Richard Hart – Chief Financial Officer Marcus Ryu – Chief Executive Officer.

Ken Wong - Citi Nandan Amladi - Deutsche Bank Justin Furby - William Blair & Company Brendan Barnicle - Pacific Crest Securities Brent Thill - UBS Alex Zukin - Piper Jaffray Tom Roderick - Stifel Sterling Auty - JPMorgan.

Good day and welcome to Guidewire's Third Quarter Fiscal 2016 Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Richard Hart, Chief Financial Officer. Please go ahead..

Good afternoon and welcome to Guidewire Software's earnings call for the third quarter of fiscal year 2016 which ended on April 30, 2016. My name is Richard Hart, I am the Chief Financial Officer of Guidewire, and with me on the call today is Marcus Ryu, Guidewire's Chief Executive 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 at ir.guidewire.com.

As a reminder, today's call is being recorded and a replay will be available following the completion of the call. During the call, we will make forward-looking statements pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 regarding trends, strategies, and the anticipated performance of the business.

These forward-looking statements are based on management's current views and expectations as of today, and should not be relied upon as representing our views as of any subsequent date. We disclaim any obligation to update any forward-looking statements or outlook. Actual results may differ materially.

Please refer to the Risk Factor section in our most recent Form 10-K and 10-Qs filed with the SEC. We will also refer to certain non-GAAP financial measures to provide additional information to investors. A reconciliation of non-GAAP to GAAP measures is provided in our press release.

Reconciliations and additional data are also posted in a supplement on our IR website. During the call, we may offer incremental metrics to provide greater insight into the dynamics of our business. These details may be one time in nature, and we may or may not provide updates in the future.

With that, let me turn the call over to Marcus for his prepared remarks, and then I will provide details on our third quarter financial results, our outlook for Q4 and for the full 2016 fiscal year..

Thanks, Richard. Revenue and profitability were above the high end of our outlook for the third quarter, with total revenue of $98.9 million. We generated license revenue of $45.8 million, of which term license revenue was $40.6 million, an increase of 32% from a year ago, as well as $5.2 million in perpetual license revenue.

Both of which contributed to our overall revenue growth in the quarter, and reinforced our confidence in the growth objectives we set forth for the year. Term license and maintenance revenue for the trailing 12 months totaled $251 million, an increase of 20% from a year ago.

At the outset of the fiscal year, we asserted our expectation that this metric would re-attain our target of the 20% growth level by Q4. The early achievement of this goal reflects a modest acceleration of deal activity into this quarter, which is not unwelcome, but which may create a difficult compare in Q3 of next year.

Our new deal activity in the third quarter was quite varied. We enjoyed customer wins in all tiers, with customers ranging in size from less than $100 million to multiple billions of DWP. We also benefited from continued strength in new product sales. Starting with our core applications, three new customers selected the entirety of InsuranceSuite.

Insurance and Care, New South Wales or ICare, an Australian insurer with over $3 billion in premiums levied selected InsuranceSuite, client data management, reinsurance management and our data - digital portals and data products.

InsuranceSuite was also selected by Horace Mann Insurance, a $600 million DWP insurer serving the education community in the US. Horace Mann has also licensed our Client Data Management, rating management and data solutions.

And Hawaii Employees Mutual, a $60 million insurer, selected InsuranceSuite for their workers’ compensation line of business, as well as Client Data Management, rating management and our data and digital offerings.

Also during the quarter, State Accident Insurance Fund of Oregon selected PolicyCenter, BillingCenter, Client Data Management, Rating Management and Business Intelligence. This nearly $500 million insurer is the nation's first public corporation to specialize in workers’ compensation.

As we suggested at our last analyst day, the expansion of our licenses is as dependent on landing new clients as it is for the successful sale of additional products into our customer base. This dynamic was on display in the third quarter as W.R.

Berkley Corporation, a ClaimCenter customer since early 2012, expanded their license to include seven additional operating units for a total of 12 out of over 50 operating units. These 12 units now represent over $1 billion in DWP.

We were also pleased that Nationwide, a household name we've been proud to serve the last three years, selected our data product during the quarter.

With this purchase on the heel of their license of Digital Portals last quarter, Nationwide will have licensed all three of our product families, and is now the tier 1 customer who has adopted the Guidewire insurance platform most fully.

These wins in data and digital engagement are representative of the market progress we continue to make with both of these newer product families. We mentioned last quarter that demand for new products was quite strong in the first half, and represented approximately a quarter of new bookings. That momentum continued in the third quarter.

In addition to the new customers I just mentioned, digital portals were also selected by AXA Asia, Insurance Corporation of British Columbia, and the Motorist Insurance Group while data and analytics products were selected by the Alberta Motor Association and Caixa Seguros.

One last win to mention was a ClaimCenter and business intelligence win at a relatively new entrant to the insurance industry, Metromile, which regards itself as much a technology company as an insurance carrier.

By targeting low mileage drivers with a pay-per-mile model and a digitally native strategy based on a unique app with many value added services, Metromile is one of the new pacesetters in the P&C industry today. Finally, I would like to congratulate a few customers that went into live production during the quarter.

American National and Germania Farm Mutual Insurance had core system go lives, while Hartford Steam Boiler is now fully live on InsuranceSuite and data management. Also during the third quarter, six customers had major follow-on go lives. Moving on to other noteworthy events during the quarter, we completed the acquisition of EagleEye Analytics.

It's early days, but we've been gratified to hear customers and industry analysts agree that EagleEye's predictive analytic solutions naturally complement and strengthen InsuranceSuite as a core operating platform.

EagleEye's products are P&C focused, cloud native and machine learning based and will be known henceforth as Guidewire Predictive Analytics.

By integrating them to InsuranceSuite, we will be able to see those analytic models that we now provide with high quality structured data, and operationalize those model's insights at the most important decision points in the underwriting and claims process.

The value and added differentiation created by these offerings should be constructive to our revenue growth, and we anticipate one or two sales prior to year end. But I must note that revenue contribution from these cloud-based offerings will be immaterial this fiscal year and modest the next.

A significant portion of the value of EagleEye resided in the talented group of engineers, data scientists and market experts they had assembled whom we now welcome to our team. Along with their intellectual property and base of 30 analytics customers, 8 of which were existing Guidewire customers.

We also announced today that Accenture has joined our PartnerConnect program. Our new partnership will be focused on Continental Europe and Latin America, and will allow us to expand the availability of Guidewire trained consultants in these territories where we're building our partner community.

And where Accenture has a decades long presence and insurance practice we have long respected. Our customers value our business transformation and implementation expertise, which our service team will continue to provide alongside our current global and regional SI partners in addition to Accenture.

Indeed a number of our mutual customers have advocated this collaboration for some time, and as a trusted advisor to a significant number of insurers Accenture may expedite introductions to prospective customers. We will begin training Accenture consultants this quarter, and hope to make significant progress over the next fiscal year.

Turning last to product development, I note that we are converging on the general availability of the next major release of InsuranceSuite version 9, which will deliver not only significant new functionality, but also architectural advances to optimize it for cloud deployment, allowing Customers and Partners to deploy the suite in public cloud environments such as AWS and Microsoft Azure.

Coordinated with the release of InsuranceSuite 9, our data and digital teams will be releasing major versions of our data management, BI and digital engagement products.

This modular, but coordinated major release of our core data and digital offerings as a unified whole represents the maturation of Guidewire as a platform provider to the P&C industry, and I'm very grateful to the talented software professionals who have labored to achieve this milestone.

Progress notwithstanding, and while at least maintaining our level of profitability, we intend to continue our program with investment in product development for multiple reasons. One, to strengthen the international competitiveness of our products, especially in Europe and for tier 3 and 4 insurers.

Two, to enhance value and reduce TCO for all our customers, and three, to widen our technology lead versus our competitors, many of which have been recently recapitalized and reenergized by heightened levels of investment activity in our sector.

In summary, we believe our momentum continues to reflect the transformation of the $2 trillion industry we are devoted to serving. As for so many other industries, it’s the time of accelerating change for insurers, and consequently a time of both intense expectation and opportunity for us as a specialist technology company.

We believe our ongoing efforts position us to continue earning the trust of the industry that we serve. I will now turn the call over to Richard to provide details on our third quarter financial results, and our outlook for Q4 and the full fiscal year..

Thank you, Marcus. As Marcus noted, our third-quarter revenue and earnings exceeded our outlook. Total revenue in the quarter was $98.9 million, with license revenue of $45.8 million.

Within license revenue, term license revenue was $40.6 million, increasing 32% from a year ago, and perpetual license was $5.2 million, compared to $2.5 million a year ago.

Last quarter, we indicated that perpetual license revenue would increase in the second half given interest we were seeing develop from prospects in Latin America, where volatile foreign currency exchange rates make term license transactions difficult to execute and from historical perpetual license customers.

Notably, this level of perpetual license revenue can be driven by just a few customers. The term license model remains the primary way we license our software, and in fiscal 2016 we expect perpetual license revenue to be roughly in line with fiscal 2015 on a dollar basis.

Maintenance revenue was $14.7 million for the third quarter, up 20% from a year ago and slightly above our guidance range. Services revenue was $38.4 million, also slightly above our guidance range and represented a decrease of 4% from a year ago, reflecting our goal of increasing SI partner participation and customer implementations.

The effective pursuit of this goal has reduced our anticipated percentage of revenues attributable to services from approximately 45% in fiscal 2014 to approximately 35% for fiscal 2016. Geographically, the US represented 57% of revenue for the third quarter, with 43% coming from outside the US.

Turning to our profitability metrics, we will discuss these on a non-GAAP basis and we have provided the comparable GAAP metrics and the reconciliation of GAAP to non-GAAP measures in our earnings press release issued today with the primary difference being stock-based compensation expenses.

Non-GAAP gross profit for the third quarter was $65.3 million, an increase of 26% on a year over year basis, and represented a non-GAAP gross margin of 66%, an increase from 60.9% in the year-ago quarter, primarily due to the shift to higher margin license and maintenance revenues.

Breaking that down, in the third quarter of fiscal 2016 non-GAAP gross margin for license was 96.7%, maintenance was 82.0%, and services was 23.6%. We anticipate that services margins will be subject to the same seasonal patterns that impacted gross margin in fiscal 2015 and decline sequentially in the fourth quarter.

Keep in mind that on a quarter-to-quarter basis, we will continue to see variations in services gross margin levels due to shifts in capacity utilization and the timing of revenue and expenses over the course of the year. Total non-GAAP operating expenses were $54.3 million in the third quarter, an increase of 18% compared to a year ago.

This resulted in non-GAAP operating income of $11 million, above our guidance of $4.5 million to $8.5 million, and represented a non-GAAP operating margin of 11.1%.

In the third quarter, operating income benefited primarily from higher than projected license revenues, but was offset by approximately $2 million in transaction costs and operating expenses incurred in connection with our acquisition of EagleEye.

With non-GAAP operating income above expectations, non-GAAP net income of $10.7 million was also above the top end of our guidance range.

Turning now to our balance sheet, we ended the third quarter with $680.8 million in cash, cash equivalents and investments, reflecting $23.6 million in operating cash flow for the quarter, and the use of approximately $40 million in cash in connection with the acquisition of EagleEye.

Total deferred revenue was $68.3 million at the end of the third quarter, increasing from $62.0 million at the end of the second quarter.

As a reminder, our deferred revenue balance can vary widely from quarter to quarter and is not a meaningful indicator of business activity, since we typically build term license contracts annually and recognize the full annual payment as revenue upon the due date. Further long-term deferred revenue does not reflect our multi-year contracts.

We believe that the combination of this contracted business and our best-in-class renewal rates provides us with a high level of visibility towards our revenue for the next 12 months.

Now turning to our outlook, our continued overall business momentum, particularly as it relates to license revenue, gives us the confidence to increase our portfolio revenue guidance.

With respect to profitability, we expect to continue our aggressive hiring in the fourth quarter, but are nevertheless increasing our full-year profitability guidance in light of our third-quarter performance.

For fiscal year 2016, we now anticipate total revenue to be in the range of $416.5 million to $420.5 million, representing an increase of $6 million at the midpoint from prior guidance. Within revenue, we now anticipate that license revenue will be in the range of $211 million to $215 million, an increase of $4 million at the midpoint.

As indicated earlier, we anticipate perpetual license revenue for fiscal year 2016 to be roughly in line with fiscal 2015 on a dollar basis. As Marcus mentioned, EagleEye will not contribute materially to our fiscal year 2016 results, and will contribute indeed less than $1 million to that figure.

We expect maintenance revenue to be in the range of $58 million to $59 million, representing an increase of $1 million at the midpoint. We now expect services revenue to be in the range of $146 million to $148 million, an increase of $1 million at the midpoint.

At these levels, services revenue will decline approximately 3% from fiscal 2015, and as we noted, represent approximately 35% of total revenue, a 5 percentage point decline from fiscal 2015.

We are increasing non-GAAP operating income guidance to a range of $75.5 million to $79.5 million, resulting in a full-year non-GAAP operating margin of 19% at the midpoint. Therefore, we now expect non-GAAP net income to be in the range of $53.4 million to $56.1 million. We have not guided to free cash flow in the past.

We did, however, mention in response to a question on our last call an expectation of free cash flow of $65 million to $75 million for the year.

We thought it worthwhile to update that perspective, and currently anticipate free cash flow for fiscal year '16, meaning cash flow from operations less purchases of property and equipment, of $70 million to $80 million.

Looking at the fourth quarter of fiscal year 2016, we anticipate total revenue to be in the range of $133.5 million to $137.5 million. Within revenue, we expect license revenue to be in the range of $79.5 million to $83.5 million, maintenance of $15.5 million to $16.5 million and services revenue of $37 million to $39 million.

For the fourth quarter, we anticipate non-GAAP operating income of $33.3 million to $37.3 million, and non-GAAP net income of between $22.5 million and $25.2 million. We anticipate a GAAP tax rate of approximately 43%, and an effective non-GAAP tax rate of 33% for the fourth quarter and the full year.

Looking beyond fiscal 2016, we anticipate the P&C insurers of all sizes will continue to embrace the need for transformation which InsuranceSuite and our broader platform can provide. And as such, we currently believe that we can continue to deliver term license revenue growth of 20% or greater in the next fiscal year.

We also anticipate that perpetual license revenue next year will be consistent with that this year on a dollar basis. We anticipate that for Guidewire predictive analytics, with its ratable recognition model, will continue to do contribute only a modest amount to our top line.

With respect to services revenue, our long-term goal remains to reduce services revenue to approximately 25% to 30% of total revenue. Nevertheless, we anticipate a much more modest pace in the shift of the mix of our revenues going forward.

As we have stated in the past, new product implementations rely more heavily on Guidewire delivered services, as our SI Partners require time to develop expertise with such products. In addition, we've enjoyed an increase in sales in certain territories, such as Japan, where customers rely more on vendor led implementation teams.

Sales in these regions and the strong adoption of our portal and data products will serve as primary drivers for services revenue growth in fiscal 2017. We will of course provide a more detailed assessment of our fiscal 2017 expectations on our next call. In summary, our strong third-quarter results reflect continued business momentum in our products.

We're excited about the interest in our new products, and the opportunities for our new Guidewire predictive analytics efforts, which we gain through the acquisition of EagleEye.

Ongoing momentum will reinforces our confidence that we can extend our leadership position in the market as we continue to help P&C insurers adapt to a transforming industry.

Operator, can you now open the call for questions?.

Thank you. [Operator Instructions] And we go first to Ken Wong with Citi..

Hey, Marcus, I guess first I wanted to touch on the Accenture relationship. Can you maybe give us a sense for how you think this potentially alters your trajectory with those guys? Right now, it's you mentioned Latin America and Europe.

Is there the potential for them to potentially implement Guidewire in the States?.

You know, we took care in the announcement as well as in our prepared remarks to specify that the scope of the partnership right now is for Latin America and for Europe. Obviously, we're both commercially driven organizations, and so where market demand takes us we will likely follow.

But that's the emphasis of the partnership right now, where we already have some active collaboration underway. In the past, we've talked about how there has been some demand from our end market for us to collaborate more closely. And that sentiment is not only in those two geographies. But so far, that is the official scope of the relationship..

And I guess when we think about that relationship, any sense for what the ramp might be for a service organization of that size? I imagine they're pretty well versed with the P&C base, but in terms of just their familiarity with your solutions?.

Well, they have a ramp to get through in enablement. As you note, they have a pretty mature insurance services division already, right now that has some long-standing relationships with insurers of all sizes all around the world. So they know the domain well, and they are a very capable organization.

They have to learn our technology, but we have become increasingly well practiced at enabling third parties to learn how to implement our software. And of course, we're always endeavoring to make it easier to do. So I think they should be able to ascend that ramp fairly quickly.

But to be successful in the market is not only a matter of skills and knowledge, it's also market credentials. And that comes when you have customer proof points and testimony that you can refer to, and that by its nature takes a little bit longer.

But there's every reason to expect that they will ascend that enablement ramp pretty quickly and have positive customer stories to tell soon enough..

Got it. And, Richard, maybe a quick one.

In terms of the license revenue uptick on the full-year guide, how much of that is just better uptick on the term side versus maybe guys got a perpetual deal that fell into this quarter or is coming next quarter that you guys were not expecting in the initial fiscal '16 pipe?.

So, we mentioned on our last call that the second half would have some perpetual license revenue that we were anticipating. You have to keep in mind that it only takes one or two transactions to actually get to a perpetual license amount that is - that was in our results for this quarter.

So we always maintain a focus on increasing term license by more than 20%. So our uptick in our outlook for the full year has elements of both..

Got you.

Any way, is it 50-50 or any sense of how to quantify that?.

Most of our business is always term. So a perpetual deal will come in every once in a while. But I think what we mentioned on this call is that you can imagine the perpetual license revenue line to be roughly in line with last year.

In fact, if you look over the last three years, it hovered somewhere between $10 million to $12 million and it will be difficult for us to get it below that on an absolute basis. Although on a percentage basis, I think we still have some room to go..

Got it. All right. Thanks, guys..

And we go now to Nandan Amladi with Deutsche Bank..

Thank you for taking my question. So this new joint venture for Duck Creek that was announced a few weeks ago, that time with your new partnership with Accenture.

Can you help frame how this changes the competitive environment, particularly on the product side for you?.

Right. So even though we were, or course, in dialogue with Accenture about the services partnership that we just announced we learned about the partial divestiture of Duck Creek to a private equity firm at the same time that everyone else did in the form of the press release. Obviously, we were not privy to that discussion.

It was not entirely surprising to us, however, that there are pretty clear motivations for the Accenture services organization to create a little bit more breathing room or arm's-length distance from Duck Creek as a software company.

And I think both announcements are reflective of that, giving their services organization more latitude to follow market demand where it may come. How Duck Creek will fare after this announcement is we will have to wait and see along with everyone else. I should note that they remain a very formidable competitor to us.

I would still cite them as our primary competitor, certainly here in North America, and we don't see that changing in the near term. How they will fare under a different ownership structure and management regime, we're going to have to wait and see..

Thank you. And a quick follow up on the products roadmap that you'd discussed at your analyst session about driving down TCO, and making your product more suitable for smaller carriers. In the script you mentioned a Hawaiian carrier with $60 million in DWP.

When do these new deployment options, I guess become available, so that smaller carriers can actually adopt your product much more readily than they have been able to do in the past?.

Yes, so even today, smaller insurers have options to work in a managed service mode with a number of our systems integrator partners that have developed a comprehensive pay-as-you-go model based on our platform. And we have a couple of examples of that.

But we also expect, however, with InsuranceSuite 9 that we will see more customers of all sizes choosing to deploy on public infrastructure because 9 is really optimized to support that.

And then over time, we intend to deliver more and more cloud-based services that enhance the value of the platform and could be added on as modules at much lower cost and effort.

So it's a gradual journey, but even today, insurers of all sizes have the option to deploy in that model and we expect that trend to continue and indeed accelerate over time..

Thank you. That's helpful..

We'll go now to Justin Furby with William Blair & Company..

Great. Thank for taking my questions and congrats on another fabulous quarter.

Marcus, can you give an update on TAM as you add these other product categories? I guess, if you go to an insurer and sell wall-to-wall core systems and the ancillary products, what does that or what could that look like in terms of basis points take rate? And if you take the $2 trillion number, what penetration level do you think is reasonable over the longer term? And I've got one follow up for Richard, thanks..

Sure, I'll take the second part of your question first. With respect to the overall market, we've always had a pretty bold aspiration to serve the entirety of that market. Now, no technology ever wins 100% of its target market, but that's the scope that we're going for.

And as the joke in software goes, they are all going to be our customers whether or not they realize it yet. That's at least, that's our aspiration. And we've built at a level of generality in our products to support any P&C insurer of any size and any geography, and that strategic clarity has carried us a long way so far.

What terminal value of market share we end up with, we don't know yet.

We think that, that - if we are successful in creating a real utility for the industry over time that we can achieve and then earn a very large, a large market level of market adoption, perhaps higher than other technology companies can because of the very vertical nature of what we do. But I would just be speculating.

I can tell you, we aspire to a very big number there. On the first part of your question about newer products and the total opportunity within a customer. We don't know yet as much for the newest product, predictive analytics. So you can think of its pricing as very comparable to our other data management and BI products.

It's very similar so far, but not yet really market validated. I think we will have more to report on that score over the next few quarters. In totality, the ancillary products, even in their aggregate, don't quite equal the value of InsuranceSuite itself right now, but they are now contributing a meaningful portion of our bookings.

And you could, I think roughly speaking, consider the products outside of InsuranceSuite to grow our TAM relative to InsuranceSuite by itself by maybe 50% or so, that's the way we think of it. That could grow over time as those products continue to mature and we have, and increase their scope..

So if 30 basis points was the high end of the sweet pricing back in the day is 45 to 50 basis points unreasonable at this point in terms of the other products when you add those in?.

It could be something in that zone, yes. But we don't have enough examples of customers that have licensed everything on the truck, though we have some customers that have adopted a lot of it. But in principle, that should be in the vicinity of we should be able to get on average..

Got it. That's helpful and then….

At the high end..

Right, okay.

And then, Richard, in terms of the 28% to 30% margin and the cadence of getting there over the next five years, do you think that looks fairly linear in nature exiting this year or what should it look like? And I guess just given your comments on services revenue that you made at the end of your prepared remarks, I am wondering if it is still your view that over the next two to three years that the services revenue will stabilize and grow more in line with licensed? Thanks..

Well, I think we can only predict one year out in terms of services revenue with any kind of comfort, and we are working right now on trying to really understand from a bottoms up basis where services revenues will go next year. But our initial inclination is to think of that growth as being somewhere between in the high single to low double digits.

And if that plays out, then you will continue to see that shift in the mix between license and services continue to drive down to that 25% to 30% area where we would like to see it. It's just going to do it at a slower rate. But we actually anticipate that services for some period of time will still not grow as fast as license revenue.

Does that answer your question?.

Yes, it does. Thanks, Richard. I appreciate it..

And then on the first question that you asked, whether we get to 28% to 30% on a linear basis. My sense is, you will see it be more sinusoidal than a very linear ramp.

And I think what you'll find is that this year because we outperformed on margin so much from our initial expectations, it should really reveal to people that the investments that we were hoping to make early in the year ended up coming late in the year, as we tried to be very disciplined about our hiring both in the US and as we tried to really scale our international organization.

And so those investments will continue. So I think as you think about margins for next year, for example, we hope that we are able to continue to improve, but any improvement will be incremental to this year which is really a significant job from our initial plan..

Got it. That's helpful. Thank you..

And we go now to Brendan Barnicle with Pacific Crest Securities..

Thanks so much. Following up a bit on that, Richard, you had great upside to margins, well above where expectations were.

Were you guys able to spend as much and hire as many people during the quarter as you had expected?.

This quarter, we did quite well. In fact, if you look at our headcount growth this quarter, which is published in our quarterly reports, you will find that the headcount grew more than twice as much from the previous quarter. And I think we're going to keep that pace alive for Q4..

Great..

So that by the end of the year, I think what we hope to be able to do is hire somewhere between 160 to 180 people over the full year. We might be able to do a little bit better than that..

Terrific.

And I know you've talked about some on the conference circuit, but can you just remind us of how you're thinking about these proposed new fasi [ph] rule changes and that come into effect potentially in '18?.

Yes, so we are right now looking at all of our contracts that currently exist, to make sure that we don't have to remediate them. If we do need to remediate them, what that means is that we need to terminate the initial period by the end of our fiscal year 2018 and then have them transition into an annual renewal going forward.

Any contracts that we sign now, for example, are being signed with a three-year initial term and then automatic annual renewals following that.

And that's what we have to do to make sure that we don't get caught up in any revenue recognition issues that will deprive us of the ability to recognize revenue on some of our long-term contracts following that transition..

And when do you think you will have done that through that full analysis?.

I think we are well ahead of plan. I think we have empowered a group of people to take a look at all of our contracts. We have already uploaded them in our CRM databases. We are already reaching out to customers that require remediation.

And for our contracts that are being entered into this year, we've already started and sales has already scaled into a practice of limiting them to three-year terms..

Got it. And, Marcus, as you look forward to InsuranceSuite 9 coming out and all of the product enhancements that you are doing, where does it put you in terms of looking at some of the newer adjacent markets? In the past, you've talked about potentially life insurance or some other areas, more of a CRM type product.

How do you think about those as this is about to be available?.

Well, we are as interested as ever, but really no change to the same message we have had on this topic for some time now, which is we are still in analysis mode. It is not in the planning, or let alone announced in the horizon for us.

We do know adjacent industries, particularly the life and annuities space, just because so many of our customers and potential customers internationally have some aspect of their business have a business unit active in those markets. But even those organizations think of them is quite distinct, so almost like a separate industry in itself.

And there's a lot more work and forethought that will have to go into a decision to announce an entrance into those other spaces..

Great. Thanks for the update guys..

Thanks, Brendan..

We'll go now to Brent Thill with UBS..

Marcus, last quarter, you mentioned that data and digital products drove 20% to 25% of the new bookings.

Did you have a similar figure this quarter, or did it fall in the general range again in Q3?.

Yes. We don’t – we're going to be a little circumspect about always breaking this down quarter to quarter. But to answer your question, for this quarter, Brent, yes, it was roughly the same pattern that we've seen for the first half of the year..

Okay.

And now that you're three quarters of the way through the fiscal year, if you compare and contrast last year's first three quarters, is there a major trend that is sticking out to you, Marcus, that you are seeing that you think is important to highlight?.

Well, a few trends. One, the emphasis in these transformation discussions on data and digital and working together in a unified way with the core has been striking. It's been a great validation of our core data digital strategy and the elements of our platform.

But not only that they are all important, but that they have to work together as a unified totality. That's been quite striking. And you can see that some of the new customer wins that we've announced they are not just one application, trying that out before moving onward.

But really a much more full throated adoption of the entire platform for a large chunk of the business or maybe even the totality of it. So that's pretty striking. And the fact that this is happening on an international basis is also encouraging, though not at the same speed.

It is happening still significantly faster in the English-speaking world, for example, than in Continental Europe. So I think those are pretty telling.

And then the third big trend, I mentioned it in passing in my prepared remarks, is that our competitors, not only have they been active, but that many of them have been the recipients of a lot of investment interest. And we have noticed private equity and venture have been more active in our market sector than we have seen really at any other time.

And that's obviously, validating and motivating competitively for us because some organizations that we had have come back reinvigorated into the market that we now have to think about competitively..

Okay. Quick follow up for Richard. You accelerated license growth in the last two quarters year over year, yet Q4 guide I think the midpoint is low teens.

Is there a reason for that, Richard, that in the anomalies that we should consider as we are modeling?.

Yes, I don't know this year has been a little bit different than the last three or four in that the seasonal patterns that we've witnessed in the past seem to have broken down, at least for this year. And so, the trend has been a lot more linear than we would've expected.

And so as we look out at our fiscal year at the beginning of the year, we really keep in mind the seasonal patterns of our new sales and those have been much more linear this year. And there's really nothing that we can point to that would suggest that this is a trend of any sort.

It's just that the particular uniqueness of this year's sales activities have brought about a slightly different seasonal pattern..

Thank you..

We'll go now to Alex Zukin with Piper Jaffray..

Hey, guys, congratulations on another strong quarter.

Marcus, I wanted to ask you how it's going with penetrating some of those tier 1s that were signed late last year? And then given the cadence of your upsell into accounts, how well it's going, can you frame for us where you expect the balance of term license growth to come from next year between existing and new customers? And I have a follow-up..

Sure. So the tier 1 wins that we announced last year, those projects are all going well. They are all very demanding as these kinds of transformation programs are, but those relationships are all healthy. And we have, in some cases, discussions underway about expansion to the next big product or program area.

Nothing announced this quarter, but some of that is now factored into our outlook for the coming quarters.

And I think we've talked about in the past some modest evidence and case-by-case evidence of acceleration where an insurer before would have to fully implement and maybe even rollout and have some periods of benefit realization before they would contemplate the next chapter of their transformation program.

Now saying that's just far too slow, it's not necessary, and they can move more quickly. And it's a matter of how many programs and how large a scale a program can they implement rather than really needing to validate that the technology works and that this is a worthwhile endeavor.

So that pattern is still underway, and we think it should result in expansion of some of these relationships over the next number of quarters. The first part of your question or the other part of your question I forgot. I guess it was to Richard..

Well, let me try to answer it, Alex. Because I think what you were asking is for the next fiscal year, how we foresee sales to installed base versus new logos. And I don't think we actually think of it that way, that far out.

But what we can suggest today, is that at least our experience for the first three quarters of this year reflects some consistency with last year and the year before that, where it was very much split down the line..

Got it, that's helpful. And then maybe another multi-part question. Marcus, you talked about the competitors, a reinvigoration of the competitive environment given the recapitalizations in the script and in the Q&A.

I am wondering, given what we are saying around sales cycles and seasonality being a little bit different this year, and maybe sales cycles being accelerated a little bit, I am trying to frame and understand what impact you are actually seeing from this reinvigorated competition, because it doesn't seem to be longer sales cycles.

Is it pricing? Is it something else entirely? And then as a corollary to that, what impact you anticipate on the sales cycles from this new Accenture relationship in the rest of the world?.

Sure, and I appreciate the question. It's sometimes difficult to disentangle cause-and-effect in this, when you're just a market participant and trying to do your best to win every deal and getting scraps of information even about what your perspective customers are thinking.

I can tell you that in addition to the direct evidence or the reports we hear about funding events for competitors, we just see activity and sometimes we see it directly in sales cycles, where it means that we had not considered before are now or even completely new names are part of the mix.

Sometimes we see it in the recruiting environments, where there is pressure or competition for this or that higher or inbound attempts to recruit Guidewire people.

These are the indicators that we get to see that are suggestive of a lot more activity competitively with pure play technology companies addressing roughly the same market needs that we are being active.

Now how has - what has it resulted in, there are no - competitively, we have no real change to our win rates, nothing suggestive of an adverse trend. We just have more activity, more names in the mix than we have seen two years ago. And we're on heightened alert about that, and it's a good reminder to us never to rest on our laurels..

Got it.

And what about the impact of sales cycles from Accenture?.

Well, Duck Creek still remains our most important competitor here in the US. We're in some intense pitched battles with them even as we speak. And we don't see that, we have no expectation of that changing any time soon. Has it prolonged sales cycles, I wouldn't say so.

But we still have to compete very vigorously with them across multiple product areas. Not in every geography is noted, but definitely here in North America..

Maybe if I can sneak in one more. Marcus, how important - you've got version 9 coming out, it's architected to be deployed in the cloud.

How important is the drive towards cloud computing in this vertical? Do you feel like you're being pulled to the cloud by your customers, or are you pushing your customers to evaluate the cloud, and if so, why?.

Right. I didn't say we were pushing, but I think we along with our customers are responsive to an obvious trend towards the commoditization and dramatic cost efficiencies that are coming from public infrastructure.

And it's just commonsensical for us to be prepared to deploy our software on AWS and Azure as they become very broadly adopted, and we've become even the preferential platforms for major new IT investments for enterprise applications for CIOs. That's just very common sense that we have to support those platforms, and even optimize for them.

There is another level to the cloud story, which is rendering your applications more and more cloud native.

Meaning that you are pushing out a much higher frequency of upgrades, you have a much more functionally complete ready to turn on solution, you have more business user configuration and direct business user control over the application's behavior. Things like that that are emblematic of cloud-based applications - cloud native applications.

And we, like every other player in our space, have a long journey to go before anything that could resemble a sales force or a workday and there's very good reasons for that. The heterogeneity of the industry, the complexity of the functional domain, et cetera. But we have a long distance to go, but that's also the trend.

And I would say that while we have our solutions will be cloud based, and even with release 9 implementing InsuranceSuite on Azure or on AWS, I think will become increasingly commonplace. But we still have a long distance to go before we would characterize everything we have as cloud native. But I think that will happen over time..

That's helpful. Thank you guys..

We'll go now to Tom Roderick with Stifel..

Gentlemen, thanks for taking my questions. I actually want to just build on that last question regarding version 9 and optimizing your own architecture for cloud deployments.

I am curious how you see your customers currently utilizing public cloud infrastructure, and in particular how that might parlay itself into Guidewire itself working with AWS and Azure.

It seems like that seems to be the direct you are going in, you've waited long enough such that you don't have to build your own data centers or your own massive infrastructures.

So I love to hear more about how your own clients today are thinking about public cloud and how that architecture integrates with it?.

Well, I think most CIOs and insurers have a thoughtful and nuanced approach to it, which is not that everything that they implement must be cloud based.

But I would say, I think the fair generalization that most CIOs would say where we can use a SaaS application and where we can deploy things on the cloud readily, let's explore that seriously and make that even the default choice.

And so, you see just as in every other industry, very widespread adoption of SaaS-based applications for horizontal functions like HR, like salesforce and others.

It gets a lot trickier when you talk about core system environments because of the large functional footprint, data sovereignty issues, the huge number of integration points, the complexity of the configurations, the sensitivity about upgrades and how that changes the behavior of the application.

There so many more issues as you get to core applications where then you have with the horizontal functions. But even there, if the economics are compelling then I think there's every reason to expect that insurers will look towards that. It's not the same across every segment or size.

Smaller insurers, I think there's a more natural appeal than there would be for very large ones, and certainly seeing that pattern play out.

But even it the largest insurers I think there is the desire to simplify, outsource, leverage the most inexpensive infrastructure they can; and AWS, for example, has an extremely compelling opposition on that score..

Very helpful, that's great. Richard, question for you regarding headcount. You mentioned you're playing, you've been playing catch up a little bit with your hiring plans. Sounds like you had a very good hiring quarter. I'm curious to hear as you put more resources to work, as you look at what you've hired this quarter.

Geographically, how is that stacking out? Are you finding a lot more success hiring domestically and that's where you want put the majority of these heads? Are there pockets of growth internationally that you're having some success? Maybe you can just talk a little bit more about where these investments are going from a headcount perspective..

I mean, I think that what we are trying to do is accelerate our headcount diversification, especially in the development organization into Dublin and Poland. Having said that, the center of gravity of our development organization is still here, and therefore, it will still attract a lot of talent.

So one of the things you will see is that two years ago, for example, we would've had approximately 80% of our development team in Foster City. We're hoping to end this year somewhere in the low 70%, and keep that trend going over the next three or four years until we get to a point where at some level it is even.

That allows our development organization to hire more people, because obviously they are a little bit less expensive in some of these new jurisdictions, new territories.

And so, one of the things that we're trying to do is invest in our branding as an employer in places like Poland, in the infrastructure that we have there, and these are all investments that will hopefully facilitate an acceleration of that hiring..

Got it. Very helpful. Thank you, guys. Nice job..

Thank you..

And we'll go now to Sterling Auty with JPMorgan..

Thanks, guys. Marcus, I didn't quite catch in your explanation earlier around the description of the partnership with Accenture whether or not perhaps not having the Americas region as part of the partnership might be a result of the action that they took with Duck Creek, so maybe part of the agreement with APAC [ph].

Well, I think they would have to speak to exactly their motivations. I can tell you that it was an important point of agreement on us that we should frame the partnership formally, and launch it in areas where we knew that there was compelling market demand.

Where there was really no risk to confusion to either of our businesses, and where we could, where there was a really obvious complementarity that we could serve immediately and that led us to Latin America and EMEA. There is obviously, an ongoing dialogue and now a formal business relationship that could evolve in other ways.

But exactly the pace at which that happens and even, whether that happens, is going to be dependent on our results in these first two territories..

And one follow up question.

On version 9, if you were to look at a mid-size or a large engagement with a customer as they go to look at the potential of an Azure and AWS implementation, what does that do, do you think to the total implementation times as compared to, I guess, the traditional 12 to 15 months on ClaimCenter, and 15 to 24 months on policy?.

We don't know if that changes it dramatically. It's important to keep in mind that the major driver of implementation duration is not technology, its business decision making. No one implements a core system or no one should implement a core system platform without thinking deeply about how their business prophecies will change.

And that takes a certain volume of decision making and consensus building in an organization that can only get accelerated so fast. So we think that there's a lot of infrastructure decisions that can get made more quickly once you've decided to go on AWS, and you can just safely outsource a huge volume of complexity to them and that's a benefit.

But it does not spare you of the responsibility of the customer to think through, well what we want to business to do as a result. What are our flows going to look like, what business logic do we want to enstantiate [ph] in this new platform, and that's still going to be the primary driver of project duration..

Got it. Thank you..

And with no further questions, I'll turn the call back to Marcus Ryu for closing remarks..

No other remarks. Thank you for joining our call today. Good-bye..

This concludes our conference. Thank you for your participation..