Guidewire Software, Inc. (NYSE:GWRE) Q2 2024 Earnings Call Transcript

Guidewire Software, Inc. (NYSE:GWRE) Q2 2024 Earnings Call Transcript March 7, 2024

Guidewire Software, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings. Welcome to the Guidewire 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. [Operator Instructions] 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.

Alex Hughes: 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 8-K 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 to 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. A reconciliation of non-GAAP to GAAP measures is provided in our press release. Reconciliations and additional data are also posted in the supplement on our IR website.

And with that, I’ll now turn the call over to Mike.

Mike Rosenbaum: 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 puts us, excuse me, 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. 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. 10 of these were InsuranceSuite 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 InsuranceSuite and another Tier 1 European insurer who will migrate their ClaimCenter 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 road map and the strength of our ecosystem. With the foundation of Guidewire Cloud platform now pre-established, we are better positioned to layer on additional data and analytics offerings and 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 historically 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 8 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 $1 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 vast majority of implementation revenue to be delivered by our SI ecosystem to 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 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 technology 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 continue 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.

Jeffrey Cooper: Thanks, Mike. The financial highlights in the quarter included better-than-expected ARR, 65% subscription 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 was $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. Really in our cloud transition, we led most of the cloud programs and then often subcontracted much of the work to SIs and a large 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 in lead cloud programs and our progress to decrease reliance on subcontractors. As a result, we saw services revenue from subcontracted work declined in Q2 by approximately $12 million year-over-year. And the cost of contractors 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 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 services 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 outlook for ARR to between $852 million 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 million 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 FY ’25 target of 63% to 65%. It is clear that the product investments we have made and the hard work 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 million 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 million 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 million and $820 million. Our outlook for total revenue is between $228 million 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 million and $10 million. With that, we will open the call for questions.

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Q&A Session

Operator: Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Alexei Gogolev with JPMorgan. Please proceed with your question.

Alexei Gogolev: 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 for the year is very encouraging. But could you maybe talk about how you’re seeing second half of the year panning out.

Mike Rosenbaum: Yeah. Sure. Great question. Thank you very much. We feel very, very good about the business right now. Certainly, 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 of the data that backs up the perspective that we can raise those — that guidance. And I would just say, like 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 we feel very, very good about the second half.

Jeffrey Cooper: Yeah. And 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.

Alexei Gogolev: And Mike, just to clarify, do you still feel confident about the $1 billion 2025 outlook?

Mike Rosenbaum: Yeah. We do. We — as I said, often the deals that we work on, last longer in the year. So certainly, we have a picture of what next year might look like in a certain amount of pipeline that we measure and track very carefully. And as we’ve said many, many times, the backlog. 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 $1 billion in ARR, we feel confident in.

Alexei Gogolev: 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 with your partnerships? I remember at your conference, there was a big focus on Accenture. Are there any other names that you would highlight?

Mike Rosenbaum: 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 cloud offering and to be pared 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 and that’s a very positive signal for us. It’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 see — it’s a partner 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 Gartner. And so that doesn’t 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.

Alexei Gogolev: Amazing. Thank you very much, Mike.

Operator: Thank you. Our next question comes from the line of Kevin Kumar with Goldman Sachs. Please proceed with your question.

Kevin Kumar: All right. Thanks for taking the question. 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. And 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?

Mike Rosenbaum: Yeah. It’s a great question. We do track adoption. We look at how things are being either tried deployed into test environments or deployed into production. I think that there is a — 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 in those marketplace applications after they get into production. It’s somewhat — 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 2, you start to look at these marketplace applications but 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 manage efficiently 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 sort of 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.

Kevin Kumar: Yes. That’s great. And maybe one for Jeff on the services or I 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 some of the sustainable margin profile of that or maybe longer term, I think you’ve talked about mid-teens in the past, but is that still kind of how you’re thinking about it, perhaps with the smaller internal services team?

Jeffrey Cooper: I mean, absolutely. I think this is going to look like a reversion almost to where we were pre-cloud as we 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 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 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 cars 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 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.

Kevin Kumar: Great. Thank you.

Operator: Thank you. Our next question comes from the line of Ken Wong with Oppenheimer. Please proceed with your question.

Ken Wong: 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, would love any thoughts in terms of how to think about those moving pieces?

Jeffrey Cooper: Yeah. So absolutely. As premiums grow in the industry, we price on basis points of direct written premium, so that will create a bit of a tailwind for us. 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.

Mike Rosenbaum: Yeah, I appreciate the question. I would say absolutely, this is healthy. I think it may be sort of perceived as unfortunate, if you’re a consumer. But understanding the actual risks and the actual amount of risk that you are taking in whatever particular endeavor you are looking to ensure 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 you’re the premium on if the risk associated with your home or your car 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 HazardHub. 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 yes, 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.

Ken Wong: 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 the — their ability to take the baton from you, guys, 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 ramp your customers up a lot quicker?

Mike Rosenbaum: Well, I think for sure, there’s a part of this that 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 fine job with this. That’s great to see and partially driving this. I also think as we’ve talked about, this is kind of all part of the overall plan for the company and focusing our services organization on real strategic implementations, the new product introductions and the really expert type of work that 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.

Ken Wong: Got it. Thank you very much.

Mike Rosenbaum: Thank you.

Operator: Thank you. Our next question comes from the line of Rishi Jaluria with RBC Capital Markets. Please proceed with your question.

Richard Carlin: Hi. Thanks. This is Richard Carlin 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 of times throughout the call that you accelerated kind of this road map here with transitioning services. And I know you’ve mentioned it on past calls a lot. So just kind of one on down, 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 time for kind of when we should expect that? Thanks.

Jeffrey Cooper: 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. 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, 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.

Richard Carlin: And then just a 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 HazardHub. 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 or some of that portfolio? Thanks.

Mike Rosenbaum: 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. that — we called it out and the description of some of the deals that we were able to get across the finish line this quarter. It is just really the added benefit of thinking about the InsuranceSuite applications in conjunction with analytics and really putting 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 yes, we’re continuing to drive those attach rates. And maybe we expect them to generally 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. The hazard upside, like 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 the sort of flexibility and the sort of ease of access to a very significant amount of data and risk profiling that we provide with that solution. And so we’re excited not just to drive the attach to the deals that we’re doing for InsuranceSuite and the core applications, but also thinking beyond our typical 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.

Richard Carlin: Great. Thanks for taking my questions.

Mike Rosenbaum: Thank you.

Operator: Thank you. Our next question comes from the line of Dylan Becker with William Blair. Please proceed with your question.

Dylan Becker: Hey, guys. Don’t want to believe the point here on services because I think it’s a pretty clear positive. But maybe another way of asking it, too, 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 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.

Mike Rosenbaum: I think the answer is certainly both that the ARR position the market. 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, the more capacity, the more demand in that market, it creates an opportunity. It makes for a better, more efficient implementation market. Instead of 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 to occur. And so it’s partially our choice. But certainly, I think that our win rate and the momentum and success of the InsuranceSuite 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.

Dylan Becker: Okay. Got it. 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. Can you remind us what that has on capacity to invest, right? Like is this — 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. It doesn’t seem like the latter, but I wanted to stress test it. Thanks.

Mike Rosenbaum: 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 in that it enabled us to continue to see healthy demand through. It was a very difficult time for the industry from a profitability perspective. 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, 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, like 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 growth. So anyway, thanks for the question. I appreciate it.

Dylan Becker: Yeah. It makes perfect sense. Thanks, Mike.

Operator: Thank you. Our next question comes from the line of Michael Turrin with Wells Fargo. Please proceed with your question.

Michael Turrin: Hey, great. Thanks. 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 cloud progress for fiscal ’25 thus far and the mix of what you’re seeing there and how it all stacks up relative to where your expectations were heading into the year.

Mike Rosenbaum: We’re very happy with the progress so far this year. As Jeff mentioned, driving linearity into our business has been a focus of ours for the past few years, is not relying on massive Q4 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, it 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. And that’s 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 tell me like this has been a really, really good start to the year, and we’re in a good position halfway through it.

Michael Turrin: 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.

Jeffrey Cooper: I think we touched on this a bit at the Analyst Day. 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 target a bit.

Michael Turrin: All helpful. Thank you.

Operator: Thank you. Our question comes from the line of Matt VanVliet with BTIG. Please proceed with your question.

Matthew VanVliet: Hey, good afternoon. Thanks for taking the questions. Mike, you mentioned that you signed a number of new partners this quarter. 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.

Mike Rosenbaum: Yeah. It’s a good question. We think a lot about our progress in North America, our progress in Europe, but then in specific countries. And our progress in Asia Pacific. And so I think 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 products and go to market, but 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 like — 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, right?

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 or 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.

Matthew VanVliet: Okay. Very helpful. And then when you — I guess, when you look at maybe some of your customers that have adopted HazardHub and some of the other sort of more advanced data-driven products out there, from a wallet share perspective, 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 incentivizing the go-to-market team to get that more penetrated in customers as a huge point of differentiation.

Mike Rosenbaum: 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 our — for the insurance industry that we serve. We see a pretty significant opportunity for the industry to improve the efficiency, honestly, across the board, both in claims and also in underwriting and also pricing. And so 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 or take in the value creation that we facilitate as opposed to thinking of it as sort of like 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 HazardHub has the potential to be added to and drive better decisions and efficiencies all across the industry, and that’s how we think about it. In terms of the incentive structure, we have 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 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.

Jeffrey Cooper: And HazardHub, 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 that does come with a little more of an inside sales motion initially selling into our installed base and building to that muscle, which is great for us, right, because we intend to have more of those types of products over time.

Matthew VanVliet: Great. Thank you.

Operator: Thank you. Our next question comes from the line of Parker Lane with Stifel. Please proceed with your question.

Parker Lane: 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. Seems 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?

Mike Rosenbaum: Yeah. Thanks. I appreciate the question very much. So one, I want to call out specifically is we are — we have the opportunity to work with somebody. So we work with an industry partner who has a very, very bold vision about how they’re going to grow and take advantage of what see as a real disruption in the industry. And they needed they basically need a system that was going to allow them to scale very, very significantly and had our own, 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 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 — 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 the market in the United States.

And so that’s — that was a very, very exciting win for us. The other one that I would call out is one of the deals that, we won it and lost it and won it and lost it, it lasted over two years, and we went through all the processes that you could possibly go through to make sure that they — that we were the absolute right choice. This was a specialty lines in 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 in the specialty markets that we’re going to be able to support for this partner, or for this customer, excuse me.

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.

Parker Lane: Got it. Very helpful. And then, Mike, we’re pretty far along in the alphabet here of releases and you accelerated the time line 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 how, I guess, how would you compare that to the early days of the cloud launch?

Mike Rosenbaum: 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 I don’t know if you, guys, can understand this is 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 early 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 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 that’s one of the — that’s just — it’s a good achievement for our organization. And honestly, I think for the industry, 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 in favor for every single one of our customers is that 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 time frame that 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 anything specific. But certainly, velocity around these projects create success. The velocity creates success and the success creates the opportunity for us to add the next line of business and do a 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 mostly, I would say the big news is that we’re able to establish ourselves in the great cadence in a very positive way.

Parker Lane: Got it. Makes sense. Appreciate the feedback. Thanks.

Mike Rosenbaum: Yeah. Thanks for the questions.

Operator: Thank you. Our next question comes from the line of Joe Vruwink with Baird. Please proceed with your question.

Joseph Vruwink: Great. Thanks for taking the 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 the spring into summer time frame where customers have ended up deploying their IT budgets and a little bit of a different way than maybe you were thinking. I think one year was smaller initial contracts, another year, it 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, when you see where DWP is being located in the IT budget, you really participate in those areas?

Mike Rosenbaum: Yeah. I would — 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 the potential that we see in our pipeline and our plans. But we don’t see in the deals that we’re working on right now, anything like you’re describing right now. We’ve — 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 than that across the organization. More and more of the organization has successfully prosecuted cloud deals, and that’s certainly helpful.

And so yes, I definitely I 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 — that we set and that confidence allowed us to increase slightly right now.

Jeffrey Cooper: 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, what we’re seeing with momentum in the industry and the reference ability of customer cohorts or adopting cloud. All of that builds into a demand environment that is more — almost more driven by the micro dynamics that are specifically versus some of the larger macro dynamics that we see.

Joseph Vruwink: Okay. That’s great. And then I don’t have Dylan’s reservations, 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.

Mike Rosenbaum: 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, 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 on the implementation side, but also on the solutions side, that it’s not just Guidewire, that it’s 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, creative at our 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 end like this is net new, right? It 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 approached this aggressively right, that really nurtures the partner, ecosystem as the mechanism for expanding our reach most effectively. And I think that, that is playing out to our advantage right now and hope it will continue.

Joseph Vruwink: That’s great. Thank you very much.

Operator: Thank you. Our next question comes from the line of Alex Sklar with Raymond James. Please proceed with your question.

Alexander Sklar: 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 give a little bit more color though on the improvement you alluded to in migration conversations. I think you called out conversion rates being a little bit better exiting ’23 into ’24. How notable change is that for the last few quarters?

Mike Rosenbaum: Well, I think there’s a couple of 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 and 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, 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 the customer do the migration.

And I think all of those things come together and help us result in the increase in velocity that we see in the migrations there’s still — that — all that being said, is there’s a lot of things that factor into the decision for an insurance company and 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 based on a pretty significant amount of investment and focus that we put into this over the past couple of years, and we’re seeing that start to pay off now.

Alexander Sklar: Okay. Great. 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 like the shape of slope of bookings from a ramp perspective relative to last year? Thanks.

Jeffrey Cooper: 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 that we are seeing is, we’re seeing a little bit more DWP true-up bookings activity. Those don’t come with ramps, right? That’s kind of a onetime event. But when you look at the cloud deals, nothing to call out.

Alexander Sklar: Great. Thank you, both.

Jeffrey Cooper: Thank you.

Operator: Thank you. Our next question comes from the line of Aaron Kimson with Citizens JMP. Please proceed with your question.

Aaron Kimson: Great. Thank you, guys for the questions. Mike, you talked about the four Tier 1 deals in the quarter. So stepping back, when you think about the pace of cloud transitions over the coming years, specifically at Tier 1, do you see a potential tipping point where the largest players start to move to the cloud at an increased pace or see this as more of alongside that might take 10 plus years?

Mike Rosenbaum: Well, I think it’s going to be — it’s hard to say. 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 on 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. Like I said a second ago, this is just adding up a whole bunch of factors, continue to add — that continue to add incentive and increase the likeliness of those companies making the decision in any particular quarter to begin that transition.

And 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 when they first evaluated it, that just improving release over release over release. 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, and then they make that decision. And you got to understand like we’re having that conversation with each and every one of our customers. Maybe not continuously, but probably at least once a quarter, maybe twice a year, just checking in and making sure that we’re — that they’re up-to-date on what we can do, and we’re up to date on what their objectives are.

So yes, hopefully, that gives you a perspective of why I say that this is going to sort of be a slow steady wins the race, and there isn’t going to be some magical thing that causes it all to tip in a particular quarter.

Aaron Kimson: 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 million if run the business cash, you have to convert big our stock price at the close today, that will be settled in stock. So how do you think about a scenario where you could utilize the remainder of your recourse program, if there is one?

Jeffrey Cooper: Yeah. Look, I think you laid it out nicely. We’re in a mode where, we think that there is an interesting time for us to potentially be a little bit more strategic around M&A. It’s 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 to 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.

Aaron Kimson: Understood. Thank you.

Operator: Thank you. And our next question comes from the line of Tyler Radke with Citibank. Please proceed with your question.

Unidentified Participant: Hey. This is Peter on the line for Tyler Radke. 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 gains expenses. I was just interested on customer scrutiny on making investment decisions have gotten better over the past 90 days. And then if things haven’t gone better, what’s really contributed to the recent success in migration wins? Thanks.

Mike Rosenbaum: 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 months 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, 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 greenlight modernization project. But generally, we were able — we saw — we saw them push straight through in a lot of cases, this adjustment and still greenlight projects to modernize with Guidewire, and that was really great to see. But it will be nice, I think that 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.

Unidentified Participant: Great. Thanks for the question.

Mike Rosenbaum: Hey. Thank you very much. Okay.

Operator: Thank you.

Mike Rosenbaum: I just want 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. So thank you very much.

Operator: And this concludes today’s conference, and you may disconnect your lines at this time. Thank you for your participation.