Marcus Ryu - President, Chief Executive Officer, Director Richard Hart - Chief Strategy Officer Curtis Smith - Chief Financial Officer.

Nandan Amladi - Deutsche Bank Ugam Kamat - JPMorgan Jesse Hulsing - Goldman Sachs Alex Zukin - Piper Jaffray Rishi Jaluria - D.A. Davidson Brad Sills - Bank of America Merrill Lynch Pat Walravens - JMP Securities.

Good day and welcome to the Guidewire second quarter fiscal 2018 financial results conference call. Today's conference is being recorded. And at this time, I would like to turn the call over to Richard Hart, Chief Financial Officer. Please go ahead sir..

Good afternoon and welcome to Guidewire Software's earnings conference call for the second quarter of fiscal year 2018, which ended on January 31, 2018. My name is Richard Hart.

I am the Chief Financial Officer of Guidewire and with me on the call are Marcus Ryu, Guidewire's Chief Executive Officer and Curtis Smith, our incoming 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 at ir.guidewire.com.

As a reminder, today's call is being recorded and a replay will be available following the conclusion 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 anticipated performance of the business, including developments in connection with our recent acquisition activity.

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 Factors 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 site. 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 over the call to Marcus for his prepared remarks and then I will provide details on our second quarter results before having Curtis provide our outlook for Q3 and fiscal 2018. Marcus and I will then take your questions. Thank you..

Thank you Richard. Our second quarter financial results exceeded our revenue and non-GAAP profitability guidance ranges with total revenue of $163.8 million, increasing 42% from a ago, and non-GAAP earnings of $0.33 per share.

While license revenue growth of 31% benefited from several early customer payments at the end of the quarter, we were already ahead of our expectations as a number of sales closed earlier than anticipated.

Total revenues were also augmented by significant growth in services revenues as our delivery team continued to be heavily utilized across all our geographies.

This growth in services is in large part due to the transition to cloud based solutions, which continue to pace for both the P&C industry and for Guidewire with subscription sales representing approximately 43% of new sales year-to-date above the high-end of expectations going into the year.

While the number of our non-core products such as Predictive Analytics, Underwriting Management and Cyence are cloud-only, the main drivers of subscription and services revenue are our core solutions, InsuranceSuite Cloud and InsuranceNow.

Cloud-based core systems are still a relatively new concept for P&C insurers, but we are seeing broad interest in all regions and from insurers of all sizes. Smaller insurers have been earlier adopters of cloud solutions but the benefits of simplification and risk transfer are increasingly compelling to midsize insurers as well.

For their part, Tier 1 carriers are also considering cloud-based approaches for growth initiatives and new lines of business creating, we believe, a future option to transition their large existing books of business to the cloud.

The breadth of this demand motivates us to continue to invest aggressively in our cloud operations and production services teams. Looking at sales activity for the quarter, we again enjoyed a mix of activities from both new and existing customers.

In North America, InsuranceSuite was selected by UPS Capital, which provides financial and insurance services to UPS clients and Commonwell Mutual, an Ontario-based mutual that provides residential, auto, farm and commercial insurance.

InsuranceSuite was also selected by Franklin Mutual, a New Jersey-based personal and commercial lines insurer, which sells exclusively through independent agents.

We licensed our software to new customers, such as Federated Insurance, a $1.6 billion commercial insurer, which selected PolicyCenter and Rating Management and United States Liability Group, a Berkshire Hathaway company, which selected BillingCenter and ClaimCenter.

Finally, we expanded our relationship with Royal & Sun Alliance and Promutuel in Canada, each of which purchased our digital engagement solutions.

InsuranceNow was selected by Fremont Insurance, an affiliate of The Auto Club Group based in Michigan and by Southern Trust Insurance Group, a personal and commercial lines insurer which sells through independent agents in Georgia, Tennessee and South Carolina.

We are on track to double the pace of customer wins of InsuranceNow from preacquisition and continue to invest in enhancing functionality and scalability and upgrading InsuranceNow’s service delivery capabilities.

Internationally, in APAC InsuranceSuite was selected by the Australian branch of Dutch insurer Achmea Schadeverzekeringen and AXA Japan purchased PolicyCenter, BillingCenter and several digital engagement products for the most comprehensive Guidewire-based transformation program in the AXA Group to-date.

We continue to be especially busy in EMEA where we are gratified to see a wakening demand in the major Continental European countries. In Q2, we won the largest German-only personal lines carrier. This was a significant anchor win for us and reflects the investments that we are making in the DACH region.

We also expanded our relationship with Mutuelle Saint Christophe in France, which purchased our digital engagement products.

Partially in recognition of the growing importance of Continental Europe and Asia to our business, we opened another services and engineering location in Madrid and identified Kuala Lumpur as the location of our future APAC service and support hub.

As noted in part above, the robust attach rates our digital and data products continue to validate our platform value proposition and contribute to our growth. In the second quarter, of the 13 customers that purchased digital engagement products, 11 were new.

Today, over 100 customers in more than 25 countries have selected our digital engagement products. Seven customers licensed one or more of our DataHub and InfoCenter products, as well as Guidewire Predictive Analytics and Guidewire Live.

We were also excited to close our first sale of our data visualization product, Live Analytics Explore, with a long-standing Guidewire customer who we aspire to be the first of many customers to adopt this next generation cloud-native offering.

During the quarter, we also closed the Cyence transaction and began integrating their operations and go-to-market team into Guidewire. Our end market reaction to this acquisition has been positive and the Cyence Risk Analytics platform continue to resonate as the next generation solution to underwriting 21st century risks, starting with cyber.

Cyence added three new customers in the quarter, including a Tier 1 U.S. insurer, a Bermuda-based multinational reinsurer and a specialist firm in cyber risk evaluation services.

Though Cyence is focused on the same end market as Guidewire, Cyence's go-to-market strategy and approach is different from Guidewire expanding the types of customers with which we can engage.

In addition to an insurance business user and growth focused value proposition, their platform is a value to other industry participants beyond primary P&C insurers.

As an example, just after the end of the quarter, we announced a partnership with S&P Global Ratings360 in which S&P will license Cyence Risk Analytics to power the cyber component of their enterprise market rating.

Meanwhile, we are investing in Cyence's data listening engine, both to enhance its assessment of the ever-changing world of cyber risk and to begin to apply it to standard lines of P&C insurance. Finally, as we announced in January, Richard Hart will soon be transitioning his duty as the CFO.

I am deeply grateful for all that Richard did in his tenure, to which I must add two parting accomplishments. First, the successful on-time implementation of a new ERP system on which we closed our first quarter.

And second, entering a lease for a new headquarters, nearby our current location providing a major upgrade to the working environment for over 800 Guidewire and Cyence professionals who will be able to move in next year.

I am also grateful that Richard has agreed to lead our strategy function as Chief Strategy Officer, an important mandate given the increasing and diverse growth opportunities that Guidewire has today as we build a true industry platform. Succeeding Richard as CFO is Curtis Smith, who is with us today.

Curtis also brings considerable experience as a private and public company CFO of two SaaS companies which will help us as we seek to increase the pace at which P&C insurers adopt our cloud-based solutions. He officially joined on February 1 and has been consulting for Guidewire since the beginning of the year.

This preparatory time and Richard's continued work for Guidewire has helped ensure a smooth transition. With that, I will turn it over to Richard to detail the financial results for our second quarter..

Thank you Marcus. I will review the second quarter and then pass the call over to Curtis to discuss our updated guidance before I make some closing remarks and Marcus and I answer your questions. As Marcus indicated, we exceeded our revenue and non-GAAP profitability guidance for the second quarter.

Revenue increased 42% from a year ago to $163.8 million. Within revenue, license and other revenue of $84.2 million represented an increase of 31% from a year ago. As you may recall, we recognize revenue on the earlier payment or due date. In any quarter, early payments may have a positive or negative impact on the reported period.

License and other revenue in the second quarter was positively impacted in the quarter by early payments of approximately $4.6 million due in Q3 that were remitted in Q2. If you normalize for the impacts of those payments in Q2 of fiscal 2017 and 2018, year-over-year growth would have been 24%.

Revised purchase price accounting conclusions however reduced the amount of Cyence subscription revenue we recognized in the quarter by approximately $1 million as that revenue was deemed attributable to services delivered prior to the acquisition.

Excluding the impact of early payments and the impact of revised purchase price accounting, quarterly results were still higher than expectations. Interest in adopting cloud solutions continued to grow among both new and existing customers.

And therefore, we are particularly pleased with our performance, given the dampening effect that shift towards more ratable and subscription revenue can have on our near-term revenue. For the first half of the year, as Marcus mentioned, subscriptions accounted for 43% of total new sales.

A shift towards cloud subscriptions also reduces maintenance revenue growth since fees and services associated with our maintenance offering are included as part of the subscription. As a result, we expect maintenance growth to moderate in the future.

In the second quarter, maintenance revenue was slightly above guidance at $19.1 million, a 15% increase from the year ago period. Additionally, our rolling four quarter recurring revenue, consisting of term license, subscription and maintenance revenue totaled $345.9 million in the second quarter, up 21% from a year ago.

This shift in mix from licenses that are recognized upfront on an annual basis to subscriptions that are recognized ratably also reduces growth in this metric while this shift is underway.

Our transition to a greater percentage of subscription revenues and the adoption of ASC 606, both of which introduce inconsistencies in year-over-year comparisons make this metric less relevant to our business in the future. Services revenue was $60.5 million, a 73% increase from a year ago and also slightly above our guidance range.

Services growth is driven by three primary factors, the inclusion of InsuranceNow implementation and hosting services revenue following the acquisition of ISCS which did not occur until Q3 of last year, greater demands for Guidewire services personnel in some of our European engagements and for the implementation of initial InsuranceSuite Cloud win and recognition this year of previously deferred services revenue.

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

Non-GAAP gross profit of $107.5 million increased 32% from a year ago and represented a non-GAAP gross margin of 65.6% compared to 70.3% a year ago. The expected decrease in margin was due primarily to the increase of lower margin services revenue and investments in our cloud operations.

Total non-GAAP operating expenses were $75.5 million in the second quarter, an increase of 43% compared to a year ago.

The increase was primarily driven by continued investments in R&D and sales, the impact of our recent acquisition of Cyence and ISCS and to a lesser extent, the undertaking of several large infrastructure projects, including new ERP and configured price quote systems and related implementation expenses.

This resulted in non-GAAP operating income of $32 million, which was above our guidance range, primarily due to higher than anticipated revenue and modestly lower than anticipated expenses in the current period.

Non-GAAP net income was $25.5 million or $0.33 per diluted share, compared to non-GAAP net income of $20.6 million or $0.28 per diluted share a year ago.

In light of the significant tax effects in the quarter, we note that GAAP net loss of $45.6 million was adversely impacted by a tax expense of $48.1 million driven in part by a $28.6 million non-cash charge related to the effects of the provisions of the recently introduced Tax Cuts and Jobs Act. Turning to our balance sheet.

We ended the quarter with $569.5 million in cash, cash equivalents and investments, down from $653 million at the end of the first quarter, primarily due to $130.1 million in net cash used together with equity to acquire Cyence.

This was partially offset by operating cash flow in the second quarter of $47.7 million and free cash flow of $44.7 million. Total deferred revenue was $130.9 million at the end of the second quarter, an increase from $111.2 million at the end of the first quarter.

As a reminder, our deferred revenue balance can vary widely from quarter-to-quarter and has not been a meaningful indicator of business activity, since we typically build term license contracts annually and recognize the full annual payment upon the due date.

However, deferred revenues will likely sustain higher levels as we increase sales of subscriptions though we expect deferred revenues to continue to be highly variable. Indeed, the growth of deferred revenue in the quarter was in part attributable to higher license deferred revenues generated by subscription sales.

I would like to now turn the call over to Curtis to provide our view for the remainder of the fiscal year..

Thank you Richard. Before I get into guidance, let me first say I am very excited to be here at Guidewire.

During the past two months, I have had the opportunity to meet with my team, my fellow leaders, customers and colleagues and some investors and am even more impressed with the caliber of the people I have met and the opportunity in front of the company. Let me first address our expectations for the full year.

I will then speak to Q3, a seasonally lower quarter, which this year will be impacted significantly by the timing of payments, some of which benefited Q2, as Richard previously discussed.

For the full year, we now anticipate total revenue to be in the range of $644 million to $650 million, an $11 million increase at the midpoint of our previous outlook, an increase of 25% to 26% from fiscal 2017.

We expect annual license and other revenue to be in the range of $304 million to $312 million, $1 million higher at the midpoint, an increase of 12% to 15% from fiscal 2017 on a reported basis and 17% to 20% after excluding the effect of the $6.1 million in early payments in the fourth quarter of fiscal 2017.

Our license and other revenue is being impacted primarily by three factors. First, our transition to cloud-based subscription sales results in a greater percentage of ratable revenue. Compared to term and perpetual licenses, we can recognize only a portion of the annual invoices in any given year as revenue.

Last quarter, we increased the projected percentage of new subscription sales by 10% to range of 30% to 40%. As Marcus mentioned, for the first half of the year, subscription sales represented on a dollar basis, approximately 43% of all new sales.

While we currently expect the subscription mix to be toward the high-end of our previously communicated range, seasonally high Q4 activity will have a significant impact on the final fiscal year mix.

As well, we are reducing the contribution to revenue we expect from Cyence this year due to the revised purchase price accounting conclusion that Richard mentioned earlier, which will reduce the revenue we can recognize by approximately $4 million in total this fiscal year, but will not impact our cash flow outlook.

This decrease is partially offset by higher than projected sales activity. As a result, our updated revenue estimates for Cyence is $6 million to $8 million in the fiscal year, $3 million lower than our previous expectations.

Finally, new Latin America activity has increased our expectations for perpetual licenses modestly and we now anticipate perpetual licenses to total approximately $8 million to $10 million for the year.

The net impact of these factors combined with an incremental improvement in visibility allows us to increase modestly our annual outlook for license revenue.

With regard to maintenance revenue, the accelerated timing of certain sales and the higher perpetual revenue we now expect, lead us to increase our range to $75 million to $77 million, $2 million higher at the midpoint.

Services revenue continues to be elevated in fiscal 2018 as we aggressively hire and leverage subcontractors to meet higher demand for new customer modernization initiatives.

In particular, InsuranceNow and InsuranceSuite Cloud implementations and our work for new European customers currently require greater Guidewire participation than typically necessary. We are increasing our outlook for services revenues to $260 million to $266 million, $8 million higher at the midpoint.

We currently expect growth in services in 2019 to be moderate and over the long term we intend to reduce the mix of services revenue as we work with our SI partners to take on a greater portion of cloud implementation efforts.

Due to our higher revenue outlook, we are raising our non-GAAP operating income guidance for fiscal 2018 to $97 million to $103 million, $5 million higher at the midpoint. We are also adjusting our free cash flow guidance for the year, increasing expected free cash flow to $110 million to $120 million, $7.5 million higher at the midpoint.

In addition, we are raising our outlook for non-GAAP net income to $76.3 million to $80.6 million or $0.98 to $1.04 per diluted share based on approximately 77.9 million diluted shares.

As we transition to a discussion of our Q3 outlook, I should note that the compare to the prior year quarter will be significantly impacted by the timing of payments and how that timing effects revenue recognition.

As we mentioned, approximately $4.6 million of revenue that would have been recognized in Q3 was recognized in Q2 due to early payments last quarter. In addition, a very sizable payment remitted in Q3 2017 will be invoiced for payment in Q4 in fiscal 2018 and in subsequent years.

As a result, an excess of $20 million of payments were recognized in Q2 or will be recognized in Q4. With that as a backdrop, we anticipate total revenue in fiscal Q3 to be in the range of $135 million to $139 million.

Within revenue, we expect license and other revenue to be in the range of $47 million to $49 million, maintenance revenue of $18.5 million to $19 million and services revenue of $69 million to $71 million.

For the third quarter, we anticipate a non-GAAP operating loss of between $1 million to $5 million and non-GAAP net income of between a net loss of $2.6 million to income of $0.3 million or negative $0.3 per share to breakeven, based on approximately 77.5 million basic shares and 79.0 million diluted shares, respectively.

On our next call, we anticipate offering some high-level perspective on our 606 transition. Separately, we are beginning to consider new metrics that could offer investors better insight into our business as we adopt a new revenue standard and transition to a higher mix of cloud-based subscription system.

In summary, I am excited to be joining Guidewire as the CFO. As I ramped up over the past two months, I really appreciated working closely with Richard and will look forward to maintaining a constructive relationship as he transitions into his new role. Let me now turn the call back to Richard..

Thanks Curtis. My collaboration with Curtis over the past two months, not to mention our long professional relationship, leaves me no doubt that Curtis will do a phenomenal job as my successor and that his experience in operating SaaS companies will be instrumental at this point in Guidewire's evolution.

I look forward to continuing to help in any way that I can during this transition.

On a personal note, I wanted to thank Marcus and the senior team for this wonderful opportunity, my team, a group of diverse and talented people who bring incredible work ethic of their jobs every day and have taught me much and to everyone at Guidewire, all participants of a shared mission in a great company.

I also want to thank for their support, the analysts and investors that I have gotten to know well over the past two years, best job I have ever had and I am looking forward to my upcoming strategic role at Guidewire. Operator, can you now open the call for questions..

[Operator Instructions]. And at this time, we will move to Nandan Amladi with Deutsche Bank..

Hi. Good afternoon. Thanks for taking my question. Curtis, congratulations. We look forward to working with you. The first question is on the services mix. Marcus, in the script you mentioned that you had pretty good utilization even though you are still adding a lot of people.

Given the size of your system integration community that's built out over the last several years, what will the cadence of the services headcount and eventually the services revenue mix look like, say, over the next two years or so?.

Well, there's no question that we are experiencing elevated services demand right now. It's driven really by two factors that we mentioned in the prepared remarks.

First, the fact that we have a higher attach rate on Guidewire services with the InsuranceSuite Cloud deals and initial implementations, and then heightened demand in Europe, where it's important to source some local talents and people who speak local languages, et cetera.

Both of these are, I won't want to call them one-time effects, but they are somewhat temporary in nature and there is really no deviation in our longer-term strategy and intention, which is to leverage a really robust community of capable SI partners.

But the combined effects of heightened demand in Europe and the overall cloud transition has led to increased utilization and increased aggregate demand for Guidewire services. Over time, we expect that to moderate and there is really no change to our longer term outlook on revenue mix.

It just will probably take a little bit longer than we would have thought two years ago, given these changes and our end market demand..

Nandan, let me also add that the growth this year was really turbocharged by two things. The presence of InsuranceNow services revenue, which is significant because we take leadership of all those implementations and don't forget that that was zero in Q2 of 2017. So obviously the delta increased significantly.

We were also, at the time, actually deferring revenue for our MetLife work which are now coming into the revenue line and therefore that growth also tends to accelerate because of the impact of taking it out of 2017 and bringing it into 2018. We anticipate that services growth in 2019, as Curtis mentioned, will moderate significantly.

It will still be higher than our traditional growth over the last two years, which was very, very modest but it will temper itself quite a bit.

And then in 2020, when the SIs will begin again to take much more responsibility for not only our InsuranceSuite Cloud implementations, but hopefully also for InsuranceNow, we will be able to see the reemergence of that pattern that you saw three years ago, when services went from 44% of total revenue down to 33% or 34% and we hope to be able to repeat that pattern once we have everything ready for the SIs to take a more active role in our cloud implementations..

Thank you. Very helpful..

Thanks Nandan..

At this time, we will move along to Sterling Auty with JPMorgan..

Hi Sterling..

Hi guys. This is actually Ugam Kamat, on for Sterling..

Thank you..

So my first question is, how does the AXA acquisition of XL or any other P&C M&A impacts your business? Like any high level commentary that you can provide on that?.

So M&A is kind of continuing feature of the industry that we serve.

We have had, over our history, innumerable examples of customers being acquired by other of our customers, existing customers acquiring non-Guidewire customers and then expanding their use into the acquired entity and vice versa, a non-Guidewire customer acquiring a Guidewire customer and then partially motivated or catalyzed by that acquisition then coming to adopt our software.

So this is just a kind of continuous backdrop to our business. Generally, sometimes it opens up an opportunity, sometimes it can forestall an opportunity. But it tends to wash out, I think, in a way that we treat it pretty much business as usual.

Two or three years ago, there were some discussion of these megamergers that were happening most notably, the XL acquisition of Catlin and then there was, of course, the Chubb-ACE merger that happened.

Those are pretty significant events for the industry, but aside from that, it's been a pretty steady rate of M&A for the entire 15 or 16 years that we have existed as a business..

Thanks. That's helpful.

And as a follow-up, what have your customers seen in terms of pricing power after some kind of major catastrophes that happened in 2017?.

Pricing power with respect to us as a vendor or with respect to their end market?.

Customer's, their end market?.

I think nothing really notable. There is an often remarked upon phenomenon in the industry that demand tends to increase after a catastrophe reminds policyholders that insurance performs an essential function. So that tends to be the case after any kind of catastrophe.

And that's usually a short lived phenomenon unfortunately, but sometimes it’s a little bit of benefit to the industry that offsets, of course, the heightened loss costs that go along with the catastrophe. I wouldn't say there is any kind of secular pattern there over a longer term that's different from the past -- in the past..

Perfect. Thank you so much. .

Thank you. .

We will now move to Jesse Hulsing with Goldman Sachs..

Hi Jesse..

Hi guys. Marcus, how is the sales motion and implementation motion progressing with cloud? Last quarter, you talked about sales cycles extending a bit as customers evaluate cloud versus on-prem and kind of go through their diligence on it.

Are you getting – are you starting to see those tighten up a little bit? And how are you feeling about the progression of your execution, both on the sales side and on the implementation side for these cloud deals?.

Sure. So with respect to the cloud phenomenon overall, it's an all hands on deck kind of strategic imperative for Guidewire.

And so that of course includes the go-to-market function and we are doing all the things that you would expect to enhance and routinize our messaging, our proof points, our credentials with a greater emphasis on our cloud credentials.

And so I would say, we are getting more and more articulate in explaining the value proposition, how that varies and what stays the same with our traditional division of labor in our sales and delivery. And I would say, we are getting better at that.

There is a little bit of additional evaluation and complication that the prospect has to go through to weigh their choices. In some cases, they are at a fork in the road and they have to make a kind of deeper, more strategic IT decision about what do they want to keep in-house and what do they want to pass off to a trusted partner like Guidewire.

And that's the kind of internal deliberation that we have some influence on but mostly has to happen within their four walls. I wouldn't say it's been a massive effect in our sales process.

On a case-by-case basis, it can make a little bit of a difference where they have to through another cycle or two but I would not call it out certainly as any kind of phenomenon and that affects our outlook even over a few quarters kind of horizon..

Got you. And maybe this is for Richard.

How is pricing trending for cloud? Is it still two to three times in equivalent on-premise deal? And are you still expecting, I think it was four to five cloud customers this year? Is that still what you are thinking?.

Yes. So the two to three times metric that we announced is still active, it's still what we are discussing with customers and it seems to be within the value proposition, the economics of the value proposition support that quite readily. So we are very excited about on that. On the four to five, we definitely have a view of four to five this year.

Obviously, to Marcus' point, since these are already backend weighted and since we received no revenue from some of them anyway, kind of final contracting may actually push them out of the year. But right now, we are still looking four to five for the year..

Great. Thank you..

We will now hear from Alex Zukin with Piper Jaffray..

Hi guys. I apologize for background noise. But one or two for Marcus. Marcus, I guess can you help us understand why it is that the demand for Guidewire services has picked up to such an extent, outside of the optics of the revenue recognition? The SIs do have experience with cloud practices of their own.

They have experience of selling cloud products in the insurance space.

Why are their services not good enough? Why are customers specifically requesting Guidewire? And then the follow-up is, what kind of tension, if any, is that leading to with the partner community and do you expect that to have any ramifications for your competitors?.

Right. A very thoughtful question, Alex. So first, let's fold aside the accounting effects and of course the InsuranceNow coming into the year versus the prior year and just focus on the phenomenon of the early InsuranceSuite Cloud deals.

To be clear, the agent here of much higher attach of Guidewire services is Guidewire, not our customers, in the first instance.

It is our insistence that we play a larger predominant role on the delivery, the initial implementation delivery of the program because we are taking on a very heavy responsibility, namely full postproduction responsibility for maintenance and updates of the solution indefinitely into the future.

And so it is a risk mitigation measure as much as anything on our part to ensure that we have full knowledge of whether the implementation is conducted as well as a conduit back to our product team about all that goes into making that implementation successful and looking for areas of optimization of which there should be many as we take on full responsibility for the implementation.

So the point I want to underscore here is that this is a temporary phenomenon. It's associated with our initial InsuranceSuite Cloud relationship and that we have every intention, every motivation to have our trusted SI partners play a larger and larger role in these going forward as we get more and more into cadence of delivering these.

We are absolutely reliant on the SI community to meet the demand that we have today and the demand that we anticipate going forward. We want them to be partners of us in the cloud transition and there is more than enough work to go around.

It's just that for these initial implementation and I couldn't give you an exact number of how many this will be the case, but certainly, let's call it for the first single-digit handful of them we wanted to maintain a very significant presence on those programs to ensure that we were on top of every detail.

To the latter, I hope that answers the latter part of your question which is, what does it mean for our relationship with these partners. I think those have never been stronger. There is plenty of demand to go around and they have every motivation to be capable both in go-to-market and in delivery for these customer relationships in the future..

Alex, it's Richard. I would also add that the growth metrics that are visible on our P&L tend to maybe overstate the concern that you seem to be identifying, in that without InsuranceNow, that growth rate was half, right. So now it would be in the low-30s.

And if you take MetLife out of it as well, now all of a sudden you are maybe somewhere in your 20s and speaking directionally. So the growth in our organic services revenue has actually been much more modest than what is visible on the P&L. That's one thing, I would say.

The second thing, I would say, is some of that growth is actually caused by the use of our SIs as subcontractors in contract engagements where and I am speaking about InsuranceNow, we have to have leadership of that implementation because our SI partners haven't come up to speed sufficiently for them to take that role.

We expect that in the future that should happen. So all of these things actually are increasing the opportunity for our SIs to work with us for new products, new market segments and new international spheres. So that's why our relationship with our partners, as Marcus suggested, has not in any way been discomforted by this trend..

Got it. Thank you guys. And maybe just if I can sneak in a follow-up around competition.

Are you seeing part of the tailwind around the demand for cloud adoption being driven by some of your competitors like Duck Creek or any other phenomenon? Or is it just a groundswell of, they are seeing cloud adoption in so many other parts of their business out that this is a natural next step for them?.

Yes. I think there are many causes. But if I were to identify a single motivation that that's predominates over the others for our customers, it's a desire for simplification in risk transfer.

That environment which they have to do with a competitive landscape for insurers seems to be shifting toward a more digital data driven which one of the many phenomenon that's insure techs players are talking about, they want to concentrate more and more attention to that new emerging competitive frontier.

And in order to do that, they have to disburden themselves of a lot of the core operations that currently occupies so much of their time and the cloud seems to offer a path for that risk transfer and simplification. I would say, that's really the driving motivation. It's not something enamored with the cloud as such.

It is using it as a vehicle or an instrument to disburden themselves of what they have to deal with today..

Perfect. Thank you guys..

We will now hear from Rishi Jaluria with D.A. Davidson..

Hi guys. Thanks for taking my questions. I guess first, Marcus, on the top of topic of InsuranceSuite Cloud, your talked in your prepared remarks about how you are seeing some Tier 1 insurers that are expressing interest within emerging business units.

Has there any indication from these customers that on a long-term basis their plan is to maybe implement IS Cloud firmwide? Or is it more just exploring it within units and then we will see where it goes? And then I have got one follow-up..

No. I would say that there is tremendous interest in exploring that option or exploring the creation of that option over some handful of years.

We don't know yet of a case and I will be quite surprised if one were to emerge of a Tier 1 insurer saying, we have religion on this topic now and we are going to entirety of our existing book of business to the cloud ASAP. That has not happened. I would be surprised if it does.

But almost every one of them is saying, let's create that option for ourselves and we want to do it in a way that's kind of self funding or value creating. Let's use a new platform to explore new business line and really validate not only that end market but validate this architectural approach and the service delivery approach.

And I think that's very rational. We encourage our customers to think along those lines. I think it's kind of risk management for both sides and we expect multiple of these kinds of relationships to emerge both with existing and new customers..

Got it. That's helpful. And then just, Marcus, on Cyence. You are seeing some positive interest from some of your customers.

Can you give us for maybe what your strategy for getting Cyence into the hands of existing Guidewire customers may be? And what that sort path looks like in terms of timeline until it's a full-on integrated solution and what work needs to be done to get there? Thanks..

Yes. Sure. So it's important to understand that Cyence's business, as a very young startup was focused on a completely emerging business for the insurance industry, namely cyber insurance, which is still in the low single digit billions in aggregate premiums globally which in insurance terms is really very, very small but growing rapidly.

In fact, it's the most rapidly growing product segment in the industry, but on a tiny base. And it's a relatively small number of insurers today, mostly large ones that write monoline cyber product. And of course to these carriers, the Cyence offering is very compelling.

We haven't sold all of them or Cyence hasn't rather and we certainly want to expand those relationships and we want to participate in those growth. So that's vector one. Vector two is, that even in traditional lines of insurance like commercial auto or property, there is a recognition that there is cyber component to it.

The cars that we drive these days have computers, right. And so some of the risk that we face or that insurance face are not just the traditional perils of bad weather and accidents, but of being hacked or of cyber related equipment malfunction.

And so this phenomenon is called silent cyber and even traditional insurers who haven't traditionally thought about cyber now have a reason to care about that. And that's kind of broader applicability of the Cyence offering, even to those traditional lines.

But it's the third sector, I think, that's the most intriguing to us and it's over the long term which is, can we apply the data listening and machine learning approach that Cyence has brought to this one line of business? Can we apply that more broadly to conventional insurance risks, which are vastly larger in size? And there's lot of good reasons to believe that we can.

There are zetabytes of data out there that, if it could be properly captured and curated and mined for insight, could really enhance or maybe even displace the conventional actuarial approach that insurers use today. So that's the great prize that we and a number of Cyence's existing customers are really intrigued by.

But that's all out there in the future. We have a lot of work to do but that's a very compelling proposition that's worth investing in and that's exactly what we are doing..

Okay. Great. Thanks..

At this time, we will move to Brad Sills with Bank of America Merrill Lynch..

Hi guys. Thanks for taking my question. I just wanted to ask about the Tier 1 category. I think in the past you said that in order to get the remaining Tier 1s that aren't customers, it's really a function of building out content primarily in Europe and Asia.

Could you remind us what that content is? And is there some potential catalysts for deliverable coming that might stimulate demand or even push some of these deals that are in the pipeline over the finish line?.

Yes. Thanks Brad. Let me separate your question into two parts. First, just general Tier 1 activity and then you have the question of content in international markets.

So on the latter, when we talk about content, we are referring to those things that are specific to a given geography or to a particular line of business that can sit on top of the general insurance process and transactional and operational flow that we support in the product.

So the biggest category of content is actually regulatory and as you would guess, in different geographies insurers that report on different data, on different kinds of formats and cadences and they expect the system to do all of that. And of course that differs from each country and each jurisdiction.

In the U.S., we have 50 different jurisdictions where each of which have its own kind of content requirements. So we have to do that whatever we go into a new country to serve them and that's has been an inhibitor, but we have been chipping away at that for years and we will continue to do so.

And that applies not just to Tier 1 prospects, that applies anytime you want to sell to a German insurer or an Italian one or a French one et cetera. Now on the Tier 1 question, we are, as you would guess, continuing to engage with every Tier 1 insurer in the market and we make good progress both with existing ones and new ones.

We anticipate winning at least one new mandate from a Tier 1 insurer this year, hopefully more than that, but with confidence of at least one. And expanding our relationship with, including with InsuranceSuite Cloud along the liens that I mentioned in responses to earlier questions, with a long-standing existing customer as well.

So I would say that those conversations are robust and we see just as much demand in the Tier 1 as we do in every other segment and they are still, I would say, the majority of our TAM resides in that segment..

Got it. Thanks Marcus. And then I think earlier you were saying that you don't expect any Tier 1s to move over entirely to the cloud or you haven't seen it yet.

Did I hear that properly? And if so, why wouldn't a Tier 1 want to move the entire suite, billings, claims, policy at a one time over to the cloud? Is there something about the offering that needs to mature or just your experience, your learning curve in positioning the offering? Thanks again..

Sure. They have the same motivations that insurers in any size would have, the same goals of complexity, transfer, risk transfer outside of the Tier 1 as well. There's just more at risk and it's a harder lift.

And so the larger the insurers, the more natural it is to say, let's take an experimental step, not just a proof of concept, but something that creates some value or allows us to go into a new market and let's see that that destination makes sense and works and that you, Guidewire, know what you are doing there and then we have a conversation about the core book of business.

A smaller insurer or especially a very small insurer doesn't really have the luxury of that interim step. They have to say, we need simplification and risk transfer now. We can't take a half step there. We have got to go the whole journey right up front.

And that's why I described smaller insurers as really being the earlier adopters of cloud out of necessity really more than anything else..

Great. Thanks Marcus..

[Operator Instructions]. At this time we will move to Pat Walravens with JMP Securities..

Great. Thank you. Curtis, one for you.

So love to hear what attracted you to Guidewire? And then you know, in the first couple of months, anything that has surprised you?.

No surprises. And what attracts me on that was, I will start with the quality of the team, I have been super impressed across the board of the quality of the team and while I have been here, even more impressed with their commitment to the work at the company.

And so, I have been able experience firsthand a lot late nights and some weekend and have to say that has had a big impression on me that the team has this mentality around get it, not just get it done. And that's been great to be a part of that and witness that directly over the past couple of months.

In terms of what I have seen, it's hard to argue with the company's success, including on the IR front. Plus philosophically, I believe in continuous improvement and believe there is an opportunity to apply my cloud-based operating experience to Guidewire as it continues its transition to the cloud.

So I will be looking to add some value in those ways going forward..

All right. Great. Thank you..

That will conclude the Q&A session. At this time, I will turn it back to Marcus Ryu for closing remarks..

No additional remarks.. Thanks to all for participating in our call today and goodbye..

And again that does conclude today's conference call. Thank you all for your participation..