Joseph Vruwink : Hi, great. Going back to the subscription gross margin topic. Given the updated guidance for the year and again, the backlog back of the envelope as just on the subscription line. I think it implies an incremental margin pretty close to 60%, and last year was also pretty close to 60%. So obviously, you just hold proven over time, but I also think the midterm framework implies reaching a next tire level. What are some of the elements that are going to inflect that? Or is it not even necessarily discrete elements, but maybe just more a function of how your business evolves over time given some of the installed base and kind of vintage dynamics you highlighted at the Investor Day.
Jeff Cooper : Yeah. I’m not sure I followed completely your analysis. I’m not sure that I’ve looked at it the exact same way. But in terms of the key levers that we’re focused on, you’ve heard us talk repeatedly about building our cloud operations team in advance of the demand to ensure that every 1 of these early cloud programs are ultimately successful. This is critical to our long-term strategy. And as we think about the build-out of that particular function, we’ve indicated at Analyst Day that largely, we’ve built out the team to support $1 billion of ARR and now we need to grow into that profile without necessarily expanding significantly the existing cloud operations team. But we saw in this quarter towards the end of this quarter, we were able to repurpose or reallocate heads and employees that were working on customer specific things and so impacting cost of goods sold.
And now they are focused where they should have where they were originally focused on building more platform capabilities that will address all of our customers. There’s other things like that, that we can do, specifically as we continue to march through migrating the customers that went live on Guidewire Cloud platform to GWCP and recognizing the efficiency uplift associated with that. So those are the things we’re focused on. And we think we have all the levers in place to execute to the margin targets that we set forth at the Analyst Day.
Joseph Vruwink : Okay. Great, thank you.
Operator: And our next question comes from the line of Michael Funk with Bank of America. Please proceed with your question.
Michael Funk: Hey, guys. Thank you for the questions tonight. So I appreciate the comments about the resiliency of your customer base in terms of spending in earlier comments about the efficiencies that your customers see when they adopt your platform. Maybe just stepping back and trying to quantify the value proposition that you sell to your clients. And how you quantify that for them in terms of payback? And maybe where there are differences in that conversation when talking about new deployments versus some of the customers are electing to remain on-prem because they have substantial investments in legacy bespoke systems. That would be helpful if you could walk us through that math how you talk to customers about the payback and the value proposition.
Mike Rosenbaum : Sure thing. I don’t know whether or not I’m going to give you the math behind it. I’ll give you this objective explanation. Maybe we could connect later to talk about the math of this on a micro sense. When we do a new deal, as you heard me describe a deal where we’re replacing a mainframe system, the value proposition associated with that has a lot to do with the risks that the company faces in operating a system that, in some cases, is like greater than 30 years old and has a very small number of people who are able to configure it and support it. And so when you talk to these companies, there’s not really a math behind that as much as it is just an overall risk calculation that they think about in terms of the ongoing operations of their company.
Certainly, there’s a lot of value that an insurance company can gain from just simply being able to create engaging digital experiences on top of core systems for doing things like quoting policies, with agents, with consumers, it is personal lines or commercial lines, it’s like being able to connect with buyers with convenient, digital processing flows is basically necessary in order to be able to compete in the modern insurance market. And we see this all the time. And so you could basically do the math of saying, we’re going to be able to implement Guidewire create a digital experience and grow this much, but you can also do the negative math, say that if we’re — we don’t get up the mainframe system, we don’t do a digital experience, we don’t create an API to connect into the broker system.
We’re not going to get any more business at all. And so you just have to do something in order to connect in a modern way to these new channels. On the claims side, being able to create a efficient claims operation to be able to manage claims efficiently, just as a direct benefit to operating expenses as an insurance company. Trade is probably one of the best examples in our customer base and maybe the industry of the kinds of impacts that you can gain from really effectively automating claims experiences. These are real structural costs for insurance companies, and you cannot do that on these legacy systems. And so that’s sort of the category of net new business. That’s great. Now you talk about the Guidewire installed base. Some of the Guidewire installed base is challenging for them to run Guidewire, right?
Everybody in the world really is looking at data center expense, IT operations expense. It’s just complicated to manage and run these systems to keep them updated. All this kind of expense and effort, it doesn’t contribute to the strategic thrust of an organization. And so by moving something to cloud, by transferring the burden of IT, of the servers, of the database, of the updates, if you transfer all that to Guidewire, there’s an economy of scale that we can deliver to our customer base and managing all of that for them and there is a value proposition there. And then there are a small number of Guidewire customers that are doing this super, super efficiently. And so for us, with that cohort of customer, we’re really talking about, what’s the incremental benefits that we’re able to add to the application and the platform beyond.
