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spk10: Greetings.
spk09: Welcome to the Guidewire's second quarter 2024 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. Please note this conference is being recorded. I will now turn the conference over to your host, Alex Hughes, Vice President of Investor Relations. You may begin. Thank you.
spk04: Thank you, Shamali. I'm Alex Hughes, Vice President of Investor Relations, and with me today is Mike Rosenbaum, Chief Executive Officer, and Jeff Cooper, 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 8K, 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 this call. Statements made on this call include forward-looking ones regarding our financial results, products, customer demand, operations, the impact of local, national, and geopolitical events on our business and other matters. These statements are subject to risks, uncertainties, and assumptions 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 and documents we file with the SEC in our most recent annual report on Form 10-K. and our prior and forthcoming quarterly reports on Form 10-Q filed and to be filed with the SEC for information on risks, uncertainties, and assumptions that may cause actual results that differ materially from those set forth in such statements. We will also refer to certain non-GAAP financial measures to provide additional information to investors. All commentary on margins, profitability, and expenses are on a non-GAAP basis unless stated otherwise. The 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.
spk15: Thank you, Alex. Good afternoon, and thanks, everybody, for joining today. I'm pleased to report another strong quarter with continued momentum in both sales activity and operational performance. Our results in Q2 put us in a great position halfway through our fiscal year, driven by outstanding execution and progress across sales, customer success, finance, product, and engineering. We reached $800 million in ARR in the quarter, and our performance through the halfway point allows us to raise our ARR guide for the fiscal year. Our continued sales momentum is clear validation of the investments we have made in our cloud platform. The approach we have taken to cloud updates and cloud services enable us to deliver a new level of agility to our customers in the P&C industry and will unlock the innovation the industry requires to continue to transform and evolve. Our suite of insurance products are winning in the market, gaining momentum, and continuing to fuel a very durable and successful business. Increasing market confidence in our cloud strategy was reflected in record sales results in the second quarter, with continued strength in the Americas and improved momentum in Europe. Overall, we closed 11 cloud deals in the quarter. Ten of these were Insurance Week cloud deals, including three in the EMEA region. We were thrilled to close four Tier 1 deals and saw a healthy distribution of demand across migrations, expansions, and net new customers, indicating good traction in each of our core growth opportunities. Some of the takeaways were... Migration activity picked up at larger insurers with three migrations in the quarter, including a Tier 1 commercial and personal lines insurer based in the United States who elected to migrate insurance suite and another Tier 1 European insurer who will migrate their claim center implementation. We also continue to attract net new customers, adding three more insurers in the quarter. This included a rapidly growing newcomer to the home insurance market who adopted Guidewire Cloud Platform for its scale and ability to embed analytics and core workflows, as well as a significant state insurer in workers' compensation that adopted Guidewire Cloud Platform for the maturity of our platform, our roadmap, and the strength of our ecosystem. With the foundation of Guidewire Cloud Platform now clearly established, we are better positioned to layer on additional data and analytics offerings, the core policy underwriting and claims workflows. These capabilities improve customer performance and business outcomes, and it's exciting to see them continue to take shape. Cloud expansion activity also remains strong as customers look to build on their initial success with Guidewire Cloud by moving new lines of business and modules to the platform. Turning to cloud and company operations, we continue to improve and optimize our performance around deployments, utilization, and platform efficiency. We now have nearly 70% of our cloud customers in production and have conducted hundreds of updates to customers' implementations on our cloud platform over the last few releases. This new cloud update capability is starkly different than the upgrade experience of our past. It marks a material change in the ongoing relationship between Guidewire and our customers and creates the framework for us to constantly deliver innovation to our customers and the industry we serve. We also continue to drive improved cloud operations efficiency, which is improving cloud margins. Subscription and support gross margin improved eight points year over year in the second quarter to 65%. This gives us increasing confidence that we have the right approach, the right team, and the experience in place to support our growth and financial objectives through a billion in ARR. In addition to our work to shift our product and customer base to cloud, we are working to better position Guidewire to achieve our long-term model by transforming the services side of our business. We have invested in our SI partner ecosystem to ensure that we are not capacity constrained as our industry adopts cloud. As our partners take on an increasing share of the prime work, the Guidewire services team will focus on a targeted portfolio of programs and strategic roles in customer programs. Our strategic focus is for the vast majority of implementation revenue to be delivered by our SI ecosystem and for our services revenue to be less than 20% of Guidewire revenue. The result will be a more powerful software-oriented business model, better overall long-term gross margins, and a better structure to serve the P&C industry. In the second quarter, we saw lower-than-expected services revenue and And this shortfall impacts our full-year total revenue guidance, which Jeff will cover. But to be clear, lowering services revenue is not correlated in any way to the overall demand we are seeing. We add the most value to the P&C industry by running a world-class cloud platform that can be integrated and configured for our customers by a market-leading and global ecosystem of SIs that it is enabled every day by the Guidewire professional services team. This strategy is working well, and I was pleased to see Guidewire's partner ecosystem continue to expand meaningfully in the quarter. We finished Q2 with 24,000 consultants now in the Guidewire SI ecosystem, and there remains a strong uptake in those getting Guidewire cloud certified. Cloud certifications increased 33% year-over-year to nearly 9,000. We also added 15 solution partners in the second quarter, bringing the total to over 200. Here, we are working with partners to drive greater content and coverage across geos and technologies, and this drives greater utility to customers and will further drive adoption. We want customers to choose Guidewire, but also the value-driving ecosystem we are building around our platform. In summary, it was a great quarter and a great first half, and our teams continued to execute well across the key pillars of our strategy. Demand for Guidewire Cloud Platform and our suite of insurance applications remain strong. We continue to drive greater efficiency gains in cloud operations, our cloud platform, and the company overall. We are progressing through a services transformation to better serve the enormous opportunity we see and further position us to grow into our long-term model. I'll now turn the call over to Jeff.
spk04: Thanks, Mike. The financial highlights in the quarter included better than expected ARR, 65% subscription and support gross margins, and robust operating income and cash flow from operations. I will touch on these points as I go through the details. Starting with ARR, strong sales activity in the quarter led to ARR of $800 million, which was above our outlook range. Total revenue is $241 million. Subscription and support revenue was largely in line with our expectations, and license revenue benefited from DWP true-up activity. As a reminder, we generally price our software as basis points of direct written premium, or DWP. So when a customer sees their DWP grow, we often see their fees increase in the form of DWP true-ups. Services revenue was lower than expectations as we saw our partners take the lead in more cloud programs. Early in our cloud transition, we led most of the cloud programs and then often subcontracted much of the work to SIs at a low margin or in some cases negative margin. This approach allowed us to maintain control and at the same time train our partner community. By design, we are now transitioning away from this approach. We are pleased with our partner's ability to step up and lead cloud programs and our progress to decrease reliance on subcontractors. As a result, we saw services revenue from subcontracted work decline in Q2 by approximately 12 million year-over-year, and the cost of subcontractors declined by 14 million year-over-year. We have adjusted our model to reflect the fact that this transition is occurring faster than we originally estimated, and it will take a bit more time to build a backlog of Guidewire-owned programs to offset the decline in subcontracted revenue. I will touch on this more when I discuss our outlook. Turning to profitability for the second quarter, which we will discuss on a non-GAAP basis, gross profit was $151 million. This result benefited from overall strength in subscription and support margins combined with higher-than-expected term license revenue, which carries a high gross margin. This strength more than offset the service's gross profit shortfall. Overall gross margin was 63% compared with 57% a year ago. Subscription and support gross margin was 65%, which compares favorably to 57% a year ago. This continues to track ahead of our expectations due to increased cloud infrastructure efficiency. With respect to services, gross profit was negative 4.2 million, and this included approximately 3 million in severance charges. Services gross margin was negative 11%. Overall operating profit was 26 million in the second quarter. This was better than expected as cloud efficiency and lower operating expenses more than offset the lower services gross profit. We continue to be thrilled with the operating profit and operating margin momentum. Overall stock-based compensation was $36 million, up 1% from Q2 of last year. We ended the quarter with $933 million in cash, cash equivalents, and investments. Operating cash flow of $69 million for the quarter was a great result and benefited from better-than-expected collections. Now let me go through our outlook for the fiscal year 2024. Starting with the top line, we are pleased to be in a position to increase our outlook for ARR to between $852 and $862 million. We continue to see strong sales momentum and an improving competitive position as this industry continues to modernize in the cloud. We now expect total revenue to be between 957 and 967 million. This is a $19 million downward adjustment at the midpoint, which is driven by a $20 million downward adjustment to our services revenue expectations. As Mike noted, we have a robust ecosystem of implementation partners, and we have invested in that ecosystem to ensure that collectively, we can execute on the cloud demand. So we are moderating our services revenue expectations, but we continue to see high levels of demand for Guidewire Cloud. Services revenue is now expected to be approximately $175 million, and our expectations for other components of revenue is largely unchanged. Turning to margins and profitability, which we will discuss on a non-GAAP basis, we now expect subscription and support gross margins to be between 64% and 65%. As we mentioned last quarter, this puts us ahead of schedule with respect to hitting our FY25 target of 63% to 65%. It is clear that the product investments we have made and the hard work of the teams focused on efficiency are having the desired impact on scalability and product gross margins. We are tempering our services gross margin expectations on a lower revenue base and now expect services margins to be between 5% and 8%. As a result, we expect overall gross margins to be approximately 62% for the full year. With respect to operating income, we are maintaining our outlook of between $82 and $92 million for the fiscal year as better than expected cloud gross margins and operating expenses offset the adjustment in services gross profit. We expect stock-based compensation to be approximately $147 million, representing a 3% growth rate year-over-year. We are also increasing our cash flow from operations expectations to between $120 and $140 million for the fiscal year. Our collections cadence, cloud margins, and cost discipline gives us confidence to increase our outlook there. Turning to our outlook for Q3, we expect ARR to finish between $815 and $820 million. Our outlook for total revenue is between $228 and $234 million. We expect subscription and support revenue of approximately $134 million and services revenue of approximately $42 million. We expect subscription and support margins of approximately 64%, services margins in the mid-single digits, and total gross margins of between 61% and 62%. Our outlook for operating income is between $4 and $10 million.
spk10: With that, we will open the call for questions.
spk09: Thank you. At this time, we will 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 two 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 key. Our first question comes from the line of Alexey Gogolev with JPMorgan. Please proceed with your question.
spk06: Thank you.
spk05: Hi, Mike, hi, Jeff. Congratulations with the results. And I wanted to ask you about your visibility into the pipeline. Obviously, increasing ARR over the years is very encouraging, but could you maybe talk about how you're seeing the second half of the year panning out?
spk15: Yes, sir. Great question. Thank you very much. Yeah, we feel very, very good about the business right now. You know, certainly, you know, win rates, competitive win rates, our view, as you know, the deal cycles are very long in the industry, and so we have a lot of forward visibility, and that gives us some confidence to increase the guidance that we set out at the beginning of the year. And certainly, the pipeline, the number of deals, and the quality of those deals are, you know, are the data that backs up the perspective that we can raise those raise that guidance. And I would just say the other part of this is that the close rates and win rates continue to be solid and give us more and more confidence in the demand for the product and our ability to, I guess, just differentiate ourselves and earn the trust of our customers and win those deals. So I feel very, very good about the second half.
spk04: Yeah, the only thing I would add is the first half was really tremendous from an overall sales activity perspective. And Mike alluded at this in his prepared remarks, but Q2 was a record sales activity quarter for us for Q2. So we're seeing really healthy linearity in the year, which also helps inform our outlook.
spk06: And Mike, just to clarify, do you still feel confident about the $1 billion 2025?
spk05: ARR outlook?
spk15: Yeah, we do. As I said, often the deals that we work on last longer than a year. So certainly we have a picture of what next year might look like and a certain amount of pipeline that we measure and track very carefully. And as we've discussed many, many times, the ARR backlog related to the ramp deals that we've closed in prior years still exists. So that gives us confidence that the structure that we put in place at the beginning of this fiscal year and the objective of a billion in ARR, we feel confident in.
spk05: Perfect. And my second question was about the SI partnerships. I was wondering if you could elaborate a little bit more about which SIs have been gaining share within your partnerships. I remember at your conference, there was a big focus on Accenture. Are there any other names that you would highlight?
spk15: Probably not appropriate to comment on who's gaining what share. I would just say that we've seen broad-based interest in working with us to expand and really dig into the the cloud offering and to be prepared to step up either on the migration side or on the net new implementation side and be aligned with us about preparedness to implement Guidewire Cloud. So that's not limited to any one particular partner, but like I said, real broad-based interest in stepping up and going to market with and being prepared to implement Guidewire Cloud. And that's a very positive signal for us. That's one of the reasons we talk about the cloud certifications and the total consultants in the ecosystem. Certainly, if you think back to connections, you can see the partners that showed up there and showed up there in a big way. And we're just incredibly excited to partner with all of them, honestly. And it would be a little bit inappropriate for me to talk about who's gaining what share. So broad-based support, and we're excited to keep growing I would say the other thing, I'm interjecting myself in the middle of my answer, is, like, I really believe and we really believe in the concept of growing the overall pie that is Guidewire and the potential for Guidewire. And so that does exactly, that points to an opportunity for many, many SIs to work with us and grow businesses around Guidewire. And we're really seeing that, and it's exciting to see.
spk07: Amazing. Thank you very much, Mike.
spk11: Thank you.
spk09: Our next question comes from the line of Kevin Kumar with Goldman Sachs. Please proceed with your question. Hi, thanks for taking my question.
spk02: Mike, I wanted to ask about kind of the growth of the guidewire marketplace. It looks like the number of apps and partnerships have grown significantly. I'm curious what the adoption trends have looked like and anything you can share that highlights the value that's being delivered to customers, just given the breadth of solutions that are being offered.
spk15: Yeah, it's a great question. You know, we do track adoption. We look at how things are being either tried, you know, deployed into test environments or deployed into production. I think that there is a, you know, there obviously is a bit of a relationship between the cycle times associated with the implementation efforts and then follow on activity around what customers are going to do with the applications or do with the implementation and those marketplace applications after they get into production. You know, it's somewhat, you know, you want to focus directly on the task at hand when you're trying to get live on a new core implementation, and then you sort of say in phase two you start to look at these marketplace applications. But certainly we are seeing an uptick in the adoption of these applications. I don't know if I'm prepared at this moment to give you any specific statistics, but it's something that we could maybe look at. adding down the line, just to give you a sense. But we're happy with it. I think partners for us are also excited to deepen the relationship with us and work with us to make sure that the offerings are certified to work effectively with our cloud and our cloud update process. And that helps create confidence with our customers that these applications can be deployed efficiently and managed efficiently, you know, and maintained. And just as I said in the prepared remarks, adds to the overall value of the implementation. So Overall, this has been a real focus for us as we shifted to cloud, just because this is not unique to Guidewire, but cloud-based platforms like this are easier to integrate to, and it makes it easier for the partner ecosystem to augment the value of the core application. We're excited to see that continue to grow.
spk02: Yeah, that's great. And maybe one for Jeff on the services, or to understand kind of the revenue impact as you shift more towards your SIs. and maybe some near-term margin pressure as you're making progress there. But I guess, how are you thinking about kind of the sustainable margin profile of that org, maybe longer term? I think you've talked about mid-teens in the past, but, you know, is that still kind of how you're thinking about it, perhaps with a smaller internal services team?
spk04: Yeah, I mean, absolutely. I think this is going to look like a reversion almost to where we were pre-cloud as we, you know, focus more on... targeted services that are done by our personnel and delivered at an attractive margin. Early in the cloud transition, we very much leaned into leading programs in a much more active role than was traditional for us. And I think that's to be expected when there's new capabilities that we're releasing to the marketplace as the overall ecosystem is still learning those capabilities and how to implement and run those programs and And now we're turning back to the orientation we had free cloud where the SI ecosystem will take the lead in most of those engagements. And the overall, you know, different revenue components of that means less subcontracted revenue where we're priming deals and subcontracting out the work. There was also some discounting that was happening in the early days of the cloud transition that created carves from license revenue that flowed through services, and that's becoming less and less noise in the financial model, which will make it easier to forecast and predict going forward. But we're very much kind of working through that transition this year. I think the net result is, you know, a really positive outcome where we have a robust ecosystem that can help us deliver on the cloud demand that we're all excited to see.
spk10: Great. Thank you.
spk09: Thank you. Our next question comes from the line of Ken Wong with Oppenheimer.
spk23: Great, fantastic. Jeff, you mentioned earlier some kind of DWP true-ups. I just wanted to understand what drove that. I think we all see the sort of big increases in insurance premiums across a range of states. Is that something that could potentially trigger that type of an action? And then, Mike, on that same point, as you think about these big step-up in premiums, I guess, would you characterize that as healthy for your customer end market, for Guidewire? I would love any thoughts in terms of how to think about those moving pieces.
spk04: Yeah, so absolutely. You know, as premiums grow in the industry, we price on basis points of direct written premiums, so that will create a bit of a tailwind for us. You know, when we can – enforce those true-ups can vary contract to contract. So that's something we spend a lot of time modeling out and assessing. But absolutely, that is a tailwind for us.
spk15: You know, and yeah, I appreciate the question. I would say absolutely, this is healthy. I think it may be, you know, sort of perceived as unfortunate if you're a consumer, you know, but understanding the actual risks and the actual amount of risk that you are taking in whatever particular endeavor you are looking to insure is very important. And there was an imbalance in the industry for a period of time. And as we've said on these calls a number of times, the industry is designed to assess that imbalance, work through that imbalance, change rates, increased premiums so that it can get back into a healthy state. And I think we are seeing that unfold. And that is a healthy thing. Like I said, it's probably not, it's certainly not enjoyable if the premium on, you know, if the risk associated with your home or your car is is deemed to be more than it was, but that's just a fact of life. And I think you can see that in the data. You see that in the risk characteristics that we help the industry assess with our products like Hazard Hub. And I think that it will help all of us make better decisions about the risks we're taking with a truer, more accurate sense of how much it costs to ensure that risk. And so, yeah, it's nice to see that process unfold. Guidewire participates that, as Jeff described, but I do think in general it's a healthy thing for the industry and for each of the state regulatory agencies to work through with industry partners and get to a more balanced insurance market.
spk23: Got it. I appreciate the really thoughtful response. And if I can just sneak a quick one in on just the partner side, I think you mentioned partners leading services at a faster pace than expected. How much of that is just them, their ability to take the baton from you guys, you know, earlier than anticipated versus, I know Diego has been working to streamline the whole deployment process. How much of it might be just they're able to kind of, you guys are able to kind of just ramp your customers up a lot quicker?
spk15: Well, I think for sure there's a part of this that, you know, we had to work very hard to ensure that the product was ready to be implemented by partners and Diego and team have done a phenomenal job with this. You know, that's great to see and partially driving this. I also think, you know, as we talked about, this is kind of all part of the overall plan. for the company in focusing our services organization on really the strategic implementations, the new product introductions, and the really expert type of work that, you know, we think we can add unique and differentiated value relative to maybe like one of our general partners in the ecosystem. And so we're just, this is simply us seeing that strategy sort of come to fruition a little bit faster than we might have expected when we scoped out the beginning of the year, but it's very much in line with where we want to head as a company.
spk10: Got it. Thank you very much.
spk09: Thank you. Thank you. Our next question comes from the line of Rishi Jaluria with RBC Capital Markets. Please proceed with your question.
spk17: Hey, thanks. This is Richard pulling on for Rishi Jaluria. Thanks for taking my question. So first one for me is just on some of the services side. You mentioned a couple times throughout the call that you accelerated kind of this roadmap here with transitioning the services, and I know you've mentioned it on past calls a lot. So just kind of want to understand, was there anything in particular that drove the decision to accelerate that? And then the second part of that question is just on The gross margin side sounds like going to be a little bit pressured this year, but as we think about that recovering to those pre-cloud margin levels, is there any time frame for kind of when we should expect that? Thanks.
spk04: Thanks for the question. On the urgency around driving the shift, I think it was largely a reflection of we had been working to – enable some of these early cloud programs and doing that in a posture that was often very low or negative margin. And so there clearly was some of the urgency around this was returning to a more sustainable long-term margin profile for our services business. And we think that this is the right posture to take in order to do that. So that's kind of what drove the urgency. And then as you think about long-term, You know, we are working through that transition. We have capacity to do a bit more services revenue than we expect to see this year. And as we kind of look ahead and get to a bit higher utilization rates, we think kind of returning the services organization into a sustainable kind of low double-digit margin profile feels about right. We could certainly do better than that if we have a particularly strong year, but that feels like the right profile to shoot for in the long term.
spk18: Thank you.
spk17: And then just to follow up, it sounds like just based on what we're hearing, the traction on the data analytics portfolio seems to be doing pretty well, especially solutions like Predict and Hazard Hub. So I guess just any update there on what you're seeing from customers and any areas where you think there's maybe room for better attach rates with some of that portfolio? Thanks.
spk15: Yeah, thanks for the question. It's certainly one of the things we talk about every week is driving those attach rates and making sure that we're positioning the products together, and it's nice to hear that you're hearing that. We certainly are, too. We called it out in the description of some of the deals that we were able to get across the finish line this quarter is just really – You know, the added benefit of thinking about the insurance suite applications in conjunction with analytics and really putting, you know, the analytics in front of the users at the point of decision such that they can practically add value to the business operations efficiency and decision quality that we're able to deliver with the products. It's really great to see. So, yeah, we're continuing to drive those attach rates. You know, and, you know, maybe we expect them to, you know, generally and slowly improve as we proceed throughout the year, better position the products, and we'll see how that goes through the second half of the year, but certainly very satisfied with the momentum and the progress that we've made. On the hazard upside, we're really very excited about just the general use case and even beyond the Guidewire customer base, as we think there's a lot of companies out there that could benefit from you know, this sort of flexibility and, you know, this sort of ease of access to a very significant amount of data and risk profiling that we can provide with that solution. And so we're excited not just to drive the attach to the deals that we're doing for insurance suite and the core applications, but also thinking beyond our typical, you you know, sort of focus area in terms of the market and figuring out ways that we can expose this to a broader audience because we're just very, very excited about what that product can do for the insurance industry.
spk10: Great. Thanks for taking my questions. Thank you.
spk09: Thank you. Our next question comes from the line of Dylan Becker with William Blair. Please proceed with your questions.
spk16: Hey, guys. Don't want to belabor the point here on services, as I think it's a pretty clear positive. But maybe another way of asking it, too, is, is this kind of an entire guidewire decision, or is the ecosystem kind of coming to you and validating that the market opportunity is resonating and there's capacity for that? And maybe what that means as we think about kind of the relationships that that those SIs have with larger institutions as we think about transitioning maybe more of these core books of business from some of the larger insurance carriers?
spk10: I think the answer is certainly both.
spk15: You know, that our position in the market, you know, if you just think of us purely as one of the players, one of the options to choose when you're going to do a Guidewire implementation, you know, the more capacity, the more demand in that market, it creates an opportunity, you know, it makes for a better, more efficient implementation market, you know, and so there could be like a supply side driver behind the competitiveness of Guidewire services relative to partners. Also, like I said, like we're engineering that to occur, and so it's partially our choice. But certainly, you know, I think that that our win rate and the momentum and success of the insurance suite application wins is making it clear that Guidewire is the platform and the company to partner with if you want to participate in this industry transformation. And so I think you see a lot of that in the outcome this quarter.
spk16: Okay, yeah, that makes sense. And then going back to Mike maybe sticking with you on the equilibrium dynamic too, so seeing a lot of improvement on that loss ratio side, could you remind us what impact that has on capacity to invest, right? Like is this kind of incentivizing the initiative of maybe not accelerating but continuing that investment cadence, or is this something that could cause an insurance carrier to rest on their laurels and say, hey, all right, we're through the thick of it, at least some of those pressures near term? Doesn't seem like the latter, but wanted to stress test it. Thanks.
spk15: No, I really don't think it is the latter, and this is something that we have spent a lot of time thinking about, talking to customers about very carefully. Honestly, this has been one of the highlights for me in terms of our perspective about the role we play in the industry and how long-term it really is. Most of our customers have been in business for, let's say, more than 50, sometimes 100, and in some cases almost 200 years. They have seen these cycles before, and they know how to work through them. And the decision that they make about their core systems partner is very often a decade-level decision. This isn't something that they're changing out every couple of years based on the profitability of the insurance side of their business, but it's something that they can really take a long-term view around. This was great for us. and that it enabled us to continue to see healthy demand through what was a very difficult time for the industry from a profitability perspective. You know, and it's nice to see that the industry is recovering and pushing the rates through the system, and like I said, getting back to more of an equilibrium state. And I don't think that that can hurt Guidewire's demand. I think we saw a healthy demand when it was tough, and as things improve, I don't think that that's going to hurt by causing people to rest. I think that there is a growing understanding that agility is that technology flexibility and agility is very, very important for remaining competitive, remaining up to date with prices, remaining as efficient as possible with respect to claims processing and submission management and underwriting. These things are not changing, and that is resonating with these prospects and with these customers, and I think that we're going to continue to see demand grow.
spk10: So anyway, thanks for the question. I appreciate it. Yeah, it makes perfect sense. Thanks, Mike.
spk09: Thank you. Our next question comes from the line of Michael Turin with Wells Fargo. Please proceed with your question.
spk03: Hey, great. Thanks. I appreciate you taking the questions. The commentary is pretty consistent. The press release mentions 11 cloud deals. Maybe you can just level set for us how you'd score 11. cloud progress for fiscal 25 thus far in the mix of what you're seeing there and how it all stacks up relative to where your expectations were heading into the year.
spk15: We're very happy with the progress so far this year. As Jeff mentioned, driving a linearity into our business has been a focus of ours for the past few years, is not relying on massive Q4s to carry the day on the fiscal year. And we have done a phenomenal job driving a rigor into the organization so that we're hitting our targets in Q1 and Q2 and Q3 and Q4. And being where we are at this point in the fiscal year just feels very good, right? We're creating steady demand. We're able to get those deals through the process and closed in a healthy way. And we feel great about that. You know, and that's, you know, kudos, I guess, to us, if that's appropriate to say, in terms of driving just operational rigor in the business. But it also speaks to the demand for the products that we're seeing and the demand for the product category in general in the insurance industry. And all those things, you know, tell me, like, this has been a really, really good start to the year, and we're in a good position halfway through it.
spk03: Thanks for that. Jeff, the cash flow targets moved up for the year even with the services revenue shortfall. Maybe speak to your ability to manage to free cash flow even as some of the contribution there shifts a bit. Thanks.
spk04: Yeah. I think we touched on this a bit at the analyst day, and we're just at this pretty exciting inflection point in this cloud transition where we're starting to see that part of the model really flex. So that's great to see. Collections has been really strong. The overall cloud gross margin profile has been really strong, and all of those dynamics just give us a lot of confidence into the cash flow forecast for this year and as we think about executing to some of those longer-term targets as well. So in general, just off to a great start ahead of where I expected to be midway through the year, and that gives us confidence to raise the target a bit.
spk10: All helpful. Thank you. Thank you.
spk09: Our next question comes from the line of Matt Van Villet with BTIG. Please proceed with your question.
spk20: Yeah, good afternoon. Thanks for taking the questions. Mike, you mentioned that you signed a number of new partners this quarter. I'm curious as you look across the global landscape, are there pockets of either regions or maybe specific areas of markets where you feel like you still need to deepen the roster of partners that you have there, especially now as you're looking to put as much of the services mix on those partners as possible?
spk15: Yeah, it's a good question. You know, we think a lot about our progress in North America, our progress in Europe, but then, you know, in specific countries and our progress in Asia Pacific. And so I think as we you know, as we think about where should we be growing over the next five years faster, certainly there are some specific countries where we have an opportunity to better optimize our approach, not just in our product and go-to-market, but as, you know, to your point around the partners that we're working with and how we're showing up in each of those particular markets. And it's sort of It's an interesting game for us to play. It's very, very efficient if we imagine that our approach that's working very well in North America should logically work everywhere in the world, but it doesn't always work out that way. And so it's up to us to get out there and figure out what does the market say in Germany need from Guidewire and who can we be working with in each particular country to in such a way as the customers in any particular country are getting exactly what they need from the combination of Guidewire and our systems integrator partners. So for sure there is some optimization, and I expect we will – put into the strategic plan for our organization and execute over the next few years and enable us to grow a little bit faster in the countries where we see a bigger DWP and insurance opportunity than what we've been able to capitalize on so far.
spk20: Okay, very helpful. And then I guess when you look at maybe some of your customers that have adopted Hazard Hub and some of the other sort of more advanced data-driven products out there, From a wallet share perspective, you know, how much of that can be captured or how much do those products sort of capture in some of the customers that are really leaning into that? And then how, if at all, are you sort of incentivizing the go-to-market team to get that more penetrated in customers as a huge point of differentiation?
spk15: Yeah, it's a great question. I will be honest. I tend not to think about the analytics. opportunity in terms of wallet share, but instead think about it in terms of the business impacts that we can help create for the insurance industry that we serve. You know, we see a pretty significant opportunity for the industry to improve the efficiency, you know, honestly across the board, both in claims and also in underwriting and also in pricing. And so, There's a business benefit. There's an efficiency gain that can be unlocked through data and through analytics. And so we think that by delivering value and creating an opportunity for our insurance customers to create a better system, we can partake in the value creation that we facilitate and as opposed to thinking of it as sort of like, you know, how much are you paying for who and can you ship some of that to Guidewire? That's not actually how we think about it. Certainly something like Hazard Hub has the potential to be added to and drive better decisions and efficiencies, you know, all across the industry, and that's how we think about it. In terms of the incentive structure, you know, we have, you know, all the logical – structures in place with our sales organization to ensure that the teams are incented to work together and position the different products across the spectrum. And we know we continue to tweak and optimize those things, but we're certainly incentivizing our organization to work effectively together and position those solutions side by side.
spk04: And Hazard Hub in particular is really interesting, right? Because that has more of an organic growth market motion where we can land have them test out the product, and then grow as they see success. And so, you know, that does come with a little bit more of an inside sales motion initially selling into our install base and building some of that muscle, which is great for us, right, because we intend to have more of those types of products over time.
spk10: Great. Thank you.
spk09: Thank you. Our next question comes from the line of Parker Lane with Stifel. Please proceed with your questions.
spk12: Yeah, hi, guys. Thanks for taking the question here. Mike, I wanted to focus in on the three net new customers you announced during the quarter to see if there's anything interesting you would call out about the processes or mix of systems that were in place there that you guys are replacing.
spk15: Yeah, thanks. I appreciate the question very much. So one I want to call out specifically is, you know, we have the opportunity to work with somebody So we worked with an industry partner who has a very, very bold vision about how they're going to grow and take advantage of what they see as a real disruption in the industry. And they basically needed a system that was going to allow them to scale very, very significantly and had outgrown the sort of solutions that they chose to get started with. And so it's a pretty minor shift, I would say, but it is a replacement of some, you know, solutions that are targeted at smaller sort of getting started insurance companies. But it was great to see just the vision that they have and be able to be, you know, to earn the right to be chosen as the platform that they were going to use to scale into their ambition, as I say, to take advantage of what they see as a pretty significant disruption in in the market in the United States. And so that was a very, very exciting win for us. The other one that I would call out is just one of these deals that, you know, we won it and lost it and won it and lost it, and it lasted over two years, and we went through all the processes that you could possibly go through to make sure that they, you know, that we were the absolute right choice. This was a specialty lines and commercial insurance solution that we were able to step up and prove that we were the right choice for this company. And we were just incredibly excited to get this win and get this deal closed. And I think it will end up being a very significant and strategic partner for us, especially because it's going to be a proof point for us on commercial lines insurance and the specialty markets that we're going to be able to support for this customer. So that was the other one that I would call out that we were just very, very excited to get over the finish line this quarter.
spk12: Got it. Very helpful. And then, Mike, you know, we're pretty far along in the alphabet here of releases, and you accelerated the timeline of launches last year. Are you seeing a notable pickup in how quickly customers are coming back to the well to discuss expansion opportunities? And I guess, how would you compare that to the early days of the cloud launch?
spk15: Well, so two parts to the answer. I would say we are working very hard to earn the trust of our cloud customers and prove that we can very effectively support them as we provide these updates. And so, you know, I don't know if you guys can understand this. It's like they were a little nervous when we first said, hey, we're going to go to three releases a year, and we're going to orient the releases such that you can take them every time just because their experience with upgrades in the past was pretty significant. Like it was going to take a lot of time and they had to pause a lot of the projects in order to be able to absorb those upgrades. But what we've shown and what we are working through and proving with them is that we can do these updates very, very easily and and with very minimal disruption to their operations, and that enables them to get the benefits of what we're putting in each one of these releases. And that's just a super positive sign, is that this is working for us. It was always part of the plan, but it's now, you know, a reality, and we are earning their trust, and they are starting to really get excited about what they're going to be able to do with this new operating model that we can support. And so, You know, that's just a great achievement for our organization. And honestly, I think for the industry, you know, this is a different way to operate a core system in the industry. And I think it's over the next decade, it's really going to prove to be incredibly valuable for every single one of our customers is that, you know, we're going to be able to make change. We're going to be able to add innovation. We're going to be able to deliver it to them. in a timeframe that, you know, makes a difference versus what they were going to be able to do before. And in terms of whether or not this all creates more demand, more expansion opportunity, I would say probably like generally, yes. I don't know if I could point to anything specific, but certainly velocity around these projects creates success. The velocity creates success and the success creates the opportunity for us to add the next line of business and, you know, do another deal that expands the scope of the program. And certainly we have some implementations that are going that way and going very well, and we continue to add to them. So generally, yes, but, you know, mostly I would say the big news is that we're able to establish ourselves in this upgrade cadence in a very positive way. Got it. Makes sense. Appreciate the feedback.
spk10: Thanks. Yeah, thanks for the question.
spk09: Thank you. Our next question comes from the line of Joe Ruink with Baird. Please proceed with your question.
spk22: Great. Thanks for taking my question. I know you've addressed the macro a couple of times, and this is a bit of a macro question, but in the last couple of years, it's been this spring into summer timeframe where customers have ended up deploying their IT budgets in a little bit of a different way than maybe you were thinking. I think one year was smaller initial contracts. Another year was maybe the pace and timing around just ACV. As we sit here today, are you just not seeing any of the same maybe preemptive patterns that would suggest something similar is on the horizon? And ultimately, you know, when you see where DWP is being allocated in the IT budget, you really participate in those areas?
spk15: Yeah, I would. You know, you certainly can't count your chickens before they hatch, and you have to execute, and we have to continue to stay vigilant and follow through on, you know, the potential that we see in our pipeline and our plans. But we don't see, you know, in the deals that we're working on right now, anything like you're describing right now. You know, I think we've learned a lot over the past few years about how to structure deals, what to expect in terms of timing and the things that we need to do to validate the demand and to ensure that we win the process and then get the deal successfully contracted. And we've gotten better and better and better at that across the organization. You know, more and more of the organization has successfully prosecuted cloud deals, and that's certainly helpful. And so, Yeah, I definitely don't want to send the signal that we're not appropriately anxious about all the things that you just described, but we do have a very good visibility into the rest of this year and even into next year, and we feel good about the guidance that we've set, and that confidence allowed us to increase it slightly right now.
spk04: And just to add, I mean, we talk a lot about macro, but we also feel really good about the micro, right, kind of the where Guidewire is in terms of cloud maturity and what we're seeing with momentum in the industry and the referenceability of the customer cohorts that are adopting cloud. All of that builds into a demand environment that is almost more driven by the micro dynamics that are specific to Guidewire versus some of the larger macro dynamics that we see.
spk22: Okay, that's great. And then I don't have Dylan's reservation, so I will belabor the services point. But, you know, when I think about Guidewire and getting a cloud certification, I mean, that's not an easy process. It's pretty rigorous. It takes a fair amount of time. And so having the right capacity in place, which seems to be the messaging today, that strikes me as a pretty big deal. Do you actually think that the SI community It doesn't sound like it's been a bottleneck to any deal flow, but do you actually think it could become an amplifier of your activity and actually maybe helping you bring in some more big accounts, more engagements, and so it ultimately helps demand going forward?
spk15: Yeah, I would agree. I definitely don't think it's been a bottleneck, and I certainly hope that it is an amplifier of demand for Guidewire. And I believe very strongly in what I described in the prepared remarks, that we are going to serve this industry most effectively with great software, with a great cloud platform that updates and delivers innovation to our customers through an ecosystem of partners and on the implementation side, but also on the solution side, that it's not just Guidewire, that it's an ecosystem that we are creating and nurturing and investing in, that together is going to help the industry evolve and transform, and in the process, create a better P&C insurance industry. And I certainly hope that that creates demand for Guidewire. I think logically it should. And I think, honestly, I don't want to pretend like this is net new, right? This has. This has been the strategy of the company, and I think that this uniquely differentiates us as a software provider to the P&C industry. We are certainly not the only company that approaches it this way, but I would say we are the only company that approaches it this aggressively. that really nurtures the partner ecosystem as a mechanism for expanding our reach most effectively. And I think that that is playing out to our advantage right now, and I hope it will continue.
spk10: That's great. Thank you very much.
spk09: Thank you. Our next question comes from the line of Alex Sklar with Raymond James. Please proceed with your questions.
spk25: Great. Thank you. Mike, it sounds like the record second quarter and the momentum you called out is coming from both the demand side with carriers underwriting results and the execution side on Guidewire's part. Can you just give a little bit more color, though, on the improvements you alluded to in migration conversations? I think you called out conversion rates being a little bit better exiting 23 into 24. How notable is the change in that versus the last few quarters?
spk15: Well, I think there's a couple things that are driving an improvement in migration velocity is, you know, we are getting a lot more proof points under our belt, you know, and so with 70% of our cloud customers now in production, that creates more references, that creates more experience, that creates more confidence in the existing on-prem customer base to recognize that this is a – You know, honestly, the safest path forward. So that certainly helps. I think that we've also invested quite a lot in the tooling necessary to do these transitions more and more efficiently. We've also invested pretty significantly in migration practices, specifically focused with our SIs. around driving these projects so that it doesn't have to be just Guidewire, but there's actually like a whole group of options that we can bring to bear around helping a customer do the migration. And I think all those things, you know, come together and help us, you know, result in the increase in velocity that we see in the migrations. You know, there's still, you know, all that being said is there's a lot of things that factor into this decision for an insurance company and, you know, Solving that equation for every single one is going to take us years, but we're completely focused on leaving no customer behind and ensuring that we can make this happen successfully for every single one of our existing customers. But it is, you know, based on a pretty significant amount of investment and focus that we've put into this over the past couple of years, and we're seeing that start to pay off now. Okay, great.
spk25: Thanks for that color. Maybe just a quick follow-up for you, Jeff. We're halfway through the fiscal year. Any notable changes in terms of the shape or the slope of bookings from a ramp perspective relative to last year? Thanks.
spk04: From an overall ramp perspective, no material change. I mean, we're seeing good linearity in the overall bookings, but when you look at the ramps that are embedded into the cloud deals, no change. I mean, the one thing we are seeing is we're seeing a little bit more DWP TRURA poking with activity. Those don't come with ramps, right? That's kind of a one-time event. But when you look at the cloud deals, nothing to call out.
spk10: Great. Thank you both. Thank you.
spk09: Thank you. Our next question comes from the line of Aaron Kimson with Citizens JMP. Please proceed with your question.
spk08: Great, thank you guys for the questions. Mike, you talked about the four tier one deals in the quarter. So stepping back, when you think about the pace of cloud transitions over the coming years, specifically at tier one, do you see a potential tipping point where the largest players start moving to the cloud at an increased pace or see this as more of a long haul that might take five, 10 plus years?
spk10: Well, I think it's going to be, it's hard to say.
spk15: I don't imagine that there's going to be any magic thing that causes it all to shift suddenly, just because the decision for an individual carrier has a lot of other factors that weigh into the decision and the timing. And in many circumstances, at least verbally, we have alignment about the overall intention to get to cloud. I probably haven't said it in a number of quarters, but very often the conversation is this is just a matter of when, not if. But we have to solve that equation for each and every one of those companies. You know, like I said a second ago, this is just adding up a whole bunch of factors that continue to add incentive and increase the likeliness of those companies making the decision in any particular quarter to begin that transition. And, you know, it's our readiness. It's the number of customers and the amount of experience that we have. It's the amount of value that we're able to put into the product and what they can do with it now relative to, you know, when they first evaluated it. That just keeps improving release over release over release. You know, I think all those things just add up. And then those things are compared to the internal objectives of that company and what they have on their docket in any particular quarter or year that And then they make that decision. And you've got to understand, like, we're having that conversation with each and every one of our customers, you know, maybe not continuously, but probably at least once a quarter, you know, maybe twice a year, just checking in and making sure that they're up to date on what we can do and we're up to date on what their objectives are. So, yeah, hopefully that gives you a perspective of why I say that this is going to be a slow and steady wins the race and there isn't going to be some magical thing that causes it all to tip in one particular quarter.
spk08: That's really helpful. Thank you. And then, Jeff, maybe quickly on capital allocation. So you still have about $138 million on your share repurchase program, haven't bought back any stock in the prior two quarters. That analyst that you talked about potentially keeping More than $400 million of strategic cash, at least $400 of run-of-business cash. You have the convert, but your stock price is a close today. That will be settled in stock. So how do you think about a scenario where you would utilize the remainder of your repurchase program if there is one?
spk04: Yeah, look, I think you laid it out nicely. We're in a mode where We think that there's an interesting time for us to potentially be a little bit more strategic around M&A. Obviously, a lot of thought goes into those types of processes, and we will be very disciplined, but that is becoming a bit more interesting for us on the convert side. We do have that maturity out there. You're right. We might settle in shares. We might settle that in cash, do a net share settlement. as well. Those are a number of things that we're thinking about. We do still have some capacity on our share repurchase program, but I think right now we felt like it's a good time for us to reserve a little bit more dry powder on the balance sheet.
spk10: Understood. Thank you.
spk09: Thank you. Our next question comes from the line of Tyler Radke with Citibank. Please proceed with your question. Hey, this is Peter on the line for Tyler Racky.
spk13: Thanks for taking the question. I just had one question here on the macro, more on the topic of inflation and the impact that's had on claims expenses. I was just interested on customer scrutiny on making investment decisions. Have things gotten better over the past 90 days? And then if things haven't gotten better, what's really contributed to their recent success and migration wins? Thanks.
spk15: Yeah, thanks for the question. Yeah, so definitely we've seen this. It's on the minds and on the fiscal financial outcomes of almost every insurance company in the world. But it's been nice to see that everybody has, for the most part, taken a very long-term perspective about the approach to adjusting for inflation and claims expense and passing these changes through to premium adjustments. And for the most part, I would say that hasn't dramatically changed our perspective on the IT investments associated with core system migrations and core system modernizations. Like I said a few minutes ago, these are 10-year at least decisions for these companies. They're picking a partner and executing a project that's going to They expect to last them over a decade, and so they can make long-term decisions about the point in time in which they're going to begin that transformation and partner with something like Guidewire to do that. So for sure, the slowdown in inflation and stabilization of the claims expense creates more confidence in the year-to-year business model at an insurance company. And that definitely doesn't hurt their ability to green light a modernization project. But generally, we saw them push straight through, in a lot of cases, this adjustment and still green light projects to modernize with Guidewire. And that was really great to see. But it will be nice, I think, and everyone will be very happy to see a more stable inflationary environment over the next couple of years. And I suppose, knock on wood, that that actually comes true. But it certainly will help the industry and I think will therefore help Guidewire.
spk10: Great. Thanks for the question. Hey, thank you very much. Okay. Thank you.
spk15: I just wanted to say I appreciate the time, everybody. Thanks for joining in the call. We had just a very, very strong start to the fiscal year. We feel great about the prospects for the rest of this fiscal and look forward to connecting with you all over the next few months.
spk14: So thank you very much.
spk09: And this concludes today's conference, and you may disconnect your line at this time. Thank you for your participation.
spk05: Goodbye. you you Thank you.
spk09: Greetings. Welcome to the Guidewire's second quarter 2024 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. Please note this conference is being recorded. I'll now turn the conference over to your host, Alex Hughes, Vice President of Investor Relations. You may begin. Thank you.
spk04: Thank you, Shamali. I'm Alex Hughes, Vice President of Investor Relations, and with me today is Mike Rosenbaum, Chief Executive Officer, and Jeff Cooper, 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 8K, 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 this call. Statements made on this call include forward-looking ones regarding our financial results, products, customer demand, operations, the impact of local, national, and geopolitical events on our business and other matters. These statements are subject to risks, uncertainties, and assumptions 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 and documents we file with the SEC, including our most recent annual report on Form 10-K, and our prior and forthcoming quarterly reports on Form 10-Q filed and to be filed with the SEC for information on risks, uncertainties, and assumptions that may cause actual results that differ materially from those set forth in such statements. We will also refer to certain non-GAAP financial measures to provide additional information to investors. All commentary on margins, profitability, and expenses are on a non-GAAP basis unless stated otherwise. The 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.
spk15: Thank you, Alex. Good afternoon, and thanks, everybody, for joining today. I'm pleased to report another strong quarter with continued momentum in both sales activity and operational performance. Our results in Q2 put us in a great position halfway through our fiscal year, driven by outstanding execution and progress across sales, customer success, finance, product, and engineering. We reached $800 million in ARR in the quarter, and our performance through the halfway point allows us to raise our ARR guide for the fiscal year. Our continued sales momentum is clear validation of the investments we have made in our cloud platform. The approach we have taken to cloud updates and cloud services enable us to deliver a new level of agility to our customers in the P&C industry and will unlock the innovation the industry requires to continue to transform and evolve. Our suite of insurance products are winning in the market, gaining momentum, and continuing to fuel a very durable and successful business. Increasing market confidence in our cloud strategy was reflected in record sales results in the second quarter, with continued strength in the Americas and improved momentum in Europe. Overall, we closed 11 cloud deals in the quarter. Ten of these were Insurance Week cloud deals, including three in the EMEA region. We were thrilled to close four Tier 1 deals and saw a healthy distribution of demand across migrations, expansions, and net new customers, indicating good traction in each of our core growth opportunities. Some of the takeaways were… Migration activity picked up at larger insurers with three migrations in the quarter, including a Tier 1 commercial and personal lines insurer based in the United States who elected to migrate insurance suite and another Tier 1 European insurer who will migrate their claim center implementation. We also continue to attract net new customers, adding three more insurers in the quarter. This included a rapidly growing newcomer to the home insurance market who adopted Guidewire Cloud Platform for its scale and ability to embed analytics and core workflows, as well as a significant state insurer in workers' compensation that adopted Guidewire Cloud Platform for the maturity of our platform, our roadmap, and the strength of our ecosystem. With the foundation of Guidewire Cloud Platform now clearly established, we are better positioned to layer on additional data and analytics offerings, the core policy underwriting and claims workflows. These capabilities improve customer performance and business outcomes, and it's exciting to see them continue to take shape. Cloud expansion activity also remains strong as customers look to build on their initial success with Guidewire Cloud by moving new lines of business and modules to the platform. Turning to cloud and company operations, we continue to improve and optimize our performance around deployments, utilization, and platform efficiency. We now have nearly 70% of our cloud customers in production and have conducted hundreds of updates to customers' implementations on our cloud platform over the last few releases. This new cloud update capability is starkly different than the upgrade experience of our past. It marks a material change in the ongoing relationship between Guidewire and our customers and creates the framework for us to constantly deliver innovation to our customers and the industry we serve. We also continue to drive improved cloud operations efficiency, which is improving cloud margins. Subscription and support gross margin improved eight points year over year in the second quarter to 65%. This gives us increasing confidence that we have the right approach, the right team, and the experience in place to support our growth and financial objectives through a billion in ARR. In addition to our work to shift our product and customer base to cloud, we are working to better position Guidewire to achieve our long-term model by transforming the services side of our business. We have invested in our SI partner ecosystem to ensure that we are not capacity constrained as our industry adopts cloud. As our partners take on an increasing share of the prime work, the Guidewire services team will focus on a targeted portfolio of programs and strategic roles in customer programs. Our strategic focus is for the vast majority of implementation revenue to be delivered by our SI ecosystem and for our services revenue to be less than 20% of Guidewire revenue. The result will be a more powerful software-oriented business model, better overall long-term gross margins, and a better structure to serve the P&C industry. In the second quarter, we saw lower-than-expected services revenue and And this shortfall impacts our full-year total revenue guidance, which Jeff will cover. But to be clear, lowering services revenue is not correlated in any way to the overall demand we are seeing. We add the most value to the P&C industry by running a world-class cloud platform that can be integrated and configured for our customers by a market-leading and global ecosystem of SIs that it is enabled every day by the Guidewire professional services team. This strategy is working well, and I was pleased to see Guidewire's partner ecosystem continue to expand meaningfully in the quarter. We finished Q2 with 24,000 consultants now in the Guidewire SI ecosystem, and there remains a strong uptake in those getting Guidewire cloud certified. Cloud certifications increased 33% year-over-year to nearly 9,000. We also added 15 solution partners in the second quarter, bringing the total to over 200. Here, we are working with partners to drive greater content and coverage across geos and technologies, and this drives greater utility to customers and will further drive adoption. We want customers to choose Guidewire, but also the value-driving ecosystem we are building around our platform. In summary, it was a great quarter and a great first half, and our teams continued to execute well across the key pillars of our strategy. Demand for Guidewire Cloud Platform and our suite of insurance applications remain strong. We continue to drive greater efficiency gains in cloud operations, our cloud platform, and the company overall. We are progressing through a services transformation to better serve the enormous opportunity we see and further position us to grow into our long-term model. I'll now turn the call over to Jeff.
spk04: Thanks, Mike. The financial highlights in the quarter included better than expected ARR, 65% subscription and support gross margins, and robust operating income and cash flow from operations. I will touch on these points as I go through the details. Starting with ARR, strong sales activity in the quarter led to ARR of $800 million, which was above our outlook range. Total revenue is $241 million. Subscription and support revenue was largely in line with our expectations, and license revenue benefited from DWP true-up activity. As a reminder, we generally price our software as basis points of direct written premium, or DWP. So when a customer sees their DWP grow, we often see their fees increase in the form of DWP true-ups. Services revenue was lower than expectations as we saw our partners take the lead in more cloud programs. Early in our cloud transition, we led most of the cloud programs and then often subcontracted much of the work to SIs at a low margin or in some cases negative margin. This approach allowed us to maintain control and at the same time train our partner community. By design, we are now transitioning away from this approach. We are pleased with our partner's ability to step up and lead cloud programs and our progress to decrease reliance on subcontractors. As a result, we saw services revenue from subcontracted work decline in Q2 by approximately 12 million year-over-year, and the cost of subcontractors declined by 14 million year-over-year. We have adjusted our model to reflect the fact that this transition is occurring faster than we originally estimated, and it will take a bit more time to build a backlog of Guidewire-owned programs to offset the decline in subcontracted revenue. I will touch on this more when I discuss our outlook. Turning to profitability for the second quarter, which we will discuss on a non-GAAP basis, gross profit was $151 million. This result benefited from overall strength in subscription and support margins combined with higher-than-expected term license revenue, which carries a high gross margin. This strength more than offset the service's gross profit shortfall. Overall gross margin was 63% compared with 57% a year ago. Subscription and support gross margin was 65%, which compares favorably to 57% a year ago. This continues to track ahead of our expectations due to increased cloud infrastructure efficiency. With respect to services, gross profit was negative 4.2 million, and this included approximately 3 million in severance charges. Services gross margin was negative 11%. Overall operating profit was 26 million in the second quarter. This was better than expected as cloud efficiency and lower operating expenses more than offset the lower services gross profit. We continue to be thrilled with the operating profit and operating margin momentum. Overall stock-based compensation was $36 million, up 1% from Q2 of last year. We ended the quarter with $933 million in cash, cash equivalents, and investments. Operating cash flow of $69 million for the quarter was a great result and benefited from better than expected collections. Now let me go through our outlook for the fiscal year 2024. Starting with the top line, we are pleased to be in a position to increase our outlook for ARR to between $852 and $862 million. We continue to see strong sales momentum and an improving competitive position as this industry continues to modernize in the cloud. We now expect total revenue to be between 957 and 967 million. This is a $19 million downward adjustment at the midpoint, which is driven by a $20 million downward adjustment to our services revenue expectations. As Mike noted, we have a robust ecosystem of implementation partners, and we have invested in that ecosystem to ensure that collectively, we can execute on the cloud demand. So we are moderating our services revenue expectations, but we continue to see high levels of demand for Guidewire Cloud. Services revenue is now expected to be approximately $175 million, and our expectations for other components of revenue is largely unchanged. Turning to margins and profitability, which we will discuss on a non-GAAP basis, we now expect subscription and support gross margins to be between 64% and 65%. As we mentioned last quarter, this puts us ahead of schedule with respect to hitting our FY25 target of 63% to 65%. It is clear that the product investments we have made and the hard work of the teams focused on efficiency are having the desired impact on scalability and product gross margins. We are tempering our services gross margin expectations on a lower revenue base and now expect services margins to be between 5% and 8%. As a result, we expect overall gross margins to be approximately 62% for the full year. With respect to operating income, we are maintaining our outlook of between $82 and $92 million for the fiscal year as better-than-expected cloud gross margins and operating expenses offset the adjustment in services gross profit. We expect stock-based compensation to be approximately $147 million, representing a 3% growth rate year-over-year. We are also increasing our cash flow from operations expectations to between $120 and $140 million for the fiscal year. Our collections cadence, cloud margins, and cost discipline gives us confidence to increase our outlook there. Turning to our outlook for Q3, we expect ARR to finish between $815 and $820 million. Our outlook for total revenue is between $228 and $234 million. We expect subscription and support revenue of approximately $134 million and services revenue of approximately $42 million. We expect subscription and support margins of approximately 64%, services margins in the mid-single digits, and total gross margins of between 61% and 62%. Our outlook for operating income is between $4 and $10 million.
spk10: With that, we will open the call for questions.
spk09: Thank you. At this time, we will 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 two 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 key. Our first question comes from the line of Alexey Gogolev with JPMorgan. Please proceed with your question.
spk05: Thank you. Hi, Mike, hi, Jeff. Congratulations with the results. And I wanted to ask you about your visibility into the pipeline. Obviously, increasing ARR over the years is very encouraging, but could you maybe talk about how you're seeing the second half of the year panning out?
spk15: Yeah, sure. Great question. Thank you very much. Yeah, we feel very, very good about the business right now. You know, certainly, you know, win rates, competitive win rates, our view, as you know, the deal cycles are very long in the industry, and so we have a lot of forward visibility, and that gives us some confidence to increase the guidance that we set out at the beginning of the year. And certainly, the pipeline, the number of deals, and the quality of those deals are, you know, are the data that backs up the perspective that we can raise those raise that guidance. And I would just say, like, the other part of this is that, you know, the close rates and win rates continue to be solid and give us more and more confidence in the demand for the product and our ability to, I guess, just differentiate ourselves and earn the trust of our customers and win those deals. So I feel very, very good about the second half.
spk04: Yeah, the only thing I would add is the first half was really tremendous from an overall sales activity perspective. And Mike alluded at this in his prepared remarks, but Q2 was a record sales activity quarter for us, or Q2. So we're seeing really healthy linearity in the year, which also helps inform our outlook.
spk06: And Mike, just to clarify, do you still feel confident about the $1 billion 2025 quarter?
spk05: ARR outlook?
spk15: Yeah, we do. As I said, often the deals that we work on last longer than a year. So certainly we have a picture of what next year might look like and a certain amount of pipeline that we measure and track very carefully. And as we've discussed many, many times, the ARR backlog related to the ramp deals that we've closed in prior years still exists. So that gives us confidence that the structure that we put in place at the beginning of this fiscal year and the objective of a billion in ARR, we feel confident in.
spk05: Perfect. And my second question was about the SI partnerships. I was wondering if you could elaborate a little bit more about which SIs have been gaining share within your partnerships. I remember at your conference, there was a big focus on Accenture. Are there any other names that you would highlight?
spk15: Probably not appropriate to comment on who's gaining what share. I would just say that we've seen broad-based interest in working with us to expand and really dig into the the cloud offering and to be prepared to step up either on the migration side or on the net new implementation side and be aligned with us about preparedness to implement Guidewire Cloud. So that's not limited to any one particular partner, but like I said, real broad-based interest in stepping up and going to market with and being prepared to implement Guidewire Cloud. And that's a very positive signal for us. That's one of the reasons we talk about the cloud certifications and the total consultants in the ecosystem. Certainly, if you think back to connections, you can see the partners that showed up there and showed up there in a big way. And we're just incredibly excited to partner with all of them, honestly. And it would be a little bit inappropriate for me to talk about who's gaining what share. So broad-based support, and we're excited to keep growing I would say the other thing, I'm interjecting myself in the middle of my answer, is like I really believe and we really believe in the concept of growing the overall pie that is Guidewire and the potential for Guidewire. And so that does it exactly. That points to an opportunity for many, many SIs to work with us and grow businesses around Guidewire. And we're really seeing that, and it's exciting to see.
spk07: Amazing. Thank you very much, Mike.
spk11: Thank you.
spk09: Our next question comes from the line of Kevin Kumar with Goldman Sachs. Please proceed with your question. Hi, thanks for taking my question.
spk02: Mike, I wanted to ask about kind of the growth of the guidewire marketplace. It looks like the number of apps and partnerships have grown significantly. I'm curious what the adoption trends have looked like and anything you can share that highlights the value that's being delivered to customers, just given the breadth of solutions that are being offered.
spk15: Yeah, it's a great question. You know, we do track adoption. We look at how things are being either tried, you know, deployed into test environments or deployed into production. I think that there is a, you know, there obviously is a bit of a relationship between the cycle times associated with the implementation efforts and then follow-on activity around what customers are going to do with the applications or do with the implementation and those marketplace applications after they get into production. You know, it's somewhat, you know, you want to focus directly on the task at hand when you're trying to get live on a new core implementation. And then you sort of say in phase two, you start to look at these marketplace applications. But certainly we are seeing an uptick in the adoption of these applications. I don't know if I'm prepared at this moment to give you any specific statistics, but it's something that we could maybe look at. adding down the line, just to give you a sense. But we're happy with it. I think partners for us are also excited to deepen the relationship with us and work with us to make sure that the offerings are certified to work effectively with our cloud and our cloud update process, and that helps create confidence with our customers that these applications can be deployed efficiently and managed efficiently, you know, and maintained. And just as I said in the prepared remarks, adds to the overall value of the implementation. Overall, this has been a real focus for us as we shifted to cloud, just because this is not unique to Guidewire, but cloud-based platforms like this are easier to integrate to, and it makes it easier for the partner ecosystem to augment the value of the core application. We're excited to see that continue to grow.
spk02: Yeah, that's great. And maybe one for Jeff on the services, or to understand kind of the revenue impact as you shift more towards your SIs. and maybe some near-term margin pressure as you're making progress there. But I guess, how are you thinking about kind of the sustainable margin profile of that org, maybe longer term? I think you've talked about mid-teens in the past, but, you know, is that still kind of how you're thinking about it, perhaps with a smaller internal services team?
spk04: Yeah, I mean, absolutely. I think this is going to look like a reversion almost to where we were pre-cloud as we, you know, focus more on... targeted services that are done by our personnel and delivered at an attractive margin. Early in the cloud transition, we very much leaned into leading programs in a much more active role than was traditional for us. And I think that's to be expected when there's new capabilities that we're releasing to the marketplace as the overall ecosystem is still learning those capabilities and how to implement and run those programs. And And now we're turning back to the orientation we had free cloud where the SI ecosystem will take the lead in most of those engagements. And the overall, you know, different revenue components of that means less subcontracted revenue where we're priming deals and subcontracting out the work. There was also some discounting that was happening in the early days of the cloud transition that created carves from license revenue that flowed through services, and that's becoming less and less noise in the financial model, which will make it easier to forecast and predict going forward. But we're very much kind of working through that transition this year. I think the net result is, you know, a really positive outcome where we have a robust ecosystem that can help us deliver on the cloud demand that we're all excited to see.
spk10: Great. Thank you.
spk09: Thank you. Our next question comes from the line of Ken Wong with Oppenheimer.
spk23: Great, fantastic. Jeff, you mentioned earlier some kind of DWP true-ups. Just wanted to understand what drove that. I mean, I think we all see the sort of big increases in insurance premiums across a range of states. Is that something that could potentially trigger that type of an action? And then, Mike, on that same point, as you think about these big step-up in premiums, I guess, would you characterize that as healthy for your customer end market, for Guidewire? I would love any thoughts in terms of how to think about those moving pieces.
spk04: Yeah, so absolutely. You know, as premiums grow in the industry, we price on basis points of direct written premiums, so that will create a bit of a tailwind for us. You know, when we can – enforce those true-ups can vary contract to contract. So that's something we spend a lot of time modeling out and assessing. But absolutely, that is a tailwind for us.
spk15: You know, and yeah, I appreciate the question. I would say absolutely, this is healthy. I think it may be, you know, sort of perceived as unfortunate if you're a consumer, you know, but understanding the actual risks and the actual amount of risk that you are taking in whatever particular endeavor you are looking to insure is very important. And there was an imbalance in the industry for a period of time. And as we've said on these calls a number of times, the industry is designed to assess that imbalance, work through that imbalance, change rates, increased premiums so that it can get back into a healthy state. And I think we are seeing that unfold. And that is a healthy thing. Like I said, it's probably not, it's certainly not enjoyable if the premium on, you know, if the risk associated with your home or your car is is deemed to be more than it was, but that's just a fact of life. And I think you can see that in the data. You see that in the risk characteristics that we help the industry assess with our products like Hazard Hub. And I think that it will help all of us make better decisions about the risks we're taking with a truer, more accurate sense of how much it costs to ensure that risk. And so, yeah, it's nice to see that process unfold. Guidewire participates that, as Jeff described, but I do think in general it's a healthy thing for the industry and for each of the state regulatory agencies to work through with industry partners and get to a more balanced insurance market.
spk23: Got it. I appreciate the really thoughtful response. And if I can just sneak a quick one in on just the partner side, I think you mentioned partners leading services at a faster pace than expected. How much of that is just them, their ability to take the baton from you guys, you know, earlier than anticipated versus, I know Diego has been working to streamline the whole deployment process. How much of it might be just they're able to kind of, you guys are able to kind of just ramp your customers up a lot quicker?
spk15: Well, I think for sure there's a part of this that, you know, we had to work very hard to ensure that the product was ready to be implemented by partners and Diego and team have done a phenomenal job with this. You know, that's great to see and partially driving this. I also think, you know, as we talked about, this is kind of all part of the overall plan for the company in focusing our services organization on really the strategic implementations, the new product introductions, and the really expert type of work that, you know, we think we can add unique and differentiated value relative to maybe like one of our general partners in the ecosystem. And so we're just, this is simply seeing that strategy sort of come to fruition a little bit faster than we might have expected when we scoped out the beginning of the year, but it's very much in line with where we want to head as a company.
spk10: Got it. Thank you very much.
spk09: Thank you. Thank you. Our next question comes from the line of Rishi Jaluria with RBC Capital Markets. Please proceed with your question.
spk17: Hey, thanks. This is Richard pulling on for Rishi Jaluria. Thanks for taking my question. So first one for me is just on some of the services side. You mentioned a couple times throughout the call that you accelerated kind of this roadmap here with transitioning the services, and I know you've mentioned it on past calls a lot. So just kind of want to understand, was there anything in particular that drove the decision to accelerate that? And then the second part of that question is just on The gross margin side, it sounds like going to be a little bit pressured this year, but as we think about that recovering to those pre-cloud margin levels, is there any timeframe for when we should expect that? Thanks.
spk04: Thanks for the question. On the urgency around driving this shift, I think it was largely a reflection of we had been working to enable some of these early cloud programs and doing that in a posture that was often very low or negative margin. And so there clearly was some of the urgency around this was returning to a more sustainable long-term margin profile for our services business. And we think that this is the right posture to take in order to do that. So that's kind of what drove the urgency. And then as you think about long-term, You know, we are working through that transition. We have capacity to do a bit more services revenue than we expect to see this year. And as we kind of look ahead and get to a bit higher utilization rates, we think kind of returning the services organization into a sustainable kind of low double-digit margin profile feels about right. We could certainly do better than that if we have a particularly strong year, but that feels like the right profile to shoot for in the long term.
spk18: Thank you.
spk17: And then just to follow up, it sounds like just based on what we're hearing, the traction on the data analytics portfolio seems to be doing pretty well, especially solutions like Predict and Hazard Hub. So I guess just any update there on what you're seeing from customers and any areas where you think there's maybe room for better attach rates with some of that portfolio? Thanks.
spk15: Yeah, thanks for the question. It's certainly one of the things we talk about every week is driving those attach rates and making sure that we're positioning the products together, and it's nice to hear that you're hearing that. We certainly are, too. We called it out in the description of some of the deals that we were able to get across the finish line this quarter is just really – You know, the added benefit of thinking about the insurance suite applications in conjunction with analytics and really putting, you know, the analytics in front of the users at the point of decision such that they can practically add value to the business operations efficiency and decision quality that we're able to deliver with the products. It's really great to see. So, yeah, we're continuing to drive those attach rates. You know, and, you know, maybe we expect them to, you know, generally and slowly improve as we proceed throughout the year, better position the products, and we'll see how that goes through the second half of the year, but certainly very satisfied with the momentum and the progress that we've made. On the hazard upside, we're really very excited about just the general use case and even beyond the Guidewire customer base, as we think there's a lot of companies out there that could benefit from you know, the sort of flexibility and, you know, the sort of ease of access to a very significant amount of data and risk profiling that we can provide with that solution. And so we're excited not just to drive the attach to the deals that we're doing for insurance suite and the core applications, but also thinking beyond our typical you know, sort of focus area in terms of the market and figuring out ways that we can expose this to a broader audience because we're just very, very excited about what that product can do for the insurance industry.
spk10: Great. Thanks for taking my questions. Thank you.
spk09: Thank you. Our next question comes from the line of Dylan Becker with William Blair. Please proceed with your questions.
spk16: Hey, guys. Don't want to belabor the point here on services, as I think it's a pretty clear positive. But maybe another way of asking it, too, is, is this kind of an entire guidewire decision, or is the ecosystem kind of coming to you and validating that the market opportunity is resonating and there's capacity for that? And maybe what that means as we think about kind of the relationships that that those SIs have with larger institutions as we think about transitioning maybe more of these core books of business from some of the larger insurance carriers?
spk10: I think the answer is certainly both.
spk15: You know, that our position in the market, you know, if you just think of us purely as one of the players, one of the options to choose when you're going to do a Guidewire implementation, You know, the more capacity, the more demand in that market, it creates an opportunity. You know, it makes for a better, more efficient implementation market. You know, and so there could be, like, a supply-side driver behind the competitiveness of Guidewire services relative to partners. Also, like I said, like, we're engineering that to occur, and so it's partially our choice. But certainly, you know, I think – that our win rate and the momentum and success of the insurance suite application wins is making it clear that Guidewire is the platform and the company to partner with if you want to participate in this industry transformation. And so I think you see a lot of that in the outcome this quarter.
spk16: Okay, yeah, that makes sense. And then going back to Mike maybe sticking with you on the equilibrium dynamic too, so seeing a lot of improvement on that loss ratio side, could you remind us what impact that has on capacity to invest, right? Like is this kind of incentivizing the initiative of maybe not accelerating but continuing that investment cadence, or is this something that could cause an insurance carrier to rest on their laurels and say, hey, all right, we're through the thick of it, at least some of those pressures near term? Doesn't seem like the latter, but wanted to stress test it. Thanks.
spk15: No, I really don't think it is the latter, and this is something that we have spent a lot of time thinking about, talking to customers about very carefully. Honestly, this has been one of the highlights for me in terms of our perspective about the role we play in the industry and how long-term it really is. Most of our customers have been in business for, let's say, more than 50, sometimes 100, and in some cases almost 200 years. They have seen these cycles before, and they know how to work through them. And the decision that they make about their core systems partner is very often a decade-level decision. This isn't something that they're changing out every couple of years based on the profitability of the insurance side of their business, but it's something that they can really take a long-term view around. This was great for us. and that it enabled us to continue to see healthy demand through what was a very difficult time for the industry from a profitability perspective. You know, and it's nice to see that the industry is recovering and pushing the rates through the system and, like I said, getting back to more of an equilibrium state. And I don't think that that can hurt Guidewire's demand. I think we saw a healthy demand when it was tough, and as things improve, I don't think that that's going to hurt by causing people to rest. I think that there is a growing understanding that agility matters, that technology flexibility and agility is very, very important for remaining competitive, remaining up to date with prices, remaining as efficient as possible with respect to claims processing and submission management and underwriting. These things are not changing, and that is resonating with these prospects and with these customers, and I think that we're going to continue to see demand grow. So anyway, thanks for the question.
spk10: I appreciate it. Yeah, it makes perfect sense. Thanks, Mike.
spk09: Thank you. Our next question comes from the line of Michael Turin with Wells Fargo. Please proceed with your question.
spk03: Hey, great. Thanks. I appreciate you taking the questions. The commentary is pretty consistent. The press release mentions 11 cloud deals. Maybe you can just level set for us how you'd score 11. cloud progress for fiscal 25 thus far in the mix of what you're seeing there and how it all stacks up relative to where your expectations were heading into the year.
spk15: We're very happy with the progress so far this year. As Jeff mentioned, driving a linearity into our business has been a focus of ours for the past few years, is not relying on massive Q4s to carry the day on the fiscal year. And we have done a phenomenal job driving a rigor into the organization so that we're hitting our targets in Q1 and Q2 and Q3 and Q4. And being where we are at this point in the fiscal year just feels very good, right? We're creating steady demand. We're able to get those deals through the process and closed in a healthy way. And we feel great about that. You know, and that's, you know, kudos, I guess, to us, if that's appropriate to say, in terms of driving just operational rigor in the business. But it also speaks to the demand for the products that we're seeing and the demand for the product category in general in the insurance industry. And all those things, you know, tell me, like, this has been a really, really good start to the year, and we're in a good position halfway through it.
spk03: Thanks for that. Jeff, the cash flow targets moved up for the year even with the services revenue shortfall. Maybe speak to your ability to manage to free cash flow even as some of the contribution there shifts a bit. Thanks.
spk04: Yeah. I think we touched on this a bit at the analyst day, and we're just at this pretty exciting inflection point in this cloud transition where we're starting to see that part of the model really flex. So that's great to see. Collections has been really strong. The overall cloud gross margin profile has been really strong, and all of those dynamics just give us a lot of confidence into the cash flow forecast for this year and as we think about executing to some of those longer-term targets as well. So in general, just off to a great start ahead of where I expect it to be midway through the year, and that gives us confidence to raise the target a bit.
spk10: All helpful. Thank you. Thank you.
spk09: Our next question comes from the line of Matt Van Villet with BTIG. Please proceed with your question.
spk20: Yeah, good afternoon. Thanks for taking the questions. Mike, you mentioned that you signed a number of new partners this quarter. I'm curious as you look across the global landscape, are there pockets of either regions or maybe specific areas of markets where you feel like you still need to deepen the roster of partners that you have there, especially now as you're looking to put as much of the services mix on those partners as possible?
spk15: Yeah, it's a good question. You know, we think a lot about our progress in North America, our progress in Europe, but then, you know, in specific countries and our progress in Asia Pacific. And so I think as we you know, as we think about where should we be growing over the next five years faster, certainly there are some specific countries where we have an opportunity to better optimize our approach, not just in our product and go-to-market, but as, you know, to your point around the partners that we're working with and how we're showing up in each of those particular markets. And it's sort of It's an interesting game for us to play. It's very, very efficient if we imagine that our approach that's working very well in North America should logically work everywhere in the world, but it doesn't always work out that way. And so it's up to us to get out there and figure out what does the market say in Germany need from Guidewire and who can we be working with in each particular country in such a way as the customers in any particular country are getting exactly what they need from the combination of Guidewire and our systems integrator partners. So for sure there is some optimization, and I expect we will – put into the strategic plan for our organization and execute over the next few years and enable us to grow a little bit faster in the countries where we see a bigger DWP and insurance opportunity than what we've been able to capitalize on so far.
spk20: Okay, very helpful. And then I guess when you look at maybe some of your customers that have adopted Hazard Hub and some of the other sort of more advanced data-driven products out there, From a wallet share perspective, you know, how much of that can be captured or how much do those products sort of capture in some of the customers that are really leaning into that? And then how, if at all, are you sort of incentivizing the go-to-market team to get that more penetrated in customers as a huge point of differentiation?
spk15: Yeah, it's a great question. I will be honest, I tend not to think about the analytics opportunity in terms of wallet share, but instead think about it in terms of the business impacts that we can help create for the insurance industry that we serve. You know, we see a pretty significant opportunity for the industry to improve the efficiency, you know, honestly across the board, both in claims and also in underwriting and also in pricing. And so, There's a business benefit. There's an efficiency gain that can be unlocked through data and through analytics. And so we think that by delivering value and creating an opportunity for our insurance customers to create a better system, we can partake in the value creation that we facilitate and as opposed to thinking of it as sort of like, you know, how much are you paying for who and can you ship some of that to Guidewire? That's not actually how we think about it. Certainly something like Hazard Hub has the potential to be added to and drive better decisions and efficiencies, you know, all across the industry, and that's how we think about it. In terms of the incentive structure, you know, we have, you know, all the logical – structures in place with our sales organization to ensure that the teams are incented to work together and position the different products across the spectrum. And we know we continue to tweak and optimize those things, but we're certainly incentivizing our organization to work effectively together and position those solutions side by side.
spk04: And Hazard Hub in particular is really interesting, right? Because that has more of an organic growth market motion where we can land have them test out the product, and then grow as they see success. And so, you know, that does come with a little bit more of an inside sales motion initially selling into our install base and building some of that muscle, which is great for us, right, because we intend to have more of those types of products over time.
spk10: Great. Thank you. Thank you.
spk09: Our next question comes from the line of Parker Lane with Stiefel. Please proceed with your question.
spk12: Yeah, hi, guys. Thanks for taking the question here. Mike, I wanted to focus in on the three net new customers you announced during the quarter to see if there's anything interesting you would call out about the processes or mix of systems that were in place there that you guys are replacing.
spk15: Yeah, thanks. I appreciate the question very much. So one I want to call out specifically is we have the opportunity to work with somebody So we worked with an industry partner who has a very, very bold vision about how they're going to grow and take advantage of what they see as a real disruption in the industry. And they basically needed a system that was going to allow them to scale very, very significantly and had outgrown the sort of solutions that they chose to get started with. And so it's a pretty minor shift, I would say, but it is a replacement of some, you know, solutions that are targeted at smaller sort of getting started insurance companies. But it was great to see just the vision that they have and be able to be, you know, to earn the right to be chosen as the platform that they were going to use to scale into their ambition, as I say, to take advantage of what they see as a pretty significant disruption in in the market in the United States. And so that was a very, very exciting win for us. The other one that I would call out is just one of these deals that, you know, we won it and lost it and won it and lost it, and it lasted over two years, and we went through all the processes that you could possibly go through to make sure that they, you know, that we were the absolute right choice. This was a specialty lines and commercial insurance solution that we were able to step up and prove that we were the right choice for this company. And we were just incredibly excited to get this win and get this deal closed. And I think it will end up being a very significant and strategic partner for us, especially because it's going to be a proof point for us on commercial lines insurance and the specialty markets that we're going to be able to support for this customer. So that was the other one that I would call out that we were just very, very excited to get over the finish line this quarter.
spk12: Got it. Very helpful. And then, Mike, you know, we're pretty far along in the alphabet here of releases, and you accelerated the timeline of launches last year. Are you seeing a notable pickup in how quickly customers are coming back to the well to discuss expansion opportunities? And I guess, how would you compare that to the early days of the cloud launch?
spk15: Well, so two parts to the answer. I would say we are working very hard to earn the trust of our cloud customers by and prove that we can very effectively support them as we provide these updates. And so, you know, I don't know if you guys can understand this. It's like they were a little nervous when we first said, hey, we're going to go to three releases a year, and we're going to orient the releases such that you can take them every time just because, Their experience with upgrades in the past was pretty significant. It was going to take a lot of time, and they had to pause a lot of the projects in order to be able to absorb those upgrades. But what we've shown and what we are working through and proving with them is that we can do these updates very, very easily and with very minimal disruption to their operations, and that enables them to get the benefits of what we're putting in each one of these releases. And that's just a super positive sign is that this is working for us. It was always part of the plan, but it's now, you know, a reality and they are, we are earning their trust and they are starting to really get excited about what they're going to be able to do with this new operating model that we can support. And so, you know, that, I think that's one of the, you know, that's, that's just, it's a, it's a great achievement for our organization. And honestly, I think for the industry, You know, there's, you know, this is a different way to operate a core system in the industry. And I think it's over the next decade, it's really going to prove to be incredibly valuable for every single one of our customers is that, you know, we're going to be able to make change. We're going to be able to add innovation. We're going to be able to deliver it to them in a timeframe that, you know, makes a difference versus what they were going to be able to do before. And in terms of whether or not this all creates more demand, more expansion opportunity, I would say probably like generally, yes. I don't know if I could point to anything specific, but certainly velocity around these projects creates success. The velocity creates success, and the success creates the opportunity for us to add the next line of business and, you know, do another deal that expands the scope of the program. And certainly we have some implementations that are going that way and going very well, and we continue to add to them. So generally, yes, but, you know, mostly I would say the big news is that we're able to establish ourselves in this upgrade cadence in a very positive way. Got it. Makes sense.
spk10: Appreciate the feedback. Thanks. Yeah, thanks for the question.
spk09: Thank you. Our next question comes from the line of Joe Ruink with Bayer. Please proceed with your question.
spk22: Great. Thanks for taking my question. I know you've addressed the macro a couple of times, and this is a bit of a macro question, but in the last couple of years, it's been this spring into summer timeframe where customers have ended up deploying their IT budgets in a little bit of a different way than maybe you were thinking. I think one year was smaller initial contracts. Another year was maybe the pace and timing around just ACV. As we sit here today, are you just not seeing any of the same maybe preemptive patterns that would suggest something similar is on the horizon? And ultimately, you know, when you see where DWP is being allocated in the IT budget, you really participate in those areas?
spk14: Yeah, I would.
spk15: You know, you certainly can't count your chickens before they hatch, and you have to execute, and we have to continue to stay vigilant and follow through on, you know, the potential that we see in our pipeline and our plans. But we don't see, you know, in the deals that we're working on right now, anything like you're describing right now. You know, I think we've learned a lot over the past few years about how to structure deals, what to expect in terms of timing and the things that we need to do to validate the demand and to ensure that we win the process and then get the deal successfully contracted. And we've gotten better and better and better at that across the organization. You know, more and more of the organization has successfully prosecuted cloud deals, and that's certainly helpful. Yeah, I definitely don't want to send the signal that we're not appropriately anxious about all the things that you just described, but we do have a very good visibility into the rest of this year and even into next year, and we feel good about the guidance that we've set, and that confidence allowed us to increase it slightly right now.
spk04: And just to add, I mean, we talk a lot about macro, but we also feel really good about the micro, right, kind of the where Guidewire is in terms of cloud maturity and what we're seeing with momentum in the industry and the referenceability of the customer cohorts that are adopting cloud. All of that builds into a demand environment that is almost more driven by the micro dynamics that are specific to Guidewire versus some of the larger macro dynamics that we see.
spk22: Okay, that's great. And then I don't have Dylan's reservation, so I will belabor the services point. But when I think about Guidewire and getting a cloud certification, I mean, that's not an easy process. It's pretty rigorous. It takes a fair amount of time. And so having the right capacity in place, which seems to be the messaging today, that strikes me as a pretty big deal. Do you actually think that the SI community It doesn't sound like it's been a bottleneck to any deal flow, but do you actually think it could become an amplifier of your activity and actually maybe helping you bring in some more big accounts, more engagements, and so it ultimately helps demand going forward?
spk15: Yeah, I would agree. I definitely don't think it's been a bottleneck, and I certainly hope that it is an amplifier of demand for Guidewire. And I believe very strongly in what I described in the prepared remarks, that we are going to serve this industry most effectively with great software, with a great cloud platform that updates and delivers innovation to our customers through an ecosystem of partners and on the implementation side, but also on the solution side, that it's not just Guidewire, that it's an ecosystem that we are creating and nurturing and investing in, that together is going to help the industry evolve and transform, and in the process, create a better P&C insurance industry. And I certainly hope that that creates demand for Guidewire. I think logically it should. And I think, honestly, I don't want to pretend like this is net new, right? This has. This has been the strategy of the company, and I think that this uniquely differentiates us as a software provider to the P&C industry. We are certainly not the only company that approaches it this way, but I would say we are the only company that approaches it this aggressively. that really nurtures the partner ecosystem as a mechanism for expanding our reach most effectively. And I think that that is playing out to our advantage right now, and I hope it will continue.
spk10: That's great. Thank you very much.
spk09: Thank you. Our next question comes from the line of Alex Sklar with Raymond James. Please proceed with your questions.
spk25: Great. Thank you. Mike, it sounds like the record second quarter and the momentum you called out is coming from both the demand side with carriers underwriting results and the execution side on Guidewire's part. Can you just give a little bit more color, though, on the improvements you alluded to in migration conversations? I think you called out conversion rates being a little bit better exiting 23 into 24. How notable is the change in that versus the last few quarters?
spk15: Well, I think there's a couple things that are driving an improvement in migration velocity is we are getting a lot more proof points under our belt. And so with 70% of our cloud customers now in production, that creates more references, that creates more experience, that creates more confidence in the existing on-prem customer base to recognize that this is honestly the safest path forward. So that certainly helps. I think that we've also invested quite a lot in the tooling necessary to do these transitions more and more efficiently. We've also invested pretty significantly in migration practices, specifically focused with our SIs. around driving these projects so that it doesn't have to be just Guidewire, but there's actually like a whole group of options that we can bring to bear around helping a customer do the migration. And I think all those things, you know, come together and help us, you know, result in the increase in velocity that we see in the migrations. You know, there's still, you know, all that being said is there's a lot of things that factor into this decision for an insurance company and, you know, Solving that equation for every single one is going to take us years, but we're completely focused on leaving no customer behind and ensuring that we can make this happen successfully for every single one of our existing customers. But it is, you know, based on a pretty significant amount of investment and focus that we've put into this over the past couple of years, and we're seeing that start to pay off now.
spk25: Okay, great. Thanks for that, Collar. Maybe just a quick follow-up for you, Jeff. We're halfway through the fiscal year. Any notable changes in terms of the shape or the slope of bookings from a ramp perspective relative to last year? Thanks.
spk04: From an overall ramp perspective, no material change. I mean, we're seeing good linearity in the overall bookings, but when you look at the ramps that are embedded into the cloud deals, no change. I mean, the one thing we are seeing is we're seeing a little bit more DWP TrueRef poking with activity. Those don't come with ramps, right? That's kind of a one-time event. But when you look at the cloud deals, nothing to call out.
spk10: Great. Thank you both. Thank you.
spk09: Thank you. Our next question comes from the line of Aaron Kimson with Citizens JMP. Please proceed with your question.
spk08: Great, thank you guys for the questions. Mike, you talked about the four tier one deals in the quarter. So stepping back, when you think about the pace of cloud transitions over the coming years, specifically at tier one, do you see a potential tipping point where the largest players start moving to the cloud at an increased pace or see this as more of a long haul that might take five, 10 plus years?
spk10: Well, I think it's going to be, it's hard to say.
spk15: I don't imagine that there's going to be any magic thing that causes it all to shift suddenly, just because the decision for an individual carrier has a lot of other factors that weigh into the decision and the timing. And in many circumstances, at least verbally, we have alignment about the overall intention to get to cloud. I probably haven't said it in a number of quarters, but very often the conversation is this is just a matter of when, not if. But we have to solve that equation for each and every one of those companies. You know, like I said a second ago, this is just adding up a whole bunch of factors that continue to add incentive and increase the likeliness of those companies making the decision in any particular quarter to begin that transition. And, you know, it's our readiness. It's the number of customers and the amount of experience that we have. It's the amount of value that we're able to put into the product and what they can do with it now relative to, you know, when they first evaluated it. That just keeps improving release over release over release. You know, I think all those things just add up. And then those things are compared to the internal objectives of that company and what they have on their docket in any particular quarter or year that and then they make that decision. And you gotta understand, like we're having that conversation with each and every one of our customers you know, maybe not continuously, but probably at least once a quarter, you know, maybe twice a year, just checking in and making sure that they're up to date on what we can do and we're up to date on what their objectives are. So, yeah, hopefully that gives you a perspective of why I say that this is going to be a slow and steady wins the race and there isn't going to be some magical thing that causes it all to tip in one particular quarter.
spk08: That's really helpful. Thank you. And then, Jeff, maybe quickly on capital allocation. So you still have about $138 million on your share repurchase program. Haven't bought back any stock in the prior two quarters. At Analyst Day, you talked about potentially keeping more than $400 million of strategic cash, at least $400 of run-of-business cash. You know, you have to convert, but your stock price is a close today. That will be settled in stocks. So How do you think about a scenario where you would utilize the remainder of your repurchase program if there is one?
spk04: Yeah, look, I think you laid it out nicely. We're in a mode where We think that there's an interesting time for us to potentially be a little bit more strategic around M&A. Obviously, a lot of thought goes into those types of processes, and we will be very disciplined, but that is becoming a bit more interesting for us on the convert side. We do have that maturity out there. You're right. We might settle in shares. We might settle that in cash, do a net share settlement. as well. And so those are a number of things that we're thinking about. We do still have some capacity on our share repurchase program, but I think right now we felt like it's a good time for us to reserve a little bit more dry powder on the balance sheet.
spk10: Understood. Thank you.
spk09: Thank you. And our next question comes from the line of Tyler Radke with Citibank. Please proceed with your question.
spk13: Hey, this is Peter on the line for Tyler Racky. Thanks for taking the question. I just had one question here on the macro, more on the topic of inflation and the impact that's had on things expenses. I was just interested on a customer scrutiny on making investment decisions. Have things gotten better over the past 90 days? And then if things haven't gotten better, what's really contributed to their recent success and migration wins? Thanks.
spk15: Yeah, thanks for the question. Yeah, so definitely we've seen this. It's on the minds and on the fiscal financial outcomes of almost every insurance company in the world. But it's been nice to see that everybody has, for the most part, taken a very long-term perspective about the approach to adjusting for inflation and claims expense and passing these changes through to premium adjustments. And for the most part, I would say that hasn't dramatically changed our perspective on the IT investments associated with core system migrations and core system modernizations. Like I said a few minutes ago, these are 10-year at least decisions for these companies. They're picking a partner and executing a project that's going to they expect to last them over a decade. And so they can make long-term decisions about the, you know, the point in time in which they're going to begin that transformation and partner with something like Guidewire to do that. So for sure, you know, the, you know, the like slowdown in inflation and stabilization of the claims expense creates more confidence in the year-to-year business model at an insurance company. And that definitely doesn't hurt their ability to green light a modernization project. But generally, we saw them push straight through, in a lot of cases, this adjustment and still green light projects to modernize with Guidewire. And that was really great to see. But it will be nice, I think, and everyone will be very happy to see a more stable inflationary environment over the next couple of years. And I suppose, knock on wood, that that actually comes true. But it certainly will help the industry and I think will therefore help Guidewire.
spk10: Great. Thanks for the question. Okay. Thank you very much. Okay. Thank you.
spk15: I just wanted to say I appreciate the time, everybody. Thanks for joining in the call. We had just a very, very strong start to the fiscal year. We feel great about the prospects for the rest of this fiscal and look forward to connecting with you all over the next few months.
spk14: So thank you very much.
spk09: And this concludes today's conference, and you may disconnect your line at this time. Thank you for your participation.
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