Guidewire Software, Inc.

Greetings and welcome to the Guidewire fourth quarter and fiscal 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, Mr. Alex Hughes, Vice President, Investor Relations. Please go ahead.

Thank you, operator. Good afternoon and welcome to Guidewire Software's earnings conference call for the fourth quarter fiscal year 2021, which ended on July 31st. My name is Alex Hughes. I am vice president of investor relations. With me on the call today 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 a replay will be available following the conclusion of the call. Statements made on this call include forward-looking ones 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 should not be relied upon as representing our views as of any subsequent date. Please refer to the press release and the risk factors and documents we file with the SEC including our most recent annual report on Form 10-K to be filed with the SEC for information on risks, uncertainties, and assumptions that may cause actual results of different material from those set forth in such statements. We also will 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 the supplement on our IR website. And with that, I'll now turn the call over to Mike.

Thank you, Alex. Good afternoon, everyone, and thanks very much for joining us today. I'm very excited to have the opportunity to report on the results of what was truly a remarkable year. I'm proud of everyone on our Guidewire team for staying focused throughout the year and remaining determined to just steadily continue to execute on our mission to help power P&C Insurance innovation. We had a particularly strong finish to the fiscal year, which was the result of a lot of hard work in the quarter, but also a lot of hard work for months and years prior to this. With the team's execution, I continue to feel more and more confident in the path that we're on and the approach we're taking to reinvent Guidewire and our insurance suite customer base to a modern cloud platform and operating model. Our cloud momentum in the quarter and fiscal year positions us well to continue to accelerate and help drive continued innovation in the PNC insurance industry. Q4 cloud activity was phenomenal with 17 core cloud transactions, bringing our total cloud customer count across insurance suite and insurance now to 92. We closed twice as many cloud deals in fiscal 21 than in fiscal 20 and closed more deals in Q4 than in all of fiscal 20. This momentum gives us more confidence that we will continue to move customers to our cloud platform and continue to attract new customers to Guidewire Cloud. Every new customer helps fuel the Guidewire ecosystem that is so important to amplifying innovation and delivering value to our customers. In August, we also took another important step in enhancing our data and analytics platform by welcoming HazardHub to the Guidewire team. Through its API-based risk modeling approach, HazardHub adds a best-in-class property risk and hazard data service to our analytics offering. And by embedding its data and risk scores into customers' workflow, we will power smarter decisions and better service for end consumers. Turning to Q4, cloud momentum was strong with sales strength on a number of fronts. Cloud sales comprised 89% of new sales activity in the quarter and just over 82% for the year compared to just 70% last year. which illustrates how quickly and clearly we have shifted to a cloud-driven business. Cloud deal volume was also strong. Of the 17 core cloud transactions this quarter, 16 were for InsuranceSuite Cloud and one for InsuranceNow. And the majority of these deals included add-ons for data and analytics. Moreover, we saw broad-based activity, including straight migrations, migrations with significant expansions, and five exciting new customers. Let me touch on our new customers first. In the Americas, we added three. SGI, Saskatchewan's compulsory auto insurer and a property and casualty insurer in five Canadian provinces, adopted insurance suite on the Guidewire cloud platform after a comprehensive process. Guidewire's modern architecture, deep content, and technical vision were important factors as SGI looks to drive greater efficiency and speed to innovation. National American Insurance Company, or NICO, a regional insurance carrier based in Oklahoma, providing commercial property and casualty coverage since 1987, selected the full insurance suite cloud along with reinsurance management and our digital and data capabilities. Qualitas US, a subsidiary of one of the largest carriers in Mexico, selected insurance now. Qualitas is seeking a core platform that will scale with its growth, streamline internal processes, and leverage data throughout its workflow with predictive analytics. In EMEA, a large car manufacturer selected InsuranceSuite Cloud to deliver motor insurance across multiple European countries. And in APAC, Hollard Insurance, a rapidly growing insurer across Australian and New Zealand markets, selected Claim Center Cloud for its comprehensive functionality and ongoing innovation. We are excited to partner with Hollard on this next generation claims project. In addition to these new customers selecting Guidewire Cloud, we also signed another 12 cloud deals with existing customers. As our cloud operations mature and gain traction, we expect the conversion of our self-managed customer base to continue to accelerate. We saw strength across the board in the quarter with migrations occurring in both personal and commercial lines across a variety of tiers and with customers choosing to expand into new core systems not previously managed by Guidewire. Key themes we hear consistently from customers choosing to embrace cloud are the importance of a unified cloud platform, strong product vision and roadmap, and the ability to access innovation faster. I won't cover every migration deal in the quarter, but a few that I think deserve specific mention. Auto Club of Southern California, a nearly $5 billion DWP carrier, and the largest of the AAA Federation, had previously decided to upgrade their claim center instance to version 10. But prior to starting that project, changed course to ultimately decide to migrate claim center to Guidewire Cloud, while also adding policy center and billing center in the cloud. This exciting deal represents a significant increase in our footprint at this customer. Similarly AmeriSure who has served the commercial lines market for more than 100 years, not only elected to upgrade its claim center implementation to Guidewire Cloud, but after a comprehensive competitive review decided to also buy Policy Center and Billing Center to take advantage of a single unified cloud solution and to facilitate greater speed of innovation. Pekin Insurance Group, a regional Midwest PNC insurer decided to migrate their insurance suite instance to Guidewire Cloud after a review of their overall cost structure to support their core system framework in a self-managed mode, yielded significant cost savings by moving to our cloud offering. And finally, California Casualty decided to migrate their full suite to our cloud. For over 100 years, CalCash has been a provider of auto and home insurance to educators, firefighters, law enforcement, and nurses across the country, and is also one of our earliest customers, having adopted Claim Center in 2007, and then expanding to Policy Center and Billing Center in 2017. We are thrilled with the partnership here and excited to work with CalCash on this next endeavor. At the end of fiscal 2021, $539 billion of direct written premium was under license for at least one Guidewire core application. I've said for a while now that with Guidewire operating as the core system of record for many of the leading insurers around the world, we have an enormous opportunity to instantiate cloud with our customer base and to leverage this success to drive new customers to our platform. It was great to see this play out in the fourth quarter. Additionally, demand for Guidewire's data and analytics solutions was healthy in the quarter. As we grow cloud adoption, we have the opportunity to leverage Guidewire's position as the core system of record to embed both data and analytics throughout the core workflow to drive greater customer insights and better decisions. I was pleased to see a number of customers take this approach by including one or more of our analytics offerings in their cloud transactions. Ten of the cloud deals that we closed in the quarter included analytics products. And in addition, science continued to show momentum in the quarter with two notable deals. Aon's Reinsurance Solutions, a leading global reinsurance broker, We'll collaborate with Guidewire's science team to help cyber insurers better quantify their exposures and manage their risks in the face of rising ransomware and evolving cyber attacks. Aon chose science for its cyber model transparency and maturity in addition to Guidewire's technical expertise. Emerging Risk, part of Ryan's specialty group, selected science after comparing cyber risk selection and portfolio aggregation tools. And also of note, In early August, we deepened our longstanding relationship with S&P, enabling them to expand their use of our science cyber risk analytics to help power S&P's global rating service. In addition to growing cloud adoption, we also continue to drive customer cloud deployments. We had 11 customers go live on 26 products across both cloud and self-managed. We saw four cloud go lives, bringing our total to 16. We saw two customers go live on insurance now and two customers go live on insurance suite, a tier one insurer and Gore Mutual. The cloud deployment at Gore Mutual really speaks to the power of our cloud platform. They have deployed insurance suite in the cloud to help transform a national scale purpose-driven and digitally led insurer in just a few short years. Already Gore Mutual has seen time to quote reduce from an average of over 30 minutes to about eight seconds. And the time from app in the door to coverage issued improved from several days to about 15 minutes. A fundamental pillar to driving cloud adoption and deployments is our growing partner ecosystem. Upgrading the core to the cloud represents a large and complex project for many insurers. So it's important to bring a deep and talent-rich SI partner community to the table. We continue to see very healthy engagement from this community in both our deal flow and cloud deployments. We finished the fourth quarter with 13,500 SI consultants from over 32 partners, and the number of Guidewire cloud certified consultants grew 157% year over year to 2,315. 11 SI partners are now involved across 29 cloud projects. At the same time, our solution partners and the Guidewire marketplace continue to be important to powering PNC insurance innovation for our customers. We finished the fourth quarter with 731 apps from Guidewire and over 130 solution partners, while growing the number of solution partners by 43% in 2021. Before handing it over to Jeff to cover our financial performance, I'd like to briefly discuss why cloud matters so much for Guidewire. our customers, and the PNC industry. Cloud is a fundamentally more efficient mechanism for delivering technology innovation to our customers. Every six months, we seamlessly deliver updates and new innovation to our growing cloud footprint, while at the same time, solution partners can efficiently plug in through a common API-based framework, which amplifies innovation on our platform even further. As a cloud service provider, we also have significantly better access to usage data, and the real-time customer feedback necessary to further improve adoption, drive innovation, and help our customers achieve the business outcomes they're targeting. The transformation of Guidewire to a cloud service is such a monumental task that it often sounds like it's our primary goal, but it's not. Our ultimate goal is to help power innovation for our customers, to help them achieve their objectives and improve the state of the insurance industry. The cloud is an essential step in this larger mission And while I'm very excited to see cloud momentum across deal volumes, ARR growth and other quarterly results, it's important to realize that there's a larger goal of empowering innovation alongside our customers that we're focused on, making progress against and very, very proud of. I'll now turn the call over to Jeff to discuss our financial results in more detail.

Thanks, Mike. We finished the year with great momentum, which is visible in our financial results. Our strong execution in fiscal 2021 sets us up well to achieve our long-term financial targets. ARR ended the fiscal year at $582 million, up 13% from a year ago. On a constant currency basis, ARR increased 12%, finishing the year at $575 million and above our guidance range. As a reminder, we measure ARR on a constant currency basis during the fiscal year and then revalue ARR at year end for current FX rates. ARR overperformance was driven by strong new ARR conversion from 17 core cloud deals sold in the quarter. We also saw healthy conversion of ramped activity in the quarter and the fiscal year. Finally, we did better than our expectations on gross ARR attrition and core attrition finished the year at under 3%. Total cloud ARR, which we define as the ARR for all of our cloud products and for customers that have contracted to move to the cloud, even if they are not fully transitioned yet, finished the year at 234 million, up 51% year over year. Cloud ARR ended the year at 40% of total ARR, which is the upper end of the 35 to 40% range that we discussed at our analyst day last year. We expect to continue to break this out on an annual basis. Fully ramped ARR, which is defined as the fully ramped annual price outlined in the customer contract, ended the year at $694 million, representing 14% year-over-year growth and 12% growth on a constant currency basis. In other words, we expect to add $112 million of expansion ARR as we execute to the ramping fee schedules outlined in customer contracts. Total revenue in fiscal 2021 was $743.3 million, ahead of the guidance we discussed last quarter as a result of strength across the board. Subscription revenue for the year was $168.6 million, up 41% year over year due to ongoing cloud activity. As Mike noted, The vast majority of our new sales are coming from our cloud products, representing 89% and 82% of new sales activity in the fourth quarter and fiscal year, respectively. Subscription and support revenue ended the year at 252.3 million, up 24% over last year. License revenue finished in line with our expectations, with a $4 million impact from deal duration longer than our standard terms occurring in the fourth quarter. the majority of which was already included in the outlook we provided last quarter. Services revenue finished a bit ahead of our expectations on stronger than expected delivery in Q4. Turning to profitability for the fiscal year, which we will discuss on a non-GAAP basis, gross profit was $413.2 million. Overall gross margin was 56% compared to 61% a year ago. Subscription and support gross margin was 43%. And services gross margin was 5% compared to 9% a year ago. A key part of our strategy is to migrate existing customers to our cloud. These existing customers have invested significant amounts to install and configure their Guidewire on-premise applications. And moving requires an upgrade and remediation work to align to our cloud best practices. In order to accelerate these projects, we are investing alongside our customers by working on migration services at discounts to our standard billable rates. While revenue recognition guidelines require us to account for the multiple performance obligations in these arrangements and allocate some of the recurring subscription contract value to services revenue, services margins are still impacted as we execute on the cloud migration opportunity in front of us. Operating income was $26 million. better than our guidance range due to higher than expected total revenue and lower than expected expenses due to the timing of hiring and lower travel and entertainment expenses. Operating cash flow ended the year at $111.6 million, well ahead of our expectations. This was positively impacted by lower than expected expenses, strong collections including $12 million of early payments not due until Q1, and approximately $5 million incremental cash flow from FX. Free cash flow finished at $82.7 million, including $15 million in expenditures associated with our office build-outs in Toronto and Dublin. We ended the quarter with $1.3 billion in cash, cash equivalents, and investments. During the quarter, we invested $39 million on the repurchase of 366,000 shares and had $37.5 million remaining in our share repurchase authorization at the end of Q4. Now let me turn to our outlook for the fiscal year 2022 and the first quarter. For the year, we expect ARR of $657 to $667 million, representing 14% constant currency growth at the midpoint. This outlook does factor in approximately $4 to $5 million in ARR from our acquisition of hazard hubs. Going forward, Hazard Hub will be incorporated into our analytics business, and we do not expect to break out ARR for Hazard Hub in the future. Total revenue for the year is expected to be between $780 and $790 million. We expect that subscription revenue will be approximately $250 million, representing 48% growth, and that support revenue will decline by about $2 million year over year. License revenue is expected to continue to decline due to the demand for new subscription sales and cloud migrations. We have not modeled in any positive impact of new term deals or renewals with longer duration than our standard. Services revenue is expected to be approximately $200 million. We expect total gross margins for the year to be approximately 51%, but this gross margin percentage will ultimately depend on our final revenue mix. Subscription margins should start to grow from approximately 23% to the low 30% range. Overall subscription and support margins should be flat to up a point or two as the subscription margin improvement is offset by the mixed shift between subscription and support revenue. With respect to operating income, we expect an operating loss of between $38 and $28 million for the fiscal year. This reflects continued investment in customer success, sales, and product development which will help us widen the competitive moats as we execute against this large market opportunity. We recognize that it is an extremely consequential decision for an insurer to entrust to a third party to deliver their core system as a service. And we expect to be the logical choice as insurers consider this path. These investments are consistent with the expectations, with our expectations, and were factored into our midterm and longer term margin targets when we updated investors at our analyst day last year. Additionally, our operating income is impacted by the varying revenue recognition patterns reported on our income statement. While the revenue pattern is different if we sell a multi-year term license, a cloud migration arrangement, or a new cloud deal, our customers continue to pay us in the same way, which is primarily annually upfront. Over time, the vast majority of our ARR will come from cloud, and the variation in revenue patterns will become less pronounced, and operating income and cash flow will start to converge, but we're still a few years away from this. Cash flow from operations in fiscal 2022 is expected to be between 30 and 40 million. Year-over-year comparisons are challenging due to four factors. First is the size and timing of the company's annual bonus and year-end sales commission payout. which usually occurs in Q1 for the previous fiscal year. In fiscal 2022, this results in a $30 million higher cash payout in fiscal 21. This is due to higher company performance in fiscal 21, but also because the fiscal year 2020 bonus was partially paid out early in Q3 of 2020 due to an employee COVID relief initiative which lowered the cash impact in fiscal 2021. Second, we are moving our U.S. employee base to an unlimited vacation policy, and as a result, have an $18 million one-time payout of vacation accruals in fiscal 22. Third, we had 12 million of early payments from customers in fiscal 21. And finally, fiscal 21 benefited from approximately 5 million due to changes in currency exchange rates. We expect to spend approximately $30 million in capital expenditures, including $10 million in building and build-out expenses as we finalize our new offices in Dublin, Ireland and Toronto, Canada. Turning to our outlook for Q1, we expect ARR to finish between $586 and $590 million. We expect total revenue of between $162 and $166 million. As a reminder, Q1 in fiscal 2021 benefited from 15 million in incremental license revenue from deal duration, including a significant contract consolidation. And these items will not recur in Q1 of fiscal 2022. We expect subscription revenue of approximately 55 million and services revenue of approximately 50 million. We expect an operating loss of between 27 and 23 million in Q1. In summary, We are proud of what the team was able to accomplish in fiscal 2021. We remain on track to hit the financial targets discussed at Anno Estate last year, and we look forward to providing more detail at our Anno Estate this year, which will be on September 30th. We recently made the decision to transition this event to 100% virtual event. Operator, you may now open the call for questions.

Thank you. At this time, we'll be conducting a question and answer session. If you would 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 would 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. Your first question comes from the line of Matt VanVleet with BTIG. Please proceed with your question.

Yeah, thanks for taking the question, guys, and great job on the quarter. I guess as you look to continue the cloud migration momentum, how much are you hearing from existing customers that are very fixated on reference customers going live, seeing your success and efficiency of those migrations? and getting more of those existing customers sort of deeper in the pipeline on their own cloud migration?

Yeah, I'll take it. First, so thanks for the feedback. I would say that we're seeing, you know, number one, the engagement from the existing customers improve steadily. You know, like I said, I think I talked about this a little bit on our last quarterly call. You know, the degree to which one of our existing customers is able to spend time with us and really evaluate our operation in the cloud platform, how it works, how it will impact them, the benefits. You know, the more time we can spend with them, the better. And it's a very positive sign when they start to spend more time with us on that because it indicates, you know, just a change in a sort of an intent there. really to do a serious evaluation that we hope will eventually end in a positive outcome and a migration. Certainly the whole set of implementations, especially at our tier one customers is on people's minds and they consistently ask us about it. We maintain that those programs operating successfully and going live on time and successfully is critically important. And so those questions definitely come up. But I would say probably the most important signal, I'd say, is just the deeper engagement that we're seeing with our customer base on cloud.

Great. And then as you look towards some of the international markets, great to see that you had a new cloud deal in both EMEA and APAC. Are those regions, you know, starting to be a little more receptive to the cloud? How should we think about, you know, the overall mix maybe over the next year or two of deals in the pipeline? Is it still pretty U.S.-centric, or are you seeing a more holistic demand across the globe? Thank you.

Well, yeah, sure. You know, I think that the ARR base, customer base of Guidewire certainly is, when you look at it, US Amer-centric. And then we have a particularly strong presence in Canada as well. And that weight, so to speak, you definitely see that in our pipeline and business activity, just because so much of our incremental ARR will come from our customer base in those cloud migrations. But we are seeing... more and more confidence and more and more orientation, I would say, to cloud internationally. And it was great to see those two deals. We also have, you know, clear pipeline internationally across EMEA and across APAC this fiscal year that we're excited about. And so I don't think we're going to see it shift to 100% cloud, you know, next year, but definitely that is the trend. And that's true internationally.

All right, great. Thank you. Yeah, thank you.

Your next question comes from line of Jackson Ader with JP Morgan. Please proceed with your question.

Thanks for taking our questions, guys. First one is on the ARR outlook. Jeff, if we adjust for the hazard head for $5 million or so, the guidance looks pretty similar to the preliminary guidance. guidance you provided on the third quarter calls. And just given that the activity, particularly in the cloud, sounded really strong in the fourth quarter, I guess I'm just curious why the increase in activity didn't lead to a larger increase in the ARR guidance.

Yeah, that's a good question. I mean, first of all, it is similar on a growth rate basis. But on a bigger base, right, we did do a little, end up doing better than our expectations in Q4. So rolling through the bigger base on an absolute dollar basis, you know, it is a bit better than what we outlined for folks next year. Actually, some of the performance in Q4 can create from a little bit more difficult pairs on a growth basis. So we felt good that we were able to maintain growth. on an organic basis, the same growth rate that we outlined for investors last year and are excited about kind of how we see that playing out as we go through the year.

Yeah, that's fair. And then any kind of tiering information maybe you can provide on either the cloud wins in FY21 or new customers, renewal customers, any tier striation you can provide would be great.

Yeah, I mean, we saw a lot of I say our progress and overall cloud deal activity was pretty broad based. We did note on the call today we had one what we would classify as very large tier two on the precipice of being a tier one decide to migrate to the cloud. But, you know, still have not seen any tier ones move in a material way this year. So a lot of that work is still out for us to capture in the in the years to come.

Okay. All right. Great. Thank you.

Your next question comes from the line of Ken Wong with Guggenheim Securities. Please proceed with your question.

Great. Thanks for taking my question. Mike, I couldn't help but notice when you talk about the 17 cloud deals that I think a lot of the commentary was you had guys that were going to go and upgrade. There was a U-turn. You saw higher product attach. I guess is it your sense that there's probably a lot less selling and education on Guidewire's part now, and now it's more just a matter of kind of customers being ready and maybe you guys are falling along their timelines now in terms of cloud adoption? Or perhaps is there just something that you would highlight that has kind of caused a bit of a reversal from what we had been seeing in the past where it sounds like it was sort of a much harder sell for Guidewire?

I definitely wouldn't say that there's less selling involved. And I really think our teams here did a phenomenal job in the year and especially the fourth quarter. I mean, every single one of these customers that makes this decision really does a thorough evaluation of the product and of their plan and of the project and what's involved. And that's just that is just the type of investment that we have to be willing to make in order to serve this industry effectively. I think the thing that is improving is our operational readiness and the confidence around which we can predict how things are going to work for our customers on our cloud service. And that's just confidence that comes with the experience of doing these implementations and doing the updates and doing the upgrades and all of that sort of organizational knowledge, not just even in Guidewire, but also our partner ecosystem, just having great, great partners in our ecosystem that have had the experience with a couple other projects that can just provide a little bit more of that confidence that you need in order to convince, I guess, a customer that now's the time that it makes sense to make that decision. So, You know, I still expect the selling activity or sort of the, you know, the sales expense to still be pretty significant. And I think that that's just what we're ready to do. But I think more and more as we continue to do these releases and we continue to gain experience and we continue to have go lives that, you know, the confidence will just build and build. And that's what I think we're seeing.

Got it. Thank you for the insights there. Very useful. Jeff, just one on margins. As we look out to next year, you've got an operating loss there, which I think makes sense given the scale of the investment and the pipeline that you guys are closing here. Is it fair to assume that we're at a trough from a profitability perspective as we march towards that 14% to 16% range in the medium term and 26%, 29% in the later stages?

Yeah, I can. I mean, I think there's a lot going on in our income statement and some of the revenue, timing of revenue and complexity around how that gets recognized in the income statement can cause some of those challenges that we're seeing. I mean, some of the things that we focus on is the ARR growth. And then if you look at how that compares to revenue growth, you can see kind of some of the stuff that's more income statement driven versus, you know, real business factors that are driving some of that. With respect to operating income, You know, we do expect next year to be the bottoming out point with respect to operating margin. We're going to continue to align people more on cash flow margin and just how the cash flow dynamics work in the business. There's some unusual items that we walk through on the call for cash flow from operations in fiscal 22. We were obviously really excited about the cash flow achievement we did in fiscal 21. So you'll hear us continue to focus on that metric. a bit more as we go through the transition.

Got it. All right. Fantastic. Thanks, guys.

Thank you. Your next question comes from line of Bhavan Suri with William Blair. Please proceed with your question.

Hey, guys. It's Dylan on for Bhavan. I guess I maybe wanted to double-click on one of those last questions around kind of the partner ecosystem. And you guys continue to see steady momentum there with with that cloud certified number. So maybe wanted to dig in to more like what are the requirements necessary for partners to kind of establish this? And then what are you hearing as well from both the partners and the customers as kind of drivers of demand, right? So assume it's a combination here for carriers looking for more capacity towards their digital initiatives, but then also kind of partners positioning to capitalize on these broader industry trends. So love to get a sense of how you guys are thinking about that.

Sure thing. So in terms of partner certification demand, you know, the requirements is one of the things we're trying to do is make sure that the implementations of insurance suite that end up being deployed in production on Guidewire cloud are done in such a way that we can update them seamlessly release to release to release. You know, Guidewire is a very configurable platform. There's a lot of degrees of freedom associated with what you can do with it. And we believe very strongly that if you do things right, we're going to be able to update those customers every six months, sort of forever. But it's really important that the people doing those implementations, they know how we expect the system to be configured for different lines of business and different types of integrations and that they're up to date on those latest and greatest capabilities that are built into the platform so that when they do that implementation, it's done well, it's done right. Okay. And this is a major change for Guidewire and the over 10,000 people out there in the world that participate in these implementations. And so the certification program is designed to ensure that they are trained, educated, and ready to do those implementations and do them really well. Now, they're incented to do that. And in order to be able to be positioned, as a partner in these deals. You know, they're in many cases selling right alongside us, helping us convince the customers that this is the right step to take. And the more certified partners they can bring to bear on a program, the likelihood is better that they're going to get that business and they're going to be able to be selected as the implementation partner for a program. You know, I think the reason I'm so excited about that number and that number continuing to grow is really that it indicates that the consulting ecosystem recognizes that this switch is an eventual outcome that they need to be prepared for. They're not sort of sitting on the sidelines waiting for it to happen. They're participating with us and engaging with us and getting these people certified so that they're helping provide the thrust necessary to move the customer base over. And I honestly think it's in all of our best interest to do that. I think that the demand, so to speak, for innovation in the PNC insurance industry is only going to increase. And I think that when we get our customer base and more customers added to the Guidewire cloud platform, we're going to really be able to significantly innovate in the broader PNC insurance industry. And I think the partner ecosystem will be a big driver of that. Hopefully that helped answer the question. Yeah, good.

Thanks. Yeah, no, no, no. Appreciate the color on that one. I guess maybe one more as well. So as we think about kind of the dynamics shaking out over the next 12 months, you have a large portion of that installed base kind of facing end-of-life support. I guess first, maybe any update relative, again, to the pace of migration conversations you're having here. And then as a follow-on to that, could you help us walk through the dynamics as it relates kind of to that model impact as the migrations kind of tended to have more more of an impact with kind of the revenue recognition dynamics.

Sure. I'll speak to the sort of view of the fiscal and how we're thinking about this going forward. You know, look, I've said a couple times that these decisions, these projects are very, very consequential for our customers and very often need to be sequenced. with, you know, in sort of line with other business objectives. And so in terms of end of life and the various other, you know, sort of version related constraints or levers, I guess, in the system, we want to be a first class partner to our customers primarily. You know, that's the most important thing for us is to be a partner that they can trust to provide this service to them almost no matter what. We want to make the cloud product as good as we possibly can. We want to make it as easy as we possibly can make it for them to move. And we want to reduce all of those risks as close to zero as we possibly can. But even if we do that, there's going to be a timeline that makes sense for each customer, given the other business objectives they have. And we've got to be prepared for that. Now, when you think about how does that translate into business that we're going to do in this fiscal year, certainly the success that we had in Q4 and last year gives us more confidence that we'll be able to sort of incrementally tick up the pace of the cloud migrations and the cloud sales. And we feel confident with the guidance that we've given. It's all trending positive for us. But at the end of the day, these still are very, very consequential, complicated decisions And we're going to move we're going to get this industry and our customer base to move as fast as we possibly can. But we're not in complete control of that. And so we're going to do everything we possibly can, you know, that we can do. And I think things are going very well. But we feel pretty good about the guidance that we've given and how that relates to the cloud demand. Great.

Thanks. Thank you.

Thanks a lot. Your next question comes from the line of Michael Turin with Wells Fargo. Please proceed with your question.

Hey there. Thanks. Good afternoon. You closed 16 insurance suite deals here. Do you feel like you're getting back to more of a normalized seasonal trend?

And if so, can you just talk more about how that informs the visibility you have into the ARR and updated outlook for the upcoming fiscal year?

Yeah, so we did 16 insurance suite deals, insurance suite cloud deals, which was very, very positive. You know, certainly one of the things we always talk about, you know, is one of the things I think maybe all people bang their head up against the wall is, you know, how do we get the business to be more linear? You know, obviously we had a great, great Q4. We'd love to see the business be a little bit more linear. You know, I don't know whether or not you can – describe what we'll see for the next year as being more normal, but certainly I think I would sort of pivot back to the confidence that we feel in the cloud product and our operational ability to deliver it as being something that can drive a little bit more consistent demand quarter over quarter. And we work real hard with the teams here at Guidewire and with our customers to try to linearize that demand. But the most important thing, regardless of any other factor, is our readiness and the maturity of the product.

The other thing I would add is we highlighted some new customer wins, and even in some expansions and migrations, some kind of new system modernizations that are taking place. So it's exciting to start to see that play out. As you all know, There was a period of time when the cloud platforms were still unknown to insurers, and we saw a bit of a slowdown in overall core modernization activities. So we're starting to see that return, which is a very positive sign. I would say from how we've modeled it, we haven't necessarily modeled it back to historical levels pre-cloud when people were looking at on-prem modernization projects, but we are starting to see that soften a bit, which is good. That's helpful. And then I guess just going back to the comment on the subscription gross margin line, I appreciate the mixed dynamics, but I think you said you think the subscription gross margins can trend into the low 30s over the course of the year. I just wanted to revisit that. Is that mostly just better scale as we get through the year, or is there anything else just to be mindful of that can drive just structural improvement on the gross margins there? Yeah, so on the subscription side of things, we've made heavy investments in cloud operations over the last two years. You will continue to see the full year effect of that as we move into next year. But as subscription revenue scales up and we see an acceleration in the subscription revenue line, that will help us drive expansion next year and then clearly into the future as we move towards our longer-term targets that we set out at AnalystX.

Great, thank you. Thanks a lot, Michael.

Your next question comes from the line of Joe Ruink with Robert W. Baird. Please proceed with your question.

Great, hi everyone. My question on the existing customer migrations, are the deal sizes getting larger? Mike, the examples you shared, It sounded like these were all full core deals. I think there's been a tendency in the past for maybe starting with an individual module or Greenfield, so smaller in scope. Is there been a noticeable change in this regard with what some of the existing customers are deciding to do?

First, I guess it's great when we see these migrations that also include expansions. You know, those are very, very positive deals for us. And the thing I would highlight there is that customers are thinking about what's their overall cloud strategy, who's their overall cloud partner, and the benefits they see in Guidewire is that you get this full suite implementation. You get a consistent approach to the whole core system across claims, policy, and billing. And that is a very positive thing. thing for us. And so when we get those deals, we're, we're really happy to see it. I wouldn't, I don't know whether or not I would, you know, connect the dots and say that we see a trend there. But certainly, you know, when, whenever you're going to kick off one of these kinds of projects with a customer, we're looking at the whole enterprise architecture, their whole existing landscape, and we're working with them to assess what's the best and most efficient way to sort of get them completely modernized. So again, I think it's probably too soon for me to say that that indicates some sort of trend, but it's certainly a very positive signal that we saw in the quarter.

Okay, that's good color. And then just on the cash flow outlook for the year, so would you maybe, just in trying to normalize things and think about developments here, it sounds like subtracting out the 12 million and 5 million in this year's number uh adding that back to next year's number and then the additional 18 million in one-time vacation accruals um i just want to confirm so i i think you know operating cash maybe normalized would be closer to 70 million this year and if that all sounds right yeah you know is that kind of in line with uh how you would expect things to progress

Yeah, I think that's fair. That's the right way to think about it. There's been a lot of puts and takes in the number this year, but that's a fair way to think about it.

Okay. Thank you very much. Thanks, Joe.

As a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad. As a reminder, if you'd like to ask a question, please press star 1 on your telephone keypad now. One moment, please, while we poll for more questions. Your next question comes from line of Brad Sills with Bank of America. Please proceed with your question.

Oh, great. Thanks guys for taking my question. Um, I wanted to ask a similar question to, to Joe's question, which is when you get a customer migrating to the cloud, are you finding that with some of the cohort of customers that have been on the cloud for a longer period of time that your ability to upsell them into the broader suite, uh, or even just data and analytics, um,

is more seamless. In other words, those customers, because they're on your servers, you have a better ability to upsell these customers.

I guess embedded in your question is maybe the sense that they're already running on our cloud system and we are upselling them versus they are working with us to upgrade to the cloud, at which point we work with them to assess what are the other core applications that they're currently using and what should they be using going forward, right? So the pattern that we saw in the quarter, which is very positive, is that we've got an existing customer running one of our core solutions, say Claim Center, And that claim center implementation makes sense for them to move to the cloud. At the same time, they say, okay, well, what are we doing with our policy administration system and what are we doing with our billing system? Well, those need to be modernized. Well, okay, let's look at the full suite from Guidewire because we're going to get that sort of consistent cloud platform, consistent partner we trust, consistent experience across the enterprise and the systems all designed to work together And that leads to going from sort of one pillar of the Guidewire footprint to a full suite implementation in the cloud. And that's a very, very good outcome. I think over time, as we get more and more customers live on cloud, as we're able to, as I was sort of alluding to in the remarks, as we have more visibility into how they're using the system, you know, what they're adopting and what the business challenges are. There's going to be more opportunity for them to, for us to upsell them data and analytics solutions going forward. I think that's the kind of thing that you should expect to play out over years, that guidewire, as we get the customer base move to cloud. Right now, a lot of this quote, I guess, you know, think of it as upsell is happening as part of an evaluation of a cloud migration process. so that we're working with that customer to make a picture of what does their enterprise architecture look like, what does their core systems look like in the cloud provided by Guidewire, and partnering with them to find a collection of products across data and analytics in our core systems that make sense for them.

Great, thanks so much, Mike.

And then one for you, Jeff, if I may, on just the subscription margin guide for flat or upper percentage. If you could remind us kind of where we are as you look towards that 66% to 68% midterm target that you outlined there, what are some of the drivers that could get us there in the coming years? Thanks so much. Yeah, sure. So I think what we said was subscription margins are going to be up in the low 30% range off of what was 23% last year. And then subscription and support would likely be kind of roughly flat to up a percentage. And that dynamic is a result of the mix shift as support, which is usually around 82% margin declines as the overall mix that has an impact on the overall margin. And then from where we are, you know, where we are is we're seeing a lot of uptick, a lot of demand and, you know, transacting on demand for our cloud products. The accounting can be complicated, especially in a migration arrangement, but we are seeing accelerating subscription revenue growth. And we feel really good about the investments we've made over the last two years on cloud operations so that we can start to leverage those investments. And that should drive margin expansion as we look forward. Very much on track with what we were expecting as we set out those targets last year, and we feel good about the targets we talked about at analyst day. Great. Thanks, John. Thanks, Brad.

Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back to Mr. Mike Rosenbaum for closing remarks. Hey, thanks very much.

So thanks everybody for participating in the call today. It was a really big quarter during an exciting time for Guidewire and the PNC industry. We're incredibly excited about the continued demand we see for our platform and for the advancement of our cloud strategy. we remain as optimistic as ever about our long-term vision and the opportunity for all of our stakeholders. So we look forward to talking again later this month at Analyst Day, which, as Jeff said, that'll be September 30th as a virtual event. So thanks very much and have a good evening.

This concludes today's conference. You may disconnect your lines at this time. Thank you all for your participation.