Mike Rosenbaum: We’re definitely feeling more confident about identifying all of the things that we need to do to ensure that these projects go smoothly. And what we’re excited about extending that expertise, that learning to the SI ecosystem so that we have a broader group of people, sort of more horsepower in that we can bring to bear in successfully executing these migrations. I wouldn’t necessarily say that it’s going to change the pipeline or the run rate of that business for us. We work hard to do that. It’s more so the signal that I think you should see is we’re confident enough in these programs to now start to extend it to the partners and build that specialization with these specific partners so that we can ensure — like I said, we’ve got enough horsepower to meet the demand as we go forward to the next few years.
Really, it’s been great to see the balance in the bookings for us over the past couple of quarters between new business and new deals and then also the migration of our customer base, which is progressing very well. So yes, glad that you picked up on that program, I guess, that we’ve launched this quarter.
Kevin Kumar: Thanks and congrats on the quarter.
Mike Rosenbaum: Hey, thanks a lot.
Operator: Thank you. Our next question is from Parker Lane with Stifel. Please proceed with your question.
Parker Lane: Yes. Hi guys, thanks for taking the questions. Mike and Jeff, in the context of 17 cloud deals, 13 go lives here, it looks like the outlook for 2024 fiscal is fairly conservative. Is that primarily a reflection of the pronounced acceleration of ramps in ’25? Or is there something else you’re baking in there? Thanks.
Mike Rosenbaum: Yes. I think it’s two things. One, like Jeff said, we have very good visibility into what internally we call the waterfall, right, like contracted ARR that will flow into the model based on agreements that we’ve already done. Jeff explained that the shape of the ramps that we’ve already completed already contracted give us pretty good visibility into what we should expect in ’24, what should we expect in ’25 and beyond. Then we add to that a projection based on the pipeline we see for fiscal ’24, and that gets us to the guide that we provided. But what’s really critical if you really want — I think you really want to understand how powerful the business is and how great we’re doing right now. If you got to look at the 17% growth in fully ramped ARR, and we looked at hey, are we still confident in the fiscal ’25 targets.
And based on the flow of the ARR coming in off the rents in fiscal ’25, we felt comfortable that we could stick with that. And we could guide to that effectively signal that acceleration in ARR growth year-to-year. So that’s what’s driving it. Like it’s may be a unique business that we have so much visibility into the out years of the committed contracts that we do. But it is the nature of the relationships that we sign up for. And it was a great, great year for us on bookings, and it was nice to be able to get these deals signed and to be able to add as much fully ramped ARR this year as we did.
Parker Lane: Got it. Very helpful. And Jeff, just one for you here, a quick one. Is the solid profit outlook for next year or more a reflection of the improvements you made on subscription and support gross margins, services or a combination of both?
Jeff Cooper: Yes. I mean, look, the subscription and support margins are ultimately going to drive the long-term cash generation of this business. And so the improvements we’ve made there have been significant, and that’s the key driver. But the services organization returning back to positive margin in Q4, I think we have a very solid plan to continue to drive that margin moving forward. I almost think this year, as we look at the services business, we’re pushing a lot of work to our partners. We think that that’s healthy. We want to do the very strategic high-value work. And as we manage that business, we’re going to manage more to gross profit dollar basis. And so if the revenue was a little bit below our expectations, but came in above our $30 million gross profit dollar that’s implied into our guide. That’s a good outcome for Guidewire. So but we feel confident in that the organization’s ability to contribute, which is great.
Parker Lane: Makes sense. Thanks again, guys. Congrats on the quarter. Thank you.
Jeff Cooper: Thank you.
Operator: Thank you. Our next question is from Matt VanVliet with BTIG. Please proceed with your question.
Matt VanVliet: Yes. Good afternoon. Thanks for taking the question. I guess following up a little bit on that last point. Looking at the overall margin profile. Obviously, with the fully ramped deals impacting more of FY ’25, maybe that is sort of the underlying answer that you get more cloud is as you get more and more of those deals ramped up. But are there any specific levels or key indicators that you look to point us to at really expanding the gross margin on the cloud business, realizing those efficiencies of skidding able to truly wind down some of the support costs on the legacy business? Or is it a little too early to tell given some complexity around the mix shift as it happens from more of your customers migrating?
Mike Rosenbaum: I’m going to take a quick pass at this and I’ll let Jeff add to it. Expanding margins in my view are going to happen by selling more cloud, continuing to sell more cloud deals, continuing to ramp those deals over time into the fully ran values as you say. And executing as we have been continuously to improve the efficiency of the cloud platform. So it’s both of those things. So we’re increasing top line against a fixed headcount expense that we manage very carefully, and we’re continuously optimizing the way that we’re using these services such that the platform becomes more efficient each period, each release. So the two of those things combined are what drive the improved margins. I don’t want people to think that we’re dependent on these, like, I think, what did you say, retiring the sort of first phase or like, let’s say, legacy versions of the cloud.
We’re going to work with those customers to migrate them to our Guidewire Cloud platform. But as I’ve said, I think in previous calls and other quarters, the — our targets are not dependent on those transitions. We can achieve — we’re going to do right by those customers, and we’re going to manage through that with them. but we’re going to be able to grow into these margins and execute through these engineering projects, the efficiencies we need to hit those targets. That’s the way I see it.
Jeff Cooper: Yes. And I’d just add. I mean, look, I think as we manage through this transition, the outset, we started kind of more some of those early cohorts learning what the cloud requirements for — we developed Guidewire Cloud Platform. We standardized our customers on that platform. And now we are scaling that. I think you’ve heard us talk for some period of time that we hired a bit in building out a cloud operations function to make sure that we had folks ready to make sure that the early cohorts were successful. And now as we’re scaling the platform, we can leverage that investment. So we don’t need to add incremental cloud operations head count because we’ve hired ahead of that demand curve and now we’re seeing the scale benefits that we had planned for.
In general, this is playing out kind of the way we thought it would. Now the other thing that is embedded in here is that ARR lose cash collection cycles. And so we have this dynamic that we talked about, where we’re seeing a really healthy step-up in FY ’25. When we look at the cohort of the deals sold in FY ’23. Subscription revenue normalizes that under ASC 606. And so we are seeing very healthy and durable subscription revenue growth. And the midpoint of our guide implies kind of continued 30-plus percent subscription revenue growth, which is also obviously contributing to the margin expansion story.
