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spk02: and welcome to Guidewire's second quarter 2021 financial results conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Alex Hughes, Vice President of Investor Relations. Please go ahead.
spk13: Thank you, Operator. Good afternoon, and welcome to Guidewire Software's earnings conference call for the second quarter of fiscal year 2021, which ended on January 31st. My name is Alex Hughes. I am Vice President of Investor Relations, and with me on the call is Mike Rosenbaum, Guidewire's Chief Executive Officer, and Jeff Cooper, Guidewire's Chief Financial Officer. A complete disclosure of our results can be found in our press release issued today, as well as in our related form, aka, furnished to the SEC, both of which are available on the Investor Relations section of our website. Today's call is being recorded and the replay will be available following the conclusion of the call. Statements made on this call include forward-looking statements regarding our financial results, products, customer demand, operations, and 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 should not be relied upon as representing our views as of any subsequent date. Please refer to the press release and risk factors in the documents we file with the SEC, including our most recent annual report on Form 10-K and our quarterly report on Form 10-Q to be filed with the SEC for information on risks, uncertainties, and assumptions that may cause actual results to differ materially from those set forth in such statements. We will also refer to non-GAAP financial measures to provide additional information to investors. A reconciliation of non-GAAP to GAAP measures is provided in our press release. Reconciliations and additional data are also posted in a supplement on our IR website. And with that, I'll now turn the call over to Mike.
spk07: Thanks, Alex, and thanks, everyone, for joining us today. I'm pleased to report another strong quarter as our team continues to steadily execute on each of the key pillars powering our business. This includes driving a fundamental transformation of the company to a cloud service, continuing to lead the market for PNC Insurance Core system modernization, and developing an analytics capability that enhances the value we are able to deliver to our core customers while providing us growth opportunities. In the quarter, we saw a strong deal momentum for a broad selection of Guidewire solutions across customer tiers and geographies. We executed on a few key deployments on Guidewire Cloud. We had strong performance in our analytics business, and we continued to grow our partner ecosystem. We all feel great about our progress to date and our execution in the quarter makes me increasingly confident in not just our full-year financial outlook, which Jeff will talk more about in a minute, but also in the long-term potential of our company to serve the PNC insurance industry. I'd like to take a moment to comment on the PNC insurance industry and the role it plays in our economy and our lives. I think that the severe weather event in the United States, and especially Texas, is a great reminder of how important and beneficial the transfer and sharing of risk is to the function of our society. When I saw all the videos and news stories showing burst pipes and flooded houses, I asked our team how dire the situation was for our customers ensuring this risk. The answer was quick and, for me, reassuring. This event and its costs were, of course, large, but this event is exactly what the industry is here for, helping people, families, and businesses recover and get on with their lives. That answer was, as I said, reassuring, but also for me it was motivating. Having an opportunity to support an industry that helps families and businesses manage risk, giving us all some resilience in the face of crisis is a big part of why the team here at Guidewire loves what we do. Turning to the quarter, I'll walk through our sales highlights and then touch on some operational milestones. Cloud sales activity in the quarter was strong with five insurance week cloud wins and one insurance now win. Economical Mutual Insurance Company, a Canadian PNC insurer and two-time winner of the Guidewire Innovation Award, chose to migrate policy center and billing center to the Guidewire cloud to simplify their technical ecosystem and accelerate speed to market. Kentucky Farm Bureau, a tier two insurer and the second largest PNC insurer in Kentucky, agreed to upgrade their on-premise full insurance suite instance to the cloud and added predictive analytics. Mountain West Farm Bureau and 360 Insurance, a property and casualty insurance company doing business in Colorado, Montana, and Wyoming, decided to adopt the full suite in the cloud, including reinsurance management, predictive analytics, and science, representing a significant customer expansion. Royal Sun Alliance, or RSA, an existing claim center and digital customer in the UK, decided to upgrade to Guidewire Cloud, representing our first insurance suite cloud win in the UK. A longstanding Guidewire customer and global insurer selected PolicyCenter in the cloud for a new greenfield opportunity, representing their first cloud-based deployment in an important tier one insurer. And finally, Bowhead Specialty Underwriters, a new underwriting platform based in New York, selected insurance now due to its cloud maturity and confidence in our ability to deliver. We also closed two very exciting self-managed deals in the quarter, which highlights a unique benefit of our approach to our cloud transformation. While we still expect the majority of our bookings to come from cloud, We are seeing some insurers who, for a variety of reasons, are not yet ready to transition to a cloud-based core system and still have legacy systems in need of modernization. These companies recognize that eventually these applications will move to the cloud, and our approach offers them an opportunity to modernize now and smoothly migrate to our cloud when they're ready. We will work with these insurers to standardize their self-managed implementations with an eventual upgrade to the cloud in mind. This dynamic is enabled by our design approach, which optimizes for the install base of Guidewire customers, but its benefit to net new customers is proving to be important enough to call out. Covia, France's largest P&C insurer, is a good example of this dynamic. Covia selected Claim Center combined with Digital and Guidewire for Salesforce. This important win in Europe highlights both our global strength with tier one carriers and the value of our platform to large carriers seeking to modernize on-prem today with a longer term aspiration to go to our cloud. We're thrilled to establish a presence at Covea and look forward to expanding our footprint over time as we demonstrate success in this critical account. In addition, James River Group, a tier two insurer based in Bermuda, selected all of insurance suite, including digital and data, after a comprehensive RSP process. Market leadership and platform investments were critical to this win, which will start on-prem today, but we hope to have the opportunity to upgrade them to the cloud in the future. Sales activity and data and analytics was also strong in the quarter. And we were very pleased to see the momentum of our offerings, both as part of the core and as standalone solutions. Analytics is proving to be a key driver in a number of our core deals as insurers look to strategically leverage analytics across multiple touchpoints within the insurance lifecycle. We tend to think of core system modernizations as mechanisms to upgrade and de-risk decades-old systems and to provide better support for new digital experiences. But analytics and specifically new approaches to embedding analytics-driven insights within core workflows can also improve decisions and efficiency. We also saw a strong sales performance of analytics on a standalone basis with five deals, including one for our predictive analytics platform and four for science. This included a range of insurers from a large tier one to an insurance broker focused on the London market. Switching gears to customer success, our teams continue to drive solid customer deployment activity with 12 customers going live on implementations for 35 Guidewire products globally. I was particularly pleased to see the important milestones with cloud deployments. In less than nine months, USAA was able to publicly launch their small business-focused product on the Guidewire cloud platform. This milestone demonstrates our ability to work successfully with the largest and most complex insurance companies as they execute on their business imperatives and cloud journeys. I look forward to continuing to execute and build on this very important relationship. Amica, one of the first customers to align with us on our cloud strategy, went live with Billing Center on Guidewire Cloud. This is the first step in our partnership with Amica to migrate all of insurance suite to our cloud. Amica has been an incredible partner in this journey with us, and this milestone is a proof point of the progress we've made towards establishing our cloud service. EMC, while not yet in production with their cloud implementation, successfully upgraded their pre-production instance from the Aspen release to Banff. This is an exciting early demonstration of the faster, more frequent, and more efficient customer upgrade cadence that will enable us to deliver greater value to our customers. Prior to Guidewire Cloud Platform, customers would start and complete their implementation journey on a single major release and only consider an upgrade years after the initial go live event. In this instance, we had a customer take an upgrade during the pre-production implementation process, which will allow them to go live on a more current release. This is an exciting event as it marks a new pattern for us, and it is more aligned to customer success and value. Finally, we saw Warrior Invictus Holding Company, a new InsuranceNow customer that we won last year, complete a successful initial go-live. Shifting to the ecosystem, we continue to see tremendous enthusiasm and excitement across Guidewire's global partner community and marketplace. With over 12,000 Guidewire-focused consultants, our SI partners remain important to facilitating implementations and accelerating customer success with value-added solutions. Moreover, the enthusiasm for Guidewire Cloud is growing. We finished the quarter with nearly 1,200 consultants from 28 partner companies who now have earned the advanced certifications required for Guidewire Insurance Suite Cloud implementations. This is up from approximately 730 at the end of Q1. At the same time, the momentum with our marketplace partners also continues. There are now over 690 applications from Guidewire and over 100 partners, doubling the number of partners over the last two years. As we continue to grow this marketplace, we unlock greater value for our customers by enabling InsurTechs to innovate on top of our platform through our open API-first approach. I was pleased to see second quarter momentum in Europe, where we added a number of new companies to Partner Connect, including Sprout AI and Tractable. who both use artificial intelligence technology to streamline the claims process. Sprout AI offers AI-driven real-time claims recommendations to settle, investigate, or repudiate a claim. And Tractable provides an AI estimating platform that uses photo capture and other metadata to generate first repair estimates. This quarter, we also announced the first partners and marketplace apps for InsuranceNow customers. And one of the first to join is Cloverleaf. Cloverleaf accelerates the insurance process by extracting detailed policy and claim data from InsuranceNow and loading it into a pre-built reporting and analytics business intelligence solution. Finally, it's gratifying to see all of our hard work continue to be recognized by industry analysts. In the second quarter, Cellent gave Guidewire three of four excellent awards in its policy administration systems report for EMEA. Policy Center won for its breadth of functionality, customer base, and depth of service categories. Guidewire was also named best in class by IT Group in its 2020 US P&C Core Systems Report for vendor stability, client strength, client service, and product features. As we enter the second half of the year, both the progress we've made to date and the growing customer enthusiasm give us increasing confidence in our strategic direction and our ability to execute. In May, we will build on this momentum by releasing Cortina, the third release in our new Guidewire Cloud Platform six-month release cycle. And we plan to run a connections event to coincide with that release. This virtual event will be a great opportunity for you to hear more about our progress and to hear directly from our customers. Now I'll turn the call over to Jeff for more details on our financial results and our outlook for Q3 and the rest of the year. Jeff?
spk14: Thanks, Mike. I'll start with a summary of our second quarter results before turning to our outlook. Second quarter ARR ended at $520 million, up 10% year over year and in line with our expectations. As Mike noted, it was a strong quarter for new sales with a diverse mix of wins. One highlight worth noting was the number of existing customers that committed to upgrade to the Guidewire cloud. Migrating our industry-leading install base of customers to our cloud is a key pillar of our long-term strategy. And as we have noted in the past, Migrations often have a relatively small initial year ARR impact, but add meaningful ARR in future periods as these contracts fully ramp over time. With that backdrop, and given the amount of migration activity in the quarter, we were pleased to see ARR finish at the upper end of the outlook provided on our Q1 call. Total revenue was $180.1 million. ahead of our expectations due to higher than expected license revenue. We added two significant term license customers in the quarter, which contributed to strong license revenue. We also recognized 4.2 million in incremental revenue from term contracts with duration longer than our standard two-year initial terms or annual renewals. Additionally, and somewhat counter-intuitively, cloud migration deals also add license revenue, This is because when we sell a migration to an existing customer, even though the intention is to migrate to the cloud, the customer will generally need to use their on-premise software during a migration period. As a result, we allocate a portion of the total contract value to term license revenue, which is recognized upfront, with the remainder being allocated to subscription and support, which is recognized ratably. A byproduct of this accounting treatment is that migration deals will contribute less subscription revenue when compared with a new subscription deal of a similar size. Outside of license revenue, the other components of total revenue were very much in line with our expectations. Turning to profitability, for the second quarter, which we will discuss on a non-GAAP basis, gross profit was $100.4 million. Overall gross margin was 56% compared to 59% a year ago. Subscription and support gross margin was 43% compared to 56% a year ago, as we continue to see the expected impact of building out our cloud operations team. Services gross margin was negative 2% compared to positive 1% a year ago. Operating income was 7.5 million, exceeding our guidance range due to higher than expected total revenue and savings related to slower than expected hiring and lower travel and entertainment expenses due to the pandemic. We ended the quarter with 1.4 billion in cash, cash equivalents and investments. During the quarter, we invested $39 million on the repurchase of 310,000 shares. Turning to our outlook, I will discuss the full year outlook, and then I'll discuss our expectations for the third quarter. For the full year, we continue to expect ARR to be between $560 and $571 million. We are increasing the midpoint of our outlook for total revenue, which we now expect to be between $725 and $733 million. This reflects the increased strength we now expect in term license revenue, which is driven by self-managed wins like we saw at Covia and James River and from cloud migration activity. As I previously mentioned, cloud migration sales initially benefit term license revenue at the expense of subscription revenue, since we must allocate components of the total contract value to various deliverables. Given higher than expected term license and migration activity in the first half of the year, we now expect subscription revenue to be closer to $162 million. This adjustment is the result of timing of new cloud deals and not any shift in our cloud bookings expectations for the year. Our services forecast has strengthened a bit. but we have also removed all billable travel and expense from our forecast due to ongoing COVID-related travel restrictions. Billable T&E flows through services revenue at $0 margin. As of last quarter, we still had about $4 million of billable T&E in our expectations for the fourth quarter. We now expect services revenue to be closer to $183 million. We still expect total gross margin for the year to be approximately 55% at around 40%. Services gross margin for the fiscal year are expected to finish in the low single digits. We are raising our operating income expectations to between $2 million and $10 million due to an increase in the midpoint of our revenue outlook and due to the timing of hiring combined with less travel and entertainment expenses this year. Cash flow from operations expectations for the year are unchanged. Turning to our outlook for the third quarter, we expect ARR to be between 533 and 536 million. Total revenue is expected to be between 155 and 159 million. Subscription revenue is expected to be approximately 40 million. Support revenue is expected to be closer to 20 million, and services revenue is expected to be approximately 48 million. Non-GAAP operating loss is expected to be between 29 and 25 million. In summary, it was a strong Q2 with continued cloud activity, broad geographic success, and key new customer wins. We look forward to building on this momentum as we work to close out the back half of the year. Operator, you can now open the call for questions.
spk02: At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. And our first question is from Chris Merwin with Goldman Sachs. Please proceed.
spk08: Okay, thanks so much for taking my question. I just wanted to ask about the Guidewire Cloud Platform. Obviously, you have another release coming up here. Can you talk a bit about the progress you're making in migrating customers to that platform such that they continue to get the benefit of the six-month release cadence? Anything you can share about what you're doing from a go-to-market perspective to try to focus customers in on that. And as you migrate more of those customers to the platform, how we think about that gross margin ramp in the cloud over time. Thank you.
spk07: Yeah. Thanks for the question, Chris. You know, I think my quick and high-level answer is things are going very, very well with the rollout of this platform. our ability to deliver releases to the operations that sit behind that in terms of developing new innovation and pushing it into that platform. We're working with every single one of the existing cloud customers on plans to migrate to that platform and to that release cycle. you know, that'll take us probably, you know, when all is said and done, a couple years to be completely finished with all of those migrations. But it's not sort of if it happens, it's when it happens. And, you know, just lining that up with each customer has to do with their product, their priorities, their initiatives, and how those things, you know, slot together. As you're probably aware, we work very, very closely with those customers. And we will continue to see progress on those existing customers migrating to that platform. And so that's all very, very positive. In terms of the net new customers, you know, the perspective is that, you know, this is what you're buying when you buy Guidewire Cloud, is you're buying Guidewire Cloud platform and that six-month release cycle, and that's what you're going to, you know, orient yourself to going to. You know, I don't want to say that it's, you know, it's not beyond possibility that someone might go live on something other than that, but it would be an exception. And like I said, we would be immediately working to move them to that new platform. And so that's being received very, very well from the customer base. They understand the philosophy. They understand the initiative. They can see that we're sort of building momentum and experience every single day. And all of that's going really well. And I would say at a really high level, I've said this before, this is our mechanism for instantiating a degree of multi-tenancy into our architecture and starting to enable us to produce the service, deliver the service at better and better margins. Now, that's going to take time for that to flow into the financials. But from my perspective, step one was delivering the service, proving that we can execute on it, and getting customers live on it. That's now complete. Now we're sort of in phase two of scaling it out, continuing to execute. And over time, we're going to see that deliver the margin improvement that we've talked about in the past. And Jeff, I'll let you add anything to that if you want. No, I think you covered it. Okay.
spk08: Perfect. Thank you. And maybe just a quick follow-up for Jeff. I think you said that migrations aren't having as much of an impact on ARR, given, you know, as you've always talked about, the ramping nature of those contracts. So is it fair to say that you're starting to see a divergence again in fully ramped ARR relative to ARR? I know fully ramped is an annual metric, but just directionally, are you starting to see that positive divergence again?
spk14: Yeah, it's a good comment, Chris, and we are – seeing a bit of a divergence there, and we'll be in a position to talk about that in more detail at year end, but that would be my expectation as we see migration-heavy activity, that there would be a bit of a divergence between those two metrics.
spk08: Great. Thanks very much.
spk04: Thanks, Chris. And our next question is from Rishi Jaluria with the DA Davidson.
spk09: Hey guys, thanks so much for taking my questions and good to see, you know, accelerating cloud momentum. Two questions. I wanted to first start out with, you know, Mike, a comment that you had made on strength in Europe. I know you had mentioned in the past that Europe has been a little bit more challenged, partly macro and partly just on willingness to move to the cloud. Can you give us a little bit more color on, you know, why it seems the European business is moving and you know, are they maybe more willing to embrace a move to the cloud than, you know, what we saw a couple quarters ago? And then I've got to follow up.
spk07: Okay, yeah. Hey, and thanks for the question. Well, it's certainly great to see two great wins in Europe. You know, I think for everybody at Guidewire, We're very, very excited to have the opportunity to earn the business at Covia. It's sort of exactly the type of customer, tier one insurance company that leads its market in France. That is a very, very positive sign. And the other side, I touched on this in the comments, maybe it's a little bit of, You know, there's this kind of attitude that we have is that we can deliver this modernized core platform in the way that is going to allow them to modernize now with a view towards cloud in the future. I think we'll see if this sort of this momentum in the quarter indicates some sort of larger trend in Europe. Um, you know, I don't know whether or not I'm ready to say that yet, but certainly this, this points in the right direction and it helps us build momentum, um, in the region, uh, with our service, with our company and with the cloud. And, you know, as. You know, I think you're aware, you know, the, the market, you know, in Europe is, it's almost not a really a European market. It's almost a country by country by country market. And it takes us a very significant amount of time to invest and learn you know, the local requirements and expectations of each insurance company in each market. We've been very successful in the UK and Germany. It's great to see this success in France. I hope, you know, and expect that this will help us continue that momentum. So mostly I want to just say that this is, you know, just a real, real significant win for us with a tier one carrier that we're all incredibly excited about.
spk09: All right, great, Mike. That's really helpful. I appreciate the call. And then, Jeff, I wanted to go back to the gross margin question and maybe get a little bit more granular on the subscription gross margins. You know, look, based on the comments and your guidance, right, that tells us that subscription gross margins are going to decline from where they are today to the back half of the year probably in the mid to upper teens, but at least sub-20%. And I get the complications of the fact that there's cost allocated there and some gets recognized as term license and all those pieces. But that's been ongoing for a while, right? Not new. So maybe can you talk a little bit about why subscription gross margins have declined from where they are today? And maybe, you know, I know all the moves that you're making in terms of multi-tenancy and with Cortina coming out and cloud services. But at what point can we start to see subscription gross margins improve again and effectively get your total support and subscription gross margins towards that upper 60s that you talked about the analyst day? Thanks.
spk14: Sure. Yeah. No, thanks. Thanks, Rishi. I think we obviously don't break out subscription margins, but given the history of the math that you have around Our maintenance revenue, our maintenance margins, you can understand that our subscription margins today are kind of in that low 20% range. This has been an ongoing reflection of the substantial investment we're making in our cloud operations team to support both our current and future cloud customers. The shape of the overall subscription margin is very consistent with our internal expectations and how we've thought about this. We're continuing to add folks Those customers will come on board this year and start to flow into subscription revenue in future periods given the routable revenue recognition. So it's not anything unexpected when we compared to how we have modeled the business. And I think some of the commentary provided at Analyst Day, which is still very consistent, is as we look to next year is when we would expect to see subscription margins start to move back up in the right direction and start to demonstrate some expansion. It's hard to kind of, you know, give you a specific quarter, but kind of as we think about the annual basis, that's when we start to see margin expansion as we move into fiscal 22.
spk04: Got it. Thank you so much. And our next question is from Sterling Audie with JP Morgan.
spk12: Yeah, thanks. Hi, guys. Just one question from my side. I'm kind of curious, in your discussions in the quarter, how many customers are you seeing that are on-premise customers that are deciding in this environment to still upgrade to your on-premise solutions?
spk04: Oh, okay, Sterling. I think I understand your question.
spk07: So, You know, we've got on-prem customers on a variety of what I guess are now legacy versions of Guidewire. Some of those customers might decide for a variety of reasons to move to the latest on-prem or self-managed version of the product, which is version 10, and not make the decision to go to cloud. And there's, like we've talked about this before on this call, there's a variety of reasons for them to do that. Sometimes it's just organizational readiness in general. You know, and so in terms of how many, it's a, you know, it's a fair number. But I guess the flavor I would give you for the nature of those conversations is that, you know, I would say every single conversation I've had has sort of ended with the tone that eventually they will make the decision to go to cloud. That they may not be ready now, but they will be ready in the future. And the orientation of Guidewire around architecting a cloud solution that facilitates that move in a seamless way is not lost on them, okay? And sometimes I wonder whether or not that's too customer friendly. But honestly, if you think about this sort of history of Guidewire and the customer focus and approach, these things are just very, very complex and very important systems for these insurance carriers. And I want to do everything I can to make sure that we're delivering a solution that's appropriate to them. And so it's a fair number that are upgrading to 10. with an eye towards migrating to the cloud in the future. You know, and we're working real hard to do everything we can to ensure that those customers come to the logical conclusion to move to the cloud now. You know, but it's non-zero.
spk04: Does that help? It really does. Thank you, guys. Okay, thanks. And our next question is from Ken Wong with Guggenheim Securities.
spk00: Great. Thanks for taking my question, guys. I wanted to just expand a little bit on Sterling's question there. In terms of those customers that are upgrading to IS-10, I think in the past you talked about new customers coming in where you guys embed committed cloud pricing into the contracts. Are you seeing that kind of behavior with these customers that upgrade to IS10, where perhaps you guys have talked through some sort of committed cloud pricing to the extent that they decide to migrate down the line?
spk14: Yeah, sure, Ken. You know, all of our customers or many of our customers are engaging with our sales force in some capacity and exploring what it would look like to embark on a cloud migration process. You know, in general, we have not seen customers as they embark on a migration kind of embed cloud pricing into that arrangement. It's not usual for us to kind of embark on a new sales contracting process and part of a migration process. So we haven't seen any of that behavior, but You know, we have absolutely seen our sales force be out in front of most of these folks and helping them think through the pros and cons and the puts and takes in terms of migrating to version 10 versus going to our cloud today and being on our latest release that will be future proof going forward. So those conversations are active and ongoing.
spk00: Got it. Got it. Thanks for the color. And then, Mike, you mentioned five standalone wins for data analytics. I guess I'd always associated your kind of non-core systems products with just attached type modules. Should we think of data and analytics as a potential new front door to the Guidewire franchise?
spk07: Yeah, I would say certainly it's a new front door to Guidewire, the company, you know, and potentially the, you know, the franchise of insurance suite insurance now, you know, Predictive analytics is a phenomenal tool. It's a phenomenal platform. It does a lot of great and interesting things for insurance companies, sort of want to take advantage of the data assets that they have and make better and smarter decisions. We're also seeing continued and really growing interest in science for cyber risk modeling, as well as, as I've talked about previously, the extension of that product to modeling small business risk for a variety of commercial insurance use cases. All of those situations, I think, create the potential to establish a new customer relationship and potentially sell more of the Guidewire sort of product suite going forward. My sense, just from a business perspective, is that the franchise of Guidewire is so heavily weighted towards core that we're going to see more benefit in the opposite direction. But certainly, you know, the analytics first use cases, you know, is possible. I think what's probably more interesting, and I tried to highlight this in the sort of prepared remarks, is that analytics and those tools as a real value creator In the work that we do to explain how much value a carrier is going to be able to get from a modern core system, a significant amount of that can be driven by analytics and improvements in the operational metrics that they use to run their company. And that's really, really exciting. You know, you just see, you know, like I said, I think we can all kind of visualize, oh, well, I need a new digital interface to be able to interact with customers more effectively. And that's a big driver of these things. But taking more advantage of data and making smarter decisions can help us sell the core franchise as well. And so for all those reasons, I think this is a business that's like to see it growing like this on a standalone basis is, is just going to help our company. So thanks for the question.
spk04: Thank you. Very helpful.
spk02: And our next question is from Brad Sills with Bank of America.
spk06: Oh, great. Thanks, guys, for taking my question. I wanted to ask about the Cloud Direct program and the impact that might be having on kind of reducing friction in the installed base to go to the cloud release. Can you comment on that? It seems like that could be significant. And are you actually seeing, you know, elevated interest as a result of that program?
spk07: Yeah, sure. Thanks for the question. So I would say, you know, I think customers are recognizing it as a, you know, a very kind of valuable tool in the arsenal to think about what they do and what options they have. The most important thing that it's done is it's given us an opportunity to have, you know, I'm going to say direct twice, but sort of a more direct conversation about going to cloud using cloud direct. You know, it sort of offers us an ability to make the overall upgrade expense of a customer's lifecycle with Guidewire lower, and that creates a compelling opportunity for us to have that conversation with the customer, assess if now's the right time for them to make that shift, and sort of changes the math a little bit more, I think, in favor of making it logical that they would make the decision to move to the cloud. So for all those reasons, we're very positive on it. It's been well received by customers and deeply appreciated, and I think it will, you know, and has already led to sort of, you know, different sort of conversation that we can have with each of the customers that's considering what to do around that upgrade.
spk06: That's great. Thanks so much, Mike. And then one more, if I may, please. Just on the data success that you're seeing here, that's interesting. It seems that customers are relying more and more on Guidewire as a strategic solution vendor, Could you comment on some of the use cases you're seeing? Are there any commonalities there, any themes, whether it's cyber risk or new product development or just operational analytics? Any color there would be very helpful. Thanks again.
spk07: Yeah, sure. So, you know, so science is the core, you know, based on the acquisition that the company did a few years ago. And I think that that continues to produce great customer wins. You know, cyber risk and cyber insurance in general is a very, very important thing, in my opinion, that every single company in the world should be thinking about. It creates an insurance opportunity that many, many carriers and insurance companies are thinking about offering. And our science solution provides a path for them to underwrite that risk more effectively. It's smarter, choose the right risks at the right price point. It's a really compelling offering. And I think as we see that insurance market grow, we'll continue to see science grow. But Like I said before, we extended that approach. We've extended that approach now to include small business risk. We take that same idea of listening or sort of gathering data from the internet or whatever data sources we can put together in order to create a data asset that customers can use to price small business risk in a very, very unique way. This is something we've been talking about for the last couple of years at our connections events and with customers. And to see that sort of uptake, both on a standalone basis, but then also with our core insurance suite customers, you know, that's very exciting. On the predictive side, like my opinion is there's almost no end to how useful this approach can be in an insurance business process. You know, whether or not you just, you know, a really simple idea is claim comes in and how do you estimate, you know, the total exposure to a carrier? You know, there's different ways to do that, but predictive analytics offers an approach to doing that in a very seamless way. pre-integrated way. And so companies, our customers who are going to use Claims Center for managing their claims processes, this is just a very logical sort of add-on to that approach. And I think we've done a number of things in the last couple of years to sort of build a business unit around this and bring some specific focus to it and put some specific product investment and sales investment into this business unit, and it's really nice to see that that investment is starting to pay off in the form of growing sales activity.
spk04: Thanks so much, Mike. Okay, thank you. And our next question is from Tom Roderick with Staple.
spk10: Hey, everybody. Thanks for taking my questions. I appreciate it. So, you know, Mike, it's been a full year going into, you know, sales reps being on lockdown and just changing the way you've gone to market. And I appreciated last year as you started going through this, you had a pretty rigorous pipeline review and sort of trying to manage through, you know, communications with your customers. So you did a really nice job sort of finishing that year strong. As you sit here, you know, with two quarters under your belt and you've maintained the ARR guidance and kind of steering us a little higher than the midpoint, That's great. I'd love to hear what sort of metrics you're watching as you sort of track some of these, you know, Tier 1 and Tier 2 deals through the pipeline, what customers are saying as they go through this experience as well this year with the benefit of, you know, some additional data behind them and just how those conversations are going that gives you the confidence and, you know, closing the year strong the way you did last year.
spk07: Yeah, thanks for the question. I really appreciate you bringing it up because I've sort of given myself this COVID can never be an excuse kind of mental state. But certainly COVID doesn't help sell really complex enterprise sales. And everybody here at Guidewire is excited to be able to go and meet customers and talk through projects and sort of work through all the hard stuff associated with taking one of these opportunities and turning it into a green lighted, you know, sort of green lit project for a customer. And, you know, that's just a hard thing to do. Really complex, long enterprise sales cycles. And our team, and, you know, even, you know, you got to say that this is true on the customer side, everybody has pulled together in order to be able to transition as smoothly as we can to sort of Zoom-based uh, selling and planning and execution and it's worked reasonably well, but we all know that it'll start to work a little bit better once we are free of these restrictions and can safely travel. And we're all excited about that. Now, in terms of me thinking about the second half of the year, Um, you know, it's just kind of, uh, you know, me looking at the numbers, looking at the coverage that we have and the deals that we have open and the potential that we have building on the momentum that we've established with the product and with the sales, and especially with the customer success. I mean, you know, you just add up all those things and it makes me feel, uh, you know, good about sticking with our, uh, projections for the year. Um, You know, and then hopefully, you know, knock on wood, everybody executes effectively and COVID restrictions start to relax. Now we'll see, you know, but that can only help us, I think. You know, but we're not, that's not something we count on. I just think it's something that might help. You know, but to sum up your question about my, you know, just my being positive about the company and the second half, It's just all these things, you know, we, we put together a plan and, uh, especially around this new product and this new approach and getting the customers moved over and live on it. You know, it's like USAA being able to launch a product in nine months on Guidewire cloud platform is just such a phenomenal success. And I think we can use that, you know, based on the pipeline that we see, uh, to go out there and have a great second half. So, you know, hopefully that gives you a little color. about how I'm thinking about it, but I feel pretty good about how we've executed so far and what that points to for the future.
spk10: Yeah, that's great detail on the pipeline, Mike, and I appreciate that. And I'm glad you brought up the USAA example because, you know, not a ton of data points as you've gone through the ski release or the ski resort release cycles, but, you know, as you're starting to go through various iterations of this, would love to hear how your customers, A, the ones that are getting live, and B, the ones that are then trying to get live on other products, how is this increasing the level of conversations you might have? In other words, is it adding touch points with the customer that might create further add-on sales cycles? Is it driving further stickiness? Again, I know it's early, but just some early reflections as you've gone through you know, gone through Banff and into Cortina here and through the early releases of the six-month cadence.
spk07: I really appreciate that question because I think it's pretty insightful and I'll give you a very long, I think a medium to long-term answer. Our relationship with our cloud customers is so significantly more connected and more kind of in sync that I can't imagine that it is not going to help us in ways that we don't even imagine yet. One of the things that we've done this year to help ensure success with these cloud customers is we've instantiated a real customer success function in the company that operates pretty rigorously around validating almost every single step in the complex projects that underlie these implementations, you know, and the instantiation of that group has really changed the dynamic of the conversation that we're having with our customers in a very, very positive way. You know, I think it's too soon to say that, you know, that's going to pencil into some outcome for the company, but it absolutely can't hurt. We just have such a better connection to those customers and the real people on the ground who are driving those projects every day. And I think we used to have this. you know, in our, in our on-prem customer base. And we, you know, don't, don't misunderstand me. I think we still do. And we have a great track record for customer success, but it's just that sort of day-to-day week to week connection about what's going on with each one of these projects. That really gives me a lot of confidence that we're going to have just as much, we're going to have more ability to provide more value going forward with this model. You know, and, You know, there's probably people listening to this call who are sort of at cloud companies. That's kind of normal for a cloud company just because you're running the service and you have that visibility to how people are using it. But you're starting to see that take hold here at Guidewire in a very positive way that makes me very excited about our long-term potential.
spk04: It makes a ton of sense.
spk03: Great detail. Thank you.
spk04: Thank you. And our next question is from Michael Turen with Wells Fargo Securities.
spk15: Hey there. Thanks and good afternoon. On the ARR number, it came in within the range you're targeting. Growth there has been fairly consistent, trending in the low double digits. Understand and appreciate your forecasting, similar levels there for the remainder of the year. But if you think about maybe one to two potential drivers of upside that you'd highlight, is it Just more cloud maturity is there anything in the macro environment that you'd call out if we get to quicker recovery that could drive. Maybe more of a seasonal spike in the back half of the year, but what are some of the maybe the bigger indicators you're focused on that that could drive upside versus what's currently forecast.
spk07: I think. Probably the most important thing is just continued execution on our cloud transformation and proving out that we can get live customers, successful implementations up and running, referenceable customers up and running on that service. That builds the confidence that is really, I think, the key to establishing the trust that I think is necessary in order to win these customers. You know, just You know, we look at the pipeline in the second half. You look at the math associated with the upgrade potential in our customer base, and certainly there is room there to support ARR growth accelerating. You know, but, you know, the flip side to this is these are incredibly big decisions, incredibly complex projects. You know, sometimes we work deals that last decades, And so calling that in a particular quarter or even a particular half is, is challenging. You know, but I guess my you know, my summary of it is things are going well, right? We like, I keep trying to reiterate like this idea that we put together a plan for the company about what we were going to do with the product and what we're going to do with the customer base. And that plan is going very well. We're going according to plan and those, you know, The analytics connected to that starting to pick up, you know, there is potential. But just because of the nature of the cycle, you know, I think it's premature for us to call an acceleration. But, you know, we're doing all the right things. And I feel comfortable with the outlook that we've provided for the second half. And probably Jeff might want to give you a little bit of color from his perspective. But that's my perspective on everything is like things are going really well. on this transformation, and that's what's really going to create the potential to start to accelerate ARR growth.
spk14: Yeah, Mike, I think you hit on all the main points. As you all know, the three things that we track quite closely as we inspect our ARR guide is how many new deals we sell and how those deals will then translate into first-year ARR. how much ARR uplift we will get from deals sold in prior periods. That's the realization of ramps. And then if there's any ARR attrition and how we monitor that very closely. And as Mike noted, everything is largely shaping up consistent with the expectations that we had as we went into this year, obviously very focused on closing new business in the back half of the year.
spk15: That's all helpful. Maybe just as a follow-on, going back to gross margin. Subscription and support number, the segment breakout continues to slide, but you're holding to the 55% target for the year, so it doesn't sound like that shape is too far outside of maybe what you were expecting when you gave the initial guide for the year. Is there anything else you can add? beyond the color you provided earlier around where you might maybe expect those to stabilize and if it's some level of either cloud scale or milestone you're looking for that can help push the overall profile back upwards.
spk14: From a margin perspective, the overall growth margin? Yeah, overall growth. Yeah. Yeah, I mean, there's a lot that goes into that mix. And so obviously, you know, embedded in our guide is a little bit higher performance on the term license side that comes at a very high margin profile. So that has a positive impact as we look to this year and adjust our expectations for the year. Services, we noted this year is going to be in the low single digits. And then, you know, as I previously noted on the call, we're investing very heavily to build out our cloud operations team. We are seeing good traction with Guidewire Cloud Platform. It is providing me a lot more visibility into the concrete steps that we can take to drive scalability and future margin expansion. And so we are comfortable as we look forward to next year to start seeing subscription margins moving in the right direction. But it's still an investment year this year for us. Got it.
spk15: I appreciate all the detail there. Thank you.
spk04: Thank you.
spk02: And our next question is from Matt Van Vliet with BTIG.
spk11: Yeah, thanks for taking my question, guys. I wanted to ask about kind of the capacity of the development team now that you're into kind of the third iteration of the Guidewire cloud platform and a lot of that's maybe the foundation's kind of built. Does this open the team back up to, You know, creating more of these data analytics and digital add-on products, or conversely, has the move to the Guidewire Cloud enabled you to continue the momentum of the partnerships that we continue to see in press releases and in your talks with third-party software providers, providing those kind of point solutions at the end? So maybe just thinking about what the balance is internally of developing some of these newer features, versus leaning on the partner ecosystem?
spk07: Yeah, it's an interesting question. I don't know whether or not I think about it quite like that, partners versus internal, but let me give you my perspective on how things are going with the product and what we should expect in the future and why probably I think that the answer to your question is both. You know, certainly we've made a big, big investment and push around Guidewire Cloud Platform I don't think that we are quite done, and maybe never will be really completely done. But the basis is established, and I think that we have, you know, when we look out to releases, we can see the trend towards more of an investment in some of the more application-centric areas of our product and the, you know, the innovation that really is at the heart of claim center, policy center, billing center, underwriting, et cetera. So that investment is instantiated and working. There's more to do, but you can see it changing in the long-term plan. And I think that that will certainly help with things like analytics. On the partner side, look, I think that we are just making Guidewire much easier to integrate with. And I think that that is going to unlock a lot of partner opportunity Just the philosophy of Guidewire being a cloud service that has APIs that release to release to release will continue to function and work just makes it so much easier for partners to connect to us. And I think it's going to unlock a lot of innovation in the partner community. And I think it's going to make it easier for our customers to plug in these innovative InsurTech solutions into their Guidewire environments, which is exactly what they want to do. You know, I don't think it's like we have to trade one of those things for another. A big, big part of the value that Guidewire Cloud Platform provides is it makes the integrations easier. And so that's going to work internally. It's also going to work externally. So sort of I see the answer to your question being both. It should be, you know, sort of more and more fun and innovation on the product side. at Guidewire and for our customers who are with us on this journey as we continue forward down these ski resort releases.
spk11: And then on the Global SI side of the partnership community there, are you seeing any areas of strength where, you know, they're seeing projects really starting to pick up in different regions of the world or conversely, you know, are there areas that, you know, are just sort of frustratingly slow to get back to where they were Just help us think about kind of what the maybe partner solicited or kind of partner source deals, what those trends are looking like.
spk07: Yeah, I would say haven't seen a change in that perspective. Obviously, the global systems integrators are an incredibly important part of the ecosystem, both in terms of helping us prosecute deals, win deals, effectively execute on projects, bringing us deals. It hasn't really changed and I wouldn't say I've seen sort of any sort of change in the slope of the curve relative to that. I would say, as we highlighted, the real important measure is how lined up those partners are and the consultants that back those partners are to our cloud certification and really making sure that everybody that's out there implementing Guidewire is up to date on how to do it such that the implementations can be seamlessly upgraded release after release after release. The uptake from the partner community has been phenomenal there and I think points to a lot of success going forward.
spk04: All right, great. Thank you for taking my questions. Thank you. And our next question is from Tyler Radke with Citi.
spk05: Hey, thanks. I was hoping to ask you, Mike, about the go-lives you saw in the quarter. I think you talked about 12 customers going live. Maybe just give us a sense for how many of those were on Guidewire Cloud Platform, you know, the ski resort releases, and then just how you expect that number to trend going into the back house.
spk07: Well, so the biggest go-live we had in the quarter was MECA. that I talked about in the prepared remarks. One of our earliest customers who, you know, in the quarter went live. It's sort of interesting with, you know, these things are sort of happening almost continuously now. And so as we're thinking about how to talk about this on these calls, this being a month after the end of the quarter, You know, we're sort of debating how exactly we talk about this going forward. But, you know, the activity is very strong. You know, the momentum that we're seeing is very strong. You know, the sort of, you know, the 12 number is the whole of Guidewire, all of our on-prem, all of our cloud customers. You know, Amica was our major sort of go-live event. You know, the USAA also being able to sort of publicly go live with the insurance, the small business insurance initiative powered by our platform was another major milestone. But hopefully that gives you, you know, you probably want to think about it as sort of relating to the ratio of GuideWire's on-prem install base relative to our cloud momentum. And sort of over time, As we sell more and more cloud and more and more of the new customers go to cloud, the go live activity will just more and more be on GWCP. And it won't be relevant anymore for us to even call it out that way, right? Because it'll just have become the majority. You know, we certainly, when we project, you know, out, you know, just do the numbers out for the next, you know, number of quarters. And that's the future that we see. You know, for now, I think the reason, you know, I like to talk about it is just because it's such an important driver of customer success, innovation, and especially margin, as we've already touched on in the Q&A. That's why it's really important. So does that help?
spk05: Yes, thank you. And Jeff, just a quick follow-up for you. So understood that ARR guidance for the full year is, you know, essentially maintained. It sounds like you are seeing a little bit of more strength in the term license deals. I guess as a way to think about it, I think at the analyst day you talked about cloud ARR as a percent of total being 35 to 40%. I guess just in terms of that metric, should we think about it at the lower end or maybe a little bit below it, given the strength that you're seeing in the term business?
spk14: Yeah, and obviously we haven't updated our disclosure around that, but my high-level view is we did see a bit more term license activity in the first half as we inspect our our pipeline and our bookings activity for the year. There's no shift in how much is going to go cloud versus on-prem. It's still pretty consistent with how we thought about the year. So pretty consistent in general. We did just, Covio was a big one for us, one that we've been working on for a number of years. um that one you know we've been um we had to kind of earmark to close this year getting that done in q2 was it was a big positive thing that that caused our first half uh to tell on-prem be a little bit higher than what i had expected going into the year but my expectations for the year really haven't changed much at all okay helpful thank you thank you and our next question is from joe vrewink with beard
spk01: Great. Hi, everyone. Thanks for squeezing me in. I wanted to go back to just the existing customers that have already inked migration deals. And really the question is on the magnitude of this and the level of visibility that is providing for ARR growth into FY22. And, you know, Mike, you brought up the potential for upside based on how certain things fall, both pipeline and what you have visibility on. I guess I'm wondering when you consider what you have visibility on in terms of these migration deals, I mean, is it greater coverage or either ahead or behind kind of what you've budgeted as you sketch out? I think you've kind of talked about, you know, ultimately getting back to mid-teens ARR, but maybe more in the near term, it's low double-digit ARR growth. Are the nature of the migration deals, you know, any better or worse that might deviate kind of the trajectory of ARR growth?
spk14: So I think, you know, one of the things that we've talked about in the past is as we modeled this year, we actually expect relatively equal weighting between new ARR that's coming from, you know, deals that were sold in prior periods, i.e. coming from ramps from prior deals, prior years, and ARR that's being added from new deals that we sell this year, that's going to continue to build. And especially the migrations have a pretty big impact on that because they may add a relatively small amount of initial year ARR in the year in which it's sold, right? So we are seeing that play out, you know, as expected in line with our expectations. And so as we roll forward into next year and to future periods, It all depends on how much we can also accelerate and start to see the acceleration of new modernization activity and other activities as the market in general gets more comfortable with cloud-based core systems. But we are expecting to see a bit more lift from deals that were sold in previous periods, i.e. coming from what we call our ARR backlog. So it's still kind of consistent with the expectations that we've been talking about for a couple quarters and talked about at analyst day.
spk01: Okay, great. Thank you very much.
spk04: And our next question is from Bhavan Suri with William Blair.
spk03: Hey, thanks guys. And I'll be pretty quick here.
spk16: I just wanted to go back to Tom Roderick's question that you answered about closeness with customers. I guess, you know, when you think about the managed services model, so Cognizant or whomever implements Guidewire, And for you guys, it's recognized as a term of license, but they host it, they manage it, they interact with the customers. Did that create a distance between you and customers, do you feel? And are those guys, are the systems integrators, which are important in the managed services model, sort of willing to let go of what to them is a recurring revenue stream? How should we think about that interaction? Because obviously you on your hosted cloud and interacting with the customers is a very different experience than having a third party manage it. And even if the third party's managing it for the customer in your cloud, it's still your cloud. How should we think about those, Mike,
spk07: That's a great question. I think, look, I think there's certainly going to still be an opportunity for partners to take a managed services approach. It's just the nature of what you're doing, I think, changes and shifts much more towards actual value add for an insurance company than running and upgrading infrastructure. You know, I think What we're doing with Guidewire Cloud is identifying all of the common things that are being repeated across the whole customer base and the, you know, hundreds and hundreds and hundreds of instances of Guidewire that are running and being upgraded and being integrated to and being patched. And we're looking at all those things that are sort of individually being done. And saying, how do we do those centrally? How do we do those on a multi-tenant platform? How do we do those super, super, super efficiently? And that enables, you know, maybe you could say that that, you know, makes the managed service opportunity go away. I don't really think it does. I think it enables that managed service to shift towards value added activities. towards creating differentiated digital experiences and creating smarter analytics systems that enables people to make better insurance decisions more in real time. You know, I just tend to think that the insurance is, the mechanism of insurance is a digital product and the efficiency around which we are able to deliver that digital product to our customers creates opportunity for more innovation in the industry. And so, You know, I just think that the nature of that changes and in a very positive way overall for the industry based on this shift to cloud. That's how I see it.
spk03: Gotcha, gotcha, gotcha.
spk16: And I guess the next question I have, which is really quick, is you've obviously had some nice deals in the cyberspace. any of that driven by sort of the SolarWinds impact? Like, I know it's a tiny, small, it's a small portion of DWP today, but when you think about the opportunity in cyber and the risks that we're exposed with SolarWinds, has that come up in conversations? Are you seeing any benefit of that, or is that too early still? Because while cyber is supposed to be huge, it took a while to sort of play out, and I think now with sort of some of the risks people have seen, I wonder if that's going to drive more thought, more talk, more types of insurance policies in that sort of segment.
spk07: I would say it's early, and, you know, I'm a year and a half into this role, and I'm sort of learning how quickly these sorts of markets evolve. You know, but these incidents, these cyber incidents, continue to happen over and over and over again. And so, you know, the way I think about it is, okay, you know, how in the news is this? How big a risk is this to each corporation that And what's the approach of the insurance industry to sort of meet that risk? I just think it's going to keep increasing. I don't think that it's going to have any kind of big step jump, you know, in terms of one incident drives a completely different and new, you know, risk to need to be underwritten. But the trend, unfortunately, maybe, is that this risk just continues to increase. And so that creates more and more of a market for insuring that risk. So, you know, it's just unfortunately one more, you know, event in the long, consistent string of these events that every company in the world is exposed to. And, you know, I think, you know, it's almost like I feel bad saying it. It's like, unfortunately, our role in this is to help insure it. through our insurance customers. But I do think that it will continue to increase.
spk16: Yeah. Unfortunately, the bad actors don't go away. And there's no sort of thing you can't do. Exactly. All right.
spk03: Thanks for taking my questions, guys. Really appreciate it. I appreciate the call, too. Thank you. Thank you.
spk02: Ladies and gentlemen, we have reached the end of the question and answer session, and I would like to turn the call back over to CEO Mike Rosenblum to close remarks.
spk04: All right, everybody. I appreciate everybody joining us for the call.
spk07: It's been a great quarter, and we'll talk to you at the end of Q3. So thanks very much.
spk02: This concludes tonight's conference. You may disconnect your lines at this time. Thank you for your participation, and have a great evening, guys.
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