent of revenue for the full year to remain consistent with fiscal 2021. 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 $10.6 million, or 14% of revenue, down from 16% of revenue in the prior year period. This decrease is mostly timing in nature, as we expect sales and marketing spend as a percent of revenue for the full year to remain consistent with fiscal 2021. While costs such as travel and marketing programs have run below normal levels due to ongoing COVID-19 impacts, we will see a step up in spending in Q3 due in part to the in-person formation conference discussed by Mike. G&A expense was 14.9 million, or 20% of revenue, down from 21% 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 second quarter was $7.3 million, which was ahead of our guidance due to the better than expected revenue and lower expenses I just referenced. Adjusted EBITDA margin was 10 percent for the quarter, up from 5 percent in the prior year period. This represents our 13th 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 133.7 million fully diluted weighted average shares outstanding. Turning to the balance sheet and cash flow, we ended the quarter with $349 million in cash and cash equivalents, and we remained debt-free. Free cash flow was $1.2 million in the quarter compared to negative $1.6 million in the prior year period. I'd now like to finish with guidance beginning with the third fiscal quarter. We expect total revenue of $71 million to $73 million, subscription revenue of $36.5 million to $37.5 million. Adjusted gross margins are projected at 57.5% to 58%. We expect adjusted EBITDA of $0.5 to $1.5 million, and our non-GAAP net income is expected to range from negative $0.5 million to positive $0.5 million, or break even on a non-GAAP EPS basis. For the full year fiscal 2022, we are updating our guidance to total revenue of 301 to 305 million, subscription revenue of 151 million to 153 million, adjusted gross margins are projected at 58.5 to 59.5 percent. We expect adjusted EBITDA of 20.5 million to 22.5 million, and our non-GAAP net income is expected to range from 12 to 14 million or 9 to 10 cents per fully diluted share. To wrap up, our Q2 results were strong, although delayed timing in certain bookings has resulted in a bit more conservative outlook for second-half subscription revenue. We strongly believe this is a near-term dynamic, and we're currently projecting robust new bookings in the second half of this year. We've remained highly confident in the long-term growth prospects of the business as insurers continue transitioning core systems to the cloud. And with that, we'd like to open the call for Q&A. Operator?
spk05: 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. Our first question comes from Ryan Peterson with Raymond James. Can you proceed with your question?
spk02: Hi. Thanks for taking the question. I just wanted to hit on the bookings environment that you guys mentioned. I know you mentioned maybe a little bit of a slowdown versus expectations. Is there any commonality on what's driving that? And what have you guys seen maybe so far in the third quarter? We'd just love to get an update there.
spk04: Yeah, thanks, Brian. I would say that there's not a specific commonality, although we're still pleased with the activity, the level of activity that we're in discussions we're having with customers. But I think as customers looked at signing deals, closing, and getting started with projects, the common things that we referenced is sometimes they're looking at their IT resources and their readiness along with their partners to get started. And then, you know, there is a little bit of a knock-on effect as they're dealing with rising inflation and some of the increases in loss costs that they're seeing. And they're not telling us they're going to cancel projects. They're just going through another step and taking a look at what they're going to do. So as we enter in these discussions and continue with them, we think, you know, they're going to move forward with these projects. They're just looking at the timing as to when they get started.
spk02: Understood. And, Mike, maybe a follow-up just from the user conference. I know one of the big parts or pieces of news out of the user conference was the relationship with Microsoft. Anything you'd like to add there? And are there any resources being put to the go-to-market side?
spk04: Thank you. Yeah, thanks, Brian. With Microsoft, yeah, we're very excited about that relationship. And on the go-to-market side, as I indicated at Formation, we worked out an arrangement that we can be a part of their marketplace. So anyone that has Azure agreements in place can leverage that as part of buying Duck Creek. So we think that's going to be very, very helpful as we talk to larger carriers that have those larger agreements. And we're hoping what it does is incent customers to really look at their overall IT spend with us and with Microsoft in a unified manner and encourages them to buy more.
spk02: Understood. Thanks, Mike.
spk04: Great.
spk05: Thank you. Our next question comes from Alex Zupkin with Wolf Research. We may proceed with your question.
spk07: Hey, guys. This is Strecker. I'm for Alex. Thanks for taking the question. I was wondering if coming out of the conference and being in person and back out with customers, if you're starting to see anything up kind of in the pipeline there. And then, you know, as a second one, given kind of the delays and some of those deals and the sales cycles lengthening, are you contemplating any changes in the investment side of your business if new business issues persist? Thank you.
spk04: I'll start with the second part of your question. And right now we're not contemplating any changes in terms of our hiring plans or our investments. You know, we think we're on a good trajectory to add more advanced analytics into our platform and to continue to invest in our platform. And also we continue to hire in both the service management, you know, the SaaS services side and our services side of the business. In terms of your first question, I think as we came out of formation, you know, it's still early to tell in terms of new deals coming into the pipeline, but I will say this. There's a number of on-premise customers that were very excited about the investments we're making and what that means for them to move to the cloud. They're working through their overall timeframe and budgets, but we have initiated new conversations with them to migrate in. And then also, as I said in my opening remarks, we had, you know, 200% more prospects at the event, which, again, shows the robustness of our pipeline. And I think they were very excited about the investments and what they saw and also took the time to talk to our existing customers and their experience. And we think, you know, that's promising for the second half and us closing deals in the second half of the year.
spk07: Great.
spk05: Thank you very much. Thank you. Our next question comes from Dylan Becker with William Blair. You may proceed with your question.
spk11: Hey, guys. Thanks for taking the questions. I guess maybe I wanted to start on the value. I think you touched on the ease of the overall implementation and maybe how the marketplace dynamics play in here and kind of lowering that barrier to adoption. I think the perception was historically these transformation projects would be kind of that that broader big bang, but do you see it playing out where the modularization of that implementation helps knock down that initial wall, customers investing in maybe their digital transformation on the customer experience side, able to integrate a system in that makes that core adoption, maybe accelerate that overall decisioning or ease that initial upfront burden?
spk04: Yeah, Dylan, I think there's two dynamics that are at play with the speed. The first one is just our technology, and the technology helps a lot. And that comes to play when you're defining the insurance products that the carrier is bringing to market, things like their rating algorithms, their underwriting practices, and their workflows. And I think we've proven that we can do that as fast as anyone or faster than anyone in the industry can. However, the second dynamic is we're seeing a large uptick of carriers launching new greenfield products or new insure techs going to market very, very rapidly. And what's nice about those types of arrangements is you're not dealing with the legacy integration and all of the complexity of the rest of the organization quite often. Some of them want to stand it up more greenfield so that they can move with speed. And it allows them to do some of that work in parallel. But I think that early success and, you know, this is why we're excited about this new arrangement with Philadelphia Insurance, which is a subsidiary of Tokyo Marine, because that early success and proof point is obviously an entree for us to continue to expand within the account. So, you know, we think those two dynamics play well. And I think, again, especially as it relates to tier ones, us to be able to prove ourselves and then expand is certainly in line with our business model.
spk11: Got it. That's super helpful. We've also talked a lot, I think, about the cyber opportunity in the past, and I know there's a lot of emphasis here, but how valuable and how are you, I guess, working with customers to build out those initial value models, right? I think maybe is it the challenges in the collection and aggregation of the necessary data to effectively price that risk, I mean, going off of you don't have the same level of historical data that you might from an auto, a personal or commercial line to define those value models. Is that something that you guys are kind of working through with the customers now and thinking of that opportunity gradually refining itself over time? Obviously, there is a lot of emphasis in that space.
spk04: Yeah, and there's certainly going to be more emphasis in that space, given what's happening in the environment. But yeah, You know, but this isn't a new thing for us. You know, we work, you know, one of the areas that we thrive in is specialty insurance and commercial insurance. And that's where really cyber lies. And we've been doing it with many carriers for many years in terms of adding cyber coverage or launching cyber products and getting them to market. But we're always looking for new partners to help us on the analytic side and to help our customers grow. which is why we announced a new partnership with CyberCube that it brings advanced analytics at play. But the one thing I will say is each and every insurance customer that we work with, they look at how they price cyber very different. And you highlighted a very important point. You can't look at loss history and use that as a predictor of future cyber risk like you can with auto and property and some other risks. And this is why carriers take very dramatically different approaches on how they price cyber. And I think that really comes down to the flexibility of our software and how we can ingest different types of data and then come up with different pricing algorithms based on that data. And I think carriers find that we have the most flexible software in order to do that going forward. So it really supports them well.
spk11: Thanks for taking the question, guys. All the best to Vinny in the retirement and look forward to working with Kevin in the future as well. Thanks, guys. Thank you.
spk05: Thank you. Our next question comes from Jackson Ader with JP Morgan. You may proceed with your question.
spk13: Great. Good evening, guys. Thanks for taking our question. The first one, Mike, if the booking slowdown is being driven by external factors, what can you or Duck Creek do internally to try and get you know, sales cycles back on track, if anything.
spk04: Yeah, Jackson, trust me, there's a lot of conversation within Duck Creek on what we can do that. And the thing that, you know, makes us know that we're going to have a much, much better back half of the year is because The slowdown was not a result of us losing deals or deals that went away. There wasn't a material number of deals or deals that we expected to win that went away in the second quarter. And what we saw is deals that we expected to close just got deferred. And we've been in very consistent conversations with those customers around their timing, their process, and do they have budgets and do they have approvals. So I think we are set up very well, and we've planned accordingly in the back half of the year to work with our customers on their timeframe. So I think it gives us a level of confidence that we're going to have a stronger back half of the year.
spk13: Okay. And then the follow-up then would be, you know, and Vinny, I understand that you're not – you know, you guys don't guide to full-year ARR growth or numbers, but – You know, would the expectation be that even though subscription revenue is coming down a little bit, but ARR, you know, ending the year ARR might not have come down as much as revenue recognized?
spk10: Hey, Jackson, you know, it's a logical pattern, and I think we would expect that ARR growth in the second half, you know, will be reasonably strong. You know, certainly we expect to add more ARR in the second half of the year than we did in the first. And we're expecting strong bookings in both Q3 and Q4. I think the only, you know, the impact on ARR, obviously we've said this a million times, right, the impact on ARR is, you know, when we get to the fourth quarter deals, how many of them close, you know, how many of them are provisioned in generating revenue in August. But, you know, we're pretty bullish on the bookings profile for the second half, and we're expecting pretty strong ARR growth.
spk13: Okay, cool. Thank you.
spk10: Yeah.
spk05: Thank you. Our next question comes from Saket Kalia with Parkways. You may proceed with your question.
spk08: Okay, great. Hey, Mike. Hey, Vinny. Thanks for taking my questions here. Mike, maybe for you, and apologies if this was asked. I joined the call a little late, but can we just talk a little bit about the pipeline for tier one carriers and I know that that was de-risked from the guide right from the get-go, so I realize that's not what we're talking about here for the quarter. But just maybe zooming out, it just feels like a lot of moving parts from just the macroeconomic perspective. I think we've talked about some of those opportunities maybe being international. Could you just maybe give us an update just about how you feel about the pipeline for those and how those conversations have changed, if at all?
spk04: Yeah, I would say that we feel good about the pipeline. We continue to be in discussions with several tier ones, existing customers that are looking to expand or do something more broadly on our Duck Creek On Demand platform. So I'm very pleased with that. I will say with the current environment, they've just gotten a little bit more cautious or at least going through some extra steps around perhaps internal staffing and some resource needs and what they need to do to get started. So it is causing us to be a little bit more conservative on those deals. But for us, it's about a matter of timing. We feel good about them happening. And again, I'll reemphasize that The deal that we did sign with Philadelphia and Tokyo Marine is a deal that, you know, we're very excited about, and that's a new Tier 1 customer that we're bringing into the family. And then we continue discussions with several other existing Tier 1 customers. So, you know, I think the conversations, you know, we're pleased, and they're going to keep moving forward. Again, the question is really when do they start the projects, and they sign up for more usage of Duck Creek on demand.
spk08: Got it. Got it. That makes sense. Vinny, maybe for my follow-up for you, I think you touched on this a little bit with Jackson, but can you just talk about the seasonality of net new ARR from here? We talked about the second half being bigger than the first half, and if I'm getting too granular, you let me know, but typically net new is kind of flat to up in Q3, but it sounds like there's maybe just an extra layer of confidence in the back half. you know, is there any sort of spillover of activity from Q2 into Q3 that we should be thinking about, activation-driven or just open-ended? Should we think about the seasonality from Q2 to Q3 here being, you know, in line with historical patterns or maybe a little different?
spk10: So, as you guessed, Saka, you know, I'm not going to, you know, I'm not going to head towards the, you know, guiding on ARR path, but I'll say that, you know, if Using your premise that Q3 could be flat up a little bit, I think we would find that rather disappointing. That said, we don't have a lot of spillover from Q2 into Q3, but we are expecting solid bookings going forward. So, really, it's going to come down to timing on when deals get done within Q3 and whether they're contributing to ARR in the quarter or not. Now, we've not forecasted a particularly aggressive path to provisioning the bookings we get in Q3, but there is, you know, as you know, there's a range of outcome there, particularly if there's a larger deal. So, I think, you know, we're really, you know, confident in saying that we think second half ARR growth is going to be strong. I wouldn't attempt to split it between quarters. Understood. Thanks, guys.
spk05: Thank you. Our next question comes from with RBC. You may proceed with your question.
spk09: All right. Wonderful. Thanks so much for taking my questions, guys. Mike, in your prepared remarks, you talked about some of the issues, and I know a number of questions have hit on it. I want to ask you the question. You referred to it as transitory, which, you know, last time we've heard that word used, widespread, obviously. Turned out to not be quite the case, but putting that aside, what is it that's giving you confidence that this won't be a long-lasting issue, that it is something that, you know, even though it's external and not within your control, that it's not going to be kind of a long-lasting headwind? And then I have a follow-up.
spk04: Rishi, the thing that gives me confidence in that is that carriers are not telling us that they're going to stop the projects or shut them down or defer them for even one year. And I won't give you the count, but we have the most robust pipeline that we've had in the history of the company. It has really gotten robust in the later stages of our pipeline. So we know that there are deals that are going to get done. At the same time, nobody has come to us and said, look, we're going to defer this for 12 months or more. I think we had one situation where the carrier did that, but that was because they had a material loss on their books. and they're going to defer that one. But short of that one, they're all really talking with us about when and when they want to get things started. So we just don't feel like they're slowing down. And then the second thing, Rishi, that I would say is when we look at the overall activity, so new things arriving in the pipe, we track all the activities of our pre-sales team and our sales consulting team. in terms of number of demos, RFPs, and what they're responding to. And that activity is at an all-time high. So it gives us a level of confidence that carriers are interested. They're not backing off. I think what's happening is when they look at their approvals and they look at their economics, some of them are putting another layer in decision-making. Some are deferring projects because of perhaps resourcing for maybe a quarter or some period of time. And that's a signal that we're getting from them right now. Got it.
spk09: That's really helpful. Thanks. And then just as a follow-up, as I think about the, you know, subscription growth rates that we're seeing in the business, right, you know, if I look at guidance, it's implying Q4, about 25% type subscription growth. Let's imagine without getting to the question of guiding to ARR, SAS ARR growth would be a touch higher than that. But, you know, again, without getting into FY23 guidance, is that the sort of, subscription or SaaS growth profile that you'd be happy with? Or what's kind of a growth rate on the SaaS side that you would consider yourself, this is what, given the opportunities, given our relationships with our customer, everything that we should be growing?
spk04: Thanks. Well, Rishi, on that, I'll just make some opening comments. And I don't know if you want to add anything, Vinny. But what I would say is, you know, obviously, I've always talked about this business. It's relatively low deal volume, high average deal value. So you can have cycles, you know, quarter to quarter around what happens on growth rates. But when we go look at forward-looking next year and the strength of our pipeline, we would not be satisfied with growth rates down where they are, where we're guiding to the next quarter or two. You know, we think next year, long-term subscription growth rates I'm sorry, next year growth rates at 30% would be something that we'd be striving for. So that is what we would anticipate with the overall business and the bookings. I think you know that we have one contract that's been rolling off the books, that the breaks will come off of that as well, and that'll help a bit. But I would say we would not be satisfied with the short-term growth rates that you see in subscription revenue the next quarter or two.
spk10: Yeah, and, Mike, I would have had the same response that, you know, I think if you told us, you know, we're going to need 25 next year, we'd be disappointed. And I'd point out that, you know, a number, you know, and Mike cited 30, you know, a number for next year, and we're not prepared to guide for next year, obviously, at this point. But I think we'd say that whatever that number is, we believe it's sustainable for a number of years. And the reason we say that is, you know, don't forget, we think, you know, penetration levels here in terms of how much DWP is running on, you know, in real cloud platforms right now is still very low. So, you know, we don't think this is going to be a near-term phenomenon that, you know, delivering 30 or 30 plus is achievable. We think there's a lot of runway there.
spk09: All right. Wonderful. Really helpful. Thanks, Mike and Vinny. All the best for you in your retirement. Great. Thank you.
spk05: Thank you. Our next question comes from Parker Lane, which people, you may proceed with your question.
spk01: Yeah, hi, guys. Thanks for taking the question. Mike, I wanted to circle back to the topic of the availability of IT resources, and really, could you provide some more context on what the limiting factors are there? Is it primarily hiring? These companies are in a tough labor market trying to find the appropriate number of resources to take on projects. Is it physical location of those resources or perhaps a reallocation of those resources to different projects here in the near term?
spk04: Yeah, I would not put it to physical location of resources, Parker. One thing that we are seeing is the technology and IT industry is working a lot more virtual, if you will, you know, post the pandemic than they were before. And, you know, there are a lot of companies and firms now that can attract talent away from other companies regardless of where they sit. And I also think one thing that we're seeing is there's a number of deals that we have with smaller carriers also and, you know, insure tech smaller carriers that you know, don't have large IT organizations. So they are dependent either on a partnership or having some key hires in place and making sure that they have the right personnel surrounding these deals in order to get started properly is another dynamic that we've seen. So, you know, I'm not going to say it's a crazy number of deals that's tied to that, but, you know, it has come up time to time in terms of actually when a carrier gets started and as a reason cited as to, you know, maybe they're going to delay until they can get some people to own the program going forward.
spk01: Got it. Understood. And then shifting gears a bit here, you know, in the context of the current environment and your commentary you've given so far, Just wondering if you can give any update on the investment plans and I guess what the current environment in Europe is meaning for your international expansion opportunity. I think you had a few wins last quarter, perhaps in the UK. Are you still planning to invest at the same level or is there a bit of a slowdown in that investment plan related to what we're currently seeing?
spk04: Well, we're going to continue to invest at the same level, and I think we're happy with what we're seeing. And I just want to continue to emphasize that we're still early in this international journey, and our approach is just to build the foundation for future growth in international markets. And we think this go-live event at Argyle is a great example. Getting them live in 59 days is a showcase in Australia, and I know we're going to capitalize that. more, and I'm very pleased with the growth there. And then I don't know if anyone noticed this, but we did announce a new managing director for EMEA, and that is Shreyas Vasankumar, and he comes from an organization of Hexaware where he ran all of EMEA, but he also ran financial services and insurance, so very knowledgeable. So, you know, we're hiring and investing in the talent to get more done, and we're pleased with the progress, but like I said, you know, it's still a bit early in terms of what we're seeing, but we're going to continue that investment as we had planned before the events of COVID. Got it. Thanks again.
spk05: Thank you. Our next question comes from Peter Heckman with PI Davidson. You may proceed with your question.
spk03: Thanks for taking my question. So what we're hearing today is that there does not appear to be any change in the wind rate or your own internal gauge of the probability of winds. We're seeing some deferral, some deal delays. How should we think about your win rate? Where do we expect Duck Creek to gain share? And are you seeing much difference in terms of the relative modules? Or maybe you're doing better in policy or billing, anything like that? And as well, a little bit on the geography, I know it's early in the international expansion process, but just trying to figure out, you know, where do we expect some of the relative more success to be and in what areas do you consider to be more challenging?
spk04: Okay, Peter, um, I would say that, you know, you can expect us to get the majority of our success will still occur in North America. And, um, And to go back to your earlier question on win rate, you know, we're pleased with our win rate. We're pleased with our competitive positioning. There's no question that all of our competitors are positioning cloud solutions above all. And I think we were the leader in that market. And I think we caused them to make more dramatic shifts in their strategy. But I continue to emphasize that it's beyond just being a SaaS platform. It's also our low-code approach. and how our configuration tools allow insurance carriers to configure product and get them to market with speed. And where that is a tremendous value, we tend to win quite substantially. So I'm very pleased with that. And then with your final question around, how would we expect to expand? And I'm very happy with the land and expand. If you recall, You know, several, about a year ago, we were talking a lot about a balance of land and expand. We got pretty expand heavy last year, and then now we're landing some new accounts, like I referenced with Tokyo Marine, which lays the foundation for further expansion. And then, like I said, some of our existing tier one carriers that we're already in, we're in advanced discussions with other SaaS opportunities within them. So we think we have a great opportunity to pick up deals there as well.
spk03: Okay, that's helpful. And then just a clarification, on the one-time subscription revenue in the quarter, was that essentially a termination fee or was it more of a kind of a contract amendment fee?
spk10: Hey, Pete. So consider it a buyout of a subscription agreement. It was a customer, a subsidiary of a larger company that kind of had a, you know, really didn't deliver the performance they expected to on their end or they would not have been able to meet some minimum commitments to us, and they were looking for an amendment. So effectively what they did is they, at full value, bought out the rest of the term of their agreement. Since we'll no longer be providing the service, we had to book it all up front. I see. Really no reflection on Duck Creek. It's just a matter of how their business was going.
spk03: Right. I understand.
spk05: Thank you. And our final question comes from Michael Funk with Bank of America. You may proceed with your question.
spk12: Yeah, thank you for taking the questions. A couple if I could. So just going back to the sales cycle, you mentioned the two different piece parts there, one being IT headcount, second one being inflation. I guess the first one is more internal, right? Is there anything you can do as a company to affect or help that for your customers to move the process along and And then on the second one, which is more external, what's the level of confidence from customers you're in discussions with about that abating and allowing them to move forward with projects?
spk04: Yeah, on the first one, trust me, we are hard at work with our partners, all of our delivery partners and systems integrators, to make sure that we have all of the right staffing in place so that that is not a limiting factor. And Look, I think all of our partners from Accenture to Capgemini to Cognizant to many others, you know, they're really good at scaling their practices and doing what they can to have resources available. And we work with them very closely, and we continue to hire aggressively. I think sometimes it just comes down to some core or critical roles within the carrier that they want to have in place and whether they're comfortable to begin a project or not. And so regardless of things that we can do, sometimes those things are out of our control if, you know, an insurer is not ready to start a project because they don't have the right business lead in place or something like that. So, again, I think we're doing pretty well to work with our partners to make sure that that's not the issue. But from time to time, you know, we'll have carriers take a more conservative approach and not start or delay a program. Okay. And then on the second item, just as it relates to profitability and the overall environment and what's happening with their decision-making, like I said, we don't see them at large or broadly backing off of technology initiatives. And that is the evidence that we have through the pipeline and the strength of the pipeline and all the activity that What we have seen is just more meetings and taking a quick look at timing because of some of the results. You know, when we look at fiscal year 21 or calendar year 21 for carriers, the preliminary results is that, you know, it had an underwriting loss of over $4 billion. So, you know, they didn't have the underwriting profits that they've had in the past, and they're seeing some pressure on that. It's just triggering new conversations. But I think I've said this on past calls. Whenever a carrier has to deal with some of these things, changing prices, launching new products, improving efficiency, it usually leads back to a technology conversation. And we think that bodes well for Duck Creek in the long run, for sure. You know, sometimes it's just causing a temporary conversation around, hey, let's get our handle around the short-term effects before we launch this project. And that's what we're seeing right now.
spk12: I understand. Thank you for that. And I think you mentioned that your pipeline is at or near record levels. So, and obviously kind of there are a few deals that amount to a lot in potential revenue. Is there a way to quantify the number of deals that slipped or the amount of bookings maybe that slipped out of the quarter you thought were going to sign?
spk04: You know, I think I'd just be comfortable saying that perhaps it's around high single-digit millions in that neighborhood. That's really advanced that we would have liked to have had signed. So I'd be comfortable stating that.
spk12: Okay. That's great, Colin. One more, if I could, just kind of bookkeeping. On the one-timer, I know you said low single digits, but is there an exact number on the one-timer for the quarter, just so we can make a note in our models? Yes.
spk10: No, and just so you know, we have a contractual confidentiality provision where we can't discuss the exact terms of the amendment or the customer in the situation. So we just wanted to give you something directional.
spk12: Okay, that's very helpful. Thank you so much. Sure.
spk05: Thank you. I would now like to turn the call back over to Mike Jachowski for any further remarks.
spk04: Thank you, everyone, for joining us on our fiscal year 22 Q2 earnings call. And as I said in my opening remarks, we continue on our journey to deliver on our mission to help transform the P&C industry through our continued adoption of our on-demand SaaS platform. We had another meaningful tier one win at Tokyo Marine, as well as a new insure tech startup, which continues to show that our SaaS solution is well-suited for carriers of all sizes. And finally, I do want to, again, thank Vinny Japari for his partnership and his contribution to Duck Creek's success and wish him well in his retirement. He will always remain a very close friend. Again, I appreciate everyone joining the call today. Thank you and take care.
spk05: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
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