Greetings, and welcome to the Guidewire’s First Quarter 2020 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your presenter, Mr. Curtis Smith, Chief Financial Officer. Please go ahead, sir..

Good afternoon. And welcome to Guidewire Software’s earnings conference call for the first fiscal quarter – fiscal year 2020, which ended on October 31, 2019. My name is Curtis Smith, I’m the Chief Financial Officer of Guidewire. And with me on the call is Mike Rosenbaum, Guidewire’s Chief Executive Officer.

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 the market shift to cloud offerings, our product roadmap and future product availability.

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 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 Mike for his prepared remarks and then I will provide details on our results before providing our outlook for Q2 and fiscal 2020. Mike and I will then take your questions..

Thank you, Curtis, and thanks to those of you joining us for our first quarter earnings call. We’re off to a positive start to fiscal 2020 with total revenue and EPS that were above the high end of our guidance ranges. Total revenue was $157 million, and license and subscription revenue was $82.4 million, both exceeding the top end of our guidance.

ARR ended Q1 at $463 million, up from $460 million as of the end of Q4. Overall, we were pleased with our financial performance in Q1, which is always a seasonally slow quarter for us in terms of new sales activity and we believe somewhat impacted this year by our strong performance in Q4.

Connections, our annual user conference was held just after the close of the quarter and was the first I’ve had the opportunity to attend. It was an incredibly successful event and an opportunity for us to lay out our long-term plans for the Company and for the products.

It was particularly useful for me as it provided an opportunity to hear direct feedback from customers and partners on our vision and plans for the future. This was our largest Connections ever with nearly 2,400 customers, prospects, partners, and employees participating in over 100 workshops, panels, and breakout sessions.

But the statistic most impressive for me was that nearly two-thirds of our customers were represented at the event, which I think is a great indicator of the value created through our specific and singular focus on the P&C industry.

We presented a live demonstration highlighting our product vision featuring an innovative use case for rapid design, delivering, and testing of new insurance products.

It was powered by advanced product designer, a low code configuration tool that will enable insurers to rapidly design, simulate, and deploy new insurance products; and Jutro, our new digital experience framework for rapidly designing and developing digital apps.

We expect advanced product designer for digital and Jutro will be available to Guidewire Cloud in fiscal Q3 and self-managed customers in fiscal Q4.

We also outlined our plan to improve the Guidewire Cloud platform through automation, tooling, frameworks, and common cloud services and the Guidewire data platform, a P&C insurance specific data repository and factory that continuously collects data from internal and external sources enabling insurers to leverage up to the minute information to make smarter, faster decisions.

We highlighted science for small business and on-demand Risk Assessment engine that combines Internet scale data collection, P&C specific, AI and modeling, enabling customers to quickly understand and underwrite small business risk.

InsuranceNow customers and prospects reacted positively to the newest version of the product, which includes a new user interface and our new prepackaged implementation option InsuranceNow GO, which we estimate will reduce implementation time and expense by 30% to 50%.

I was impressed with the team’s ability to deliver our message and connect with our outstanding roster of customers and partners. So a big congratulations to the team and thanks of all of our customers and partners, who helped make the events such a success.

Connections is not only a forum to exchange ideas and best practices, it is an event that also serves to help customers and prospects firm up future purchase and implementation plans. We are continuing to see the market shift from self-managed to Guidewire Cloud, further validating our increased investment in cloud offerings and delivery.

We’re still in the early stages of this multiyear transition, and the nature and complexity of these transitions warrant significant consideration by our customers. Therefore, just as we experienced last year, we expect cloud demand in fiscal 2020 to be weighted towards the back half of the year.

There are a number of highlights from the first quarter that support our confidence in our expectations for the remainder of the year as well as our long-term goals. One of our largest Tier 1 customers selected InsuranceSuite cloud as a platform for new innovative greenfield use case/..

While the ARR and DWP associated with this use case are small, our platform was chosen to provide an agile framework for the carrier to innovate with. We’re excited by this potential the deal creates to demonstrate the value of our cloud solution to a Tier 1 carrier, where a much larger overall opportunity exists.

Also during the quarter, we signed Pennsylvania State Workers’ Insurance Fund, who selected our full InsuranceSuite core as well as our data and digital products.

With $225 million in DWP, this one illustrates our ability to serve insurance carriers of all sizes as well as the willingness insurers have to license and implement all of InsuranceSuite as a single project. In the first quarter, we extended relationships with 13 existing customers who chose 22 additional products.

Among these are an existing PolicyCenter and BillingCenter customer who licensed ClaimCenter to expand to the full InsuranceSuite core.

We are also happy to announce that an existing customer chose science for their workers’ compensation line of business to provide a more complete view of the underwriting process by augmenting basic company fundamentals with behavioral insights, social media sentiment, and our environmental influences.

This deal is particularly notable since its application to workers’ comp demonstrate – demonstrates continued momentum in our approach to broaden our data listening capabilities beyond the cyber use case.

Since references are critical component of the sales process and a significant factor for our customers in selecting Guidewire, our track record of successful implementations is key to extending our market leadership.

Our momentum in the first quarter reflects the strong record of successful implementation with 12 customers going live for the first time on 25 products. In addition, two customers completed major Virgin product upgrades. Our customer success also continues to be recognized by industry analysts.

InsuranceSuite was recognized for the fifth consecutive year as a leader in Gartner’s Magic Quadrant for P&C core platforms in North America. Guidewire insurancenow has been named a challenger in the same report for the third consecutive year.

And in Gartner’s Magic Quadrant for non-life insurance platforms in Europe, Guidewire was again, honored with the highest ranking for both ability to execute and completeness of vision.

This recognition is important to us, and in that it validates our approach and strategy as well as for customers and prospects who are evaluating adoption of Guidewire for transforming their businesses.

Looking back on my first quarter here at Guidewire, I could not be more excited about the opportunities ahead for Guidewire in the P&C industry, our cloud transformation is a significant part of that.

And while we still have a lot of work to do, it’s motivating to see that the industry is welcoming the transition to cloud based in modern core platform solutions. I’m looking forward to the opportunity to lead our contribution to this industry transformation.

I’ll now turn the call over to Curtis to elaborate on our Q1 results and financial outlook for Q2 and for the year..

Thank you, Mike. We began fiscal 2020 with a solid start exceeding our guidance for total revenue, operating income and earnings per share. Total revenue in the first quarter was $157 million. License and subscription revenue was $82.4 million compared to $94.7 million a year ago.

The year-over-year decrease was primarily due to two unusual term license deals that represented $23.6 million of revenue completed in the first quarter of last fiscal year, partially offset by a $12.9 million increase in subscription revenue.

One of these term deals was a new 10-year term license contracts that resulted in $14.5 million of revenue being recognized in Q1 last year with no revenue in Q1 of this year. The second deal was a contract consolidation that positively impacted Q1 last year what we expect to renew in Q2 of this year.

Subscription revenue was $28.2 million, up 84% from $15.3 million a year ago. This increase is attributed to strong InsuranceSuite cloud sales last year. From a new sales mix perspective, in the first quarter, 43% of new software sales were subscriptions, compared to 26% a year ago.

Early indications point to prospects focusing on our cloud offerings versus our self-managed offerings. Therefore, we continue to anticipate that between 55% and 75% of new sales for the year will be subscriptions.

If our subscriptions bookings trend towards the high end of this range, they could impact near-term revenue due to lower upfront revenue from term licenses as we have discussed in the past. Maintenance revenue was $21 million, flat compared to a year ago and also above the high end of our guidance range.

We expect maintenance revenue to be muted by the growth in subscription revenue, which includes maintenance activities as part of the subscription fees. This includes the impact of cloud migration deals when a customer converts a term license to a subscription service.

The ARR was $463 million on a constant currency basis at the end of the first quarter compared to $460 million at the end of the year. As Mike noted, Q1 is typically our slowest sales quarter as we digest high Q4 activity and focus on Connections. This Q1 was no different.

Services revenue for the first quarter was $53.6 million, a $11 million decrease from a year ago was driven by the completion as well as timing of customer projects.

Turning to profitability, we will discuss these metrics on a non-GAAP basis, and we have provided the comparable GAAP metrics and a reconciliation of GAAP to non-GAAP measures in our earnings press release issued today.

With the primary differences being stock-based compensation expenses, amortization of intangibles, the amortization of debt discount and issuance costs from our convertible note and the related tax effects of these adjustments. Gross profit was $88.2 million in the first quarter compared to $110.4 million a year ago.

The change compared to year ago was driven by the revenue changes already discussed, as well as greater investments in expanding our cloud capabilities. Gross margin for the quarter was 56% compared to 61% a year ago.

The anticipated decrease in gross margin is largely driven by lower term license revenue and our ongoing shift to subscriptions, including greater investments in Guidewire cloud capabilities.

Services gross margin for the quarter was 10%, up from 9% a year ago as we continue to target improved margins through effective cost management of head count and subcontractor spend.

Total operating expenses were $81.1 million in the first quarter, an increase of 5% from a year ago, driven by net increases in headcount, as well as expenses related to our new headquarters.

As a result, operating income was $7.1 million, exceeding the high end of our guidance range largely from revenue upside and favorability in expenses due to the timing of hiring and projects. Net income was $11 million or $0.13 per diluted share.

Turning to our balance sheet, we ended the quarter with $1.3 billion in cash, cash equivalents and investments, flat compared to the end of the fourth quarter. Operating cash flow for the quarter was an outflow of $18.1 million compared to an outflow of $27.2 million a year ago.

This outflow is consistent with our first quarter seasonality, where cash is used for employee bonus and commission payments achieved in the previous fiscal year. Operating cash flow was positively impacted by the $12 million customer payment that moved from Q1 into – that moved from Q4 into Q1, which we discussed last quarter.

Free cash flow for the quarter was an outflow of $21.2 million, excluding $7.9 million in build-out expenses associated with the new headquarters, compared to an outflow of $30.4 million a year ago, which excludes approximately $0.3 million [ph] in build-out expenses. Now turning to our outlook.

Coming out of Q1 and a successful Connections, we are off to a solid start, and as is normal at this point in the year, we recognize that most of our sales activity for the year is ahead. Our full year outlook for revenue, free cash flow and non-GAAP profitability are unchanged from the outlook provided on our Q4 call.

With respect to the top line, there are two things we are monitoring that inform our view.

First, to the extent that cloud demand drives our subscription bookings higher than approximately 65% of total new sales then our license and subscription revenue for the year could be negatively impacted due to ratable revenue recognition of subscription deals versus upfront revenue for new term deals.

Second, we have seen and may continue to see occasional multi-year term licenses.

While we continue to focus on term licenses with two year initial terms, followed by annual renewals, based on our experience with term license renewals and new term contracts over the past two years, along with customer interest, we may be open to longer-terms when it makes sense.

Multi-year deals would positively impact revenue in the period executed but will make future year-over-year comparisons down. The ARR as a metric is not impacted by either of these two things, and we are still comfortable with our previously discussed range of 14% to 16% year-over-year growth.

While our non-GAAP net income and net income per share expectations are unchanged, we do expect changes to our GAAP net income as a result of the new base erosion and anti-abuse tax or BEAT regulations issued earlier this week. We are still evaluating the impacts of these regulations.

We expect our GAAP tax charge to increase, but do not currently expect an impact to our non-GAAP tax provision. Given the regulations were made public this week, we expect to provide an update during our next earnings call.

Turning to the second quarter, we anticipate total revenue to be in the range of $162 million to $166 million within revenue we expect license and subscription to be in the range of $92 million to $96 million. We expect Q2 maintenance revenue of $20 million to $20.5 million and Q2 services revenue of $48 million to $51 million.

For the second quarter, we anticipate a non-GAAP operating income of between $5 million and $9 million. In summary, we're off to a positive start to the year and remain optimistic about our prospects looking forward.

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

Thank you. [Operator Instructions] Your first question comes from the line of Ken Wong with Guggenheim. Please proceed with your question..

Great, thanks for taking my question guys. Maybe just first one for you, Curtis, as we look at Q2 revenue, it does look a lot lower than maybe what me and my peers were projecting.

Just wondering, is this – do you think this is maybe due more to return to a different type of seasonality? Is there more cloud deals expected in Q2 in terms of mix than maybe we might be thinking about? Just any color there would be helpful to the extent that there is maybe some dynamic we're missing..

Yes, sure. So, we noted the same seasonality in Q1 that we've seen in the past, and Q2 is obviously up over Q1. And we've also noted that in general, we've tried to focus the investor and analyst community on annual results and not necessarily the quarterly results because things do move up and down. So, I think that's what you're seeing in Q2.

As we noted in our comments, we are continuing to see cloud demand out there. We’ll continue to monitor that over the next quarter and provide any updates coming out of Q2..

Got it. And then, Mike, a question for you when we see a lot of the recent deal announcements, we've noticed that quite a few of your customers are deploying InsuranceSuite on a partner cloud.

Can you maybe talk about this dynamic relative to what you're seeing on the Guidewire cloud side and how do you think this might impact cloud adoption for Guidewire specific cloud versus partners down the line?.

Yes, sure. Good question. Yes, I think that there is definitely this dynamic in the industry, not just specifically in P&C insurance around moving on-prem workloads to cloud environments, and sometimes that can be facilitated through a partner and we certainly see partners in our ecosystem that are working with customers to do that.

I think in the end, if you think about the long-term, the offering that cut that we expect most of Guidewire customers to move to in our cloud offering will be significantly different than just simply running an instance of Guidewire as a managed service on cloud infrastructure.

And I think when you look at some of the things that we announced at Connections around native cloud services that we will – that we are building and releasing alongside -- specifically what we talked about Connections was specifically in PolicyCenter.

Those types of services will end up being distinct and different from what you’re able to achieve when you're – what's effectively a managed service or a self-managed implementation that you're managing with a partner. I want to be clear though that we remain committed to that mode of operation.

We have a significant customer base that's running Guidewire in a self-managed mode and they may choose to move that to a cloud service either directly or through a partner as you're asking about, so we're committed to that mode of operating Guidewire but we expect in the long run most customers will make the decision to move to a sort of more native Guidewire cloud offering..

Got it. That makes sense. Thanks a lot for that, Mike..

Your next question comes from the line of Chris Merwin with Goldman Sachs. Please proceed with your question..

Okay, thank you. Yes, I have one for Mike. I think one of the things you spoke to at the Analyst Day was cloud operations and efficiency.

And I know it's still very early here, but just was hoping you could talk about any progress on that front and any incremental confidence you've gained and being able to scale up cloud gross margins in the coming years up to 65% or better? Thanks..

Sure. Thanks for the question. So like you, I'm glad that you prefaced the question with the comment that it's still early.

I am just in the – the first couple of months that I've been part of the company, very impressed with the work that we're doing to build efficiencies and build technology layers into our implementation of the cloud that will in the long run deliver the types of efficiencies that ultimately will drive the margin targets that you're referencing.

So we have the projects in place, we have the teams in place, we have the experience now that we need based on the early adopter customers that we've been working with on the cloud offering to give me a lot of confidence that we’ll eventually get there.

I don't think that – I'm not in a position now to give you details on how that turns into numbers and metrics other than to say sort of subjectively that we are headed in the right direction, that the newest implementations that we're doing on the cloud are done in a way that will lead us towards greater and greater efficiency, and the organization is aligned right now around ensuring that any work we're doing is tending towards a more and more efficient ability to deliver those implementations..

Okay, that's great, thanks. And maybe one for Curtis, just, I know you talked about the new cloud bookings mix and something you're monitoring for the impact that could have on revenue for the rest of the year.

I mean, even in the 1Q, I mean can you talk about how that trended relative to your internal expectations? I know there is three more quarters here, but just curious like if that was ahead of plan so far? Thanks..

Sure. So, we maintain that metric this year. New subscription sales as a percent of overall sales because we thought it was an important metric to continue to track as we did last year and we put the range out of the 55% to 75%. Initially when we talked about this earlier, we targeted the midpoint of that range.

As we come through Q1 and we come through Q2, when we have more information, we'll have a better indicator of where we will land on that range. We continue to see the march towards the cloud, and we'll be in a position to provide an update on that range and how we're thinking about that coming out of Q2..

Okay, great. Thank you..

Your next question comes from the line of Sterling Auty with JPMorgan. Please proceed with your question..

Great, thanks for taking our questions. This is Jackson Ader on for Sterling tonight. Just on the ARR increase, the $3 million increase sequentially.

Can you just maybe also give us an idea of how that trended relative to what your expectations were for those sequential increases in ARR?.

Yes, sure. I would say it’s generally in line with expectations in how we plan the year. As we pointed out, Q1 is traditionally a light quarter.

And I think particularly this year, we had a very, very successful and strong Q4 which probably played an impact into the Q1 activity, but that'll come in Q1, didn't do anything to change our outlook for the year, our confidence and the projections that we've made for the year, the demand for cloud and our ability to validate the guidance that we've already provided..

Okay. And then on the InsuranceSuite cloud win where you're inside that Tier 1 customer and existing Tier 1 customer even though the greenfield cloud opportunity is small.

Is that existing Tier 1 customer, are they cool InsuranceSuite term license customer at the moment?.

Yes. So I would say, I don't want to give – we're purposely not disclosing who that customer is. They have licensed part of the InsuranceSuite, but the intention isn’t to give details about what's exactly that scenario is.

I would say this though, that use case is particularly exciting for us in that – the cloud offering – cloud-based model gives these carriers the opportunity to innovate and bring to market greenfield products in a way that I think is new to this industry and something we're really excited about.

So that particular use case where we're able to partner with them to bring an innovative product to market, prove out our cloud offering and create the confidence and experience we need to potentially in the future, like we said, unlock a larger sort of existing DWP and ARR opportunity for both of us. I think that’s really exciting.

And I think, I would say, it’s one of the things that we’re seeing as we look towards the rest of the year that there is that sort of similar potential in the rest of our customer base and even beyond our customer base for those Greenfield innovative opportunities that are cloud-based model affords us and affords our prospects and customers, the potential to deploy..

Okay. Thanks for taking my questions..

Your next question comes from the line of Brad Sills with Bank of America. Please proceed with your question..

Great. Hey, guys. Thanks for taking my question. I know you have this back-end loaded trend in the business given the nature of the large enterprise market that you’re addressing. Could you just comment – I know it’s early, but on what that pipeline is shaking out like for the remainder of the year.

Just in terms of what types of deals you’re seeing this year versus last year. Are they more multi-department deals for the cloud? I think you alluded to some more strategic type deals like the one that just closed.

Any color on just kind of what the pipeline looks like for these cloud deals entering for this year?.

Yes. So we monitor the pipeline this year versus last year. One of the things we saw coming out of Q1 of last year and our conference was a lot of demand for our cloud offering.

We continue to see that trend this year, as we move throughout the year and that’s why we talk to some extent about the mix of our subscription new sales versus total new sales. So I think the nice thing about what we’re seeing this year versus a year ago, we had a year of experience going to market.

We’ve got more referenceable customers in place with some go lives in place in general. And I think that’s been helping us as we continue to go to market and to focus on the pipeline and new opportunities going forward..

I would say, obviously, it’s tough for me to give you an answer that compares it to last year at this time. But when we look at the rest of the year, we look at the pipeline, I think the key things we’re looking for is that percentage of cloud demand.

And how that deployment model, that commitment for customers to make that leap with us and what percentage is that going to be to the overall bookings that we were able to achieve for the year.

Like we keep saying, we still are very positive on the investment we’re making in the cloud and the demand we’re seeing from customers for cloud-based implementations. And I think the other – the other thing that’s interesting just for me as a newcomer here is we keep stressing that we’re committed to the self-managed mode of operating Guidewire.

I would say that has as much to do with the existing installed base and providing upgrades and new capabilities enhancements to our installed base of self-managed customers as it does to the propensity of our net new customers to choose that deployment model, right.

So even though that’s possible, we’re going to remain committed, even if everybody decides to move to the cloud. I think that sort of the interesting thing that we’re – that I look at, when I’m looking at the nature of the deals that we’re looking at for the remainder of the fiscal year.

And I guess, I would just continue to stress, as Curtis has said, we see the market shifting to the cloud. We see the demand shifting to the cloud, although we remain committed to self-managed mode of operating Guidewire..

Thanks, Mike. And then one more if I may. Just on the digital and data business. Is there something about the nature of these cloud deals that are more strategic perhaps they lend themselves more to digital and data attach? It sounds like you’re starting to see some real progress in that business..

Yes, I think to the extent that companies are looking at new greenfield use cases and using cloud as a mechanism to go after new lines of business. It creates an opportunity for them to be thinking about smarter, more modern, more agile ways of rating that business.

I think that was one of the really interesting things about the use case that we highlighted some of the things we talked about Connections with respect to data and analytics is just taking them a different more modern approach to rating commercial risk in writing the premiums, like, that’s what’s really exciting to me is you see these.

When we can line up our product offerings against the new business, the growth business initiatives of insurance carriers, whether or not that’s a core system or an analytics and data system to the extent that we can facilitate their ability to innovate and grow. That’s really exciting.

And I think that kind of – that’s the dynamic that we see and I think lines up to the sort of the basis of your question..

Great. Thanks, Mike..

Your next question comes from the line of Tyler Radke with Citi. Please proceed with your question..

Hi there, thanks for taking my question. I wanted to ask you about InsuranceNow. And I think, Mike, you made some comments that the new InsuranceNow GO offering is focused on reducing the time for implementation and the overall implementation expenses.

But maybe just give an update on where you think that businesses, like, I know that’s been a focus for you since you’ve come and in terms of improving the performance.

But I guess, when should we start to expect that business kind of get back to, maybe where you’d like it to see, where it’s meaningfully driving revenue or ARR?.

Yes, thanks for that – I appreciate the question, because it’s definitely been one of the things that we talked about at Analyst Day and in the meetings that we’ve had certainly at Connections.

I think just – this isn’t specific to InsuranceNow, I think it’s just kind of the nature of the industry in the way that these decisions are made and how serious they are for carriers. I think, I’m looking at that business on an annual basis is how I think about it.

I don’t think you should – think that things are going to change dramatically quarter-over-quarter, but we made a big investment in the product last year. Like, we’ve said previously, we made some changes in our go-to-market approach in the way that we’re incenting people to go after that business.

The InsuranceNow GO offering helps us bring an offering to market that can address the total cost of implementing the product in a very positive way. And I look at all of those things very positively, the feedback that we got from customers and prospects at Connections was positive.

And so I’m positive on the outlook for InsuranceNow, but I think that I’m looking at it on an annual basis. All right. So I do definitely want to see changes in that business quarter-to-quarter, but it’s kind of the timeframe of this whole industry, I would say, is annual.

And so that’s the sort of the metronome of the clock that we need to be thinking about, when we – when it comes to saying, okay, how do we assess the performance of that business unit and the performance of that product line for us. But like I said, everything that I’ve seen since joining the Company has been very, very positive.

Listening to the customers about the feedback around the user experience and the focus that we can take on implementing it more quickly and easily, I think that those are going to be very positive..

Great. And then, Mike, if I could ask you a follow-up question. We talked a little bit about how you’re seeing some customers choosing to move to the cloud, but maybe in a self-managed way. And I’m curious, I guess, when you get to the point, where you’re targeting customers that are self managing on the cloud to move over to InsuranceSuite Cloud.

Like, how does the go-to-market change and do you have to do less of a ramp deal, given that they’re already on the cloud? And how are you just thinking about that go-to-market rather than moving a customer that maybe a self-managing on-premise? Thank you..

Yes, okay. So I think the word cloud to me sort of represents two things. One is, where is the application running, right. Is it running on somebody else’s infrastructure? Is somebody else is managing that infrastructure on a cloud-based platform.

But then there’s also the approach to the way that you manage that implementation going forward and who is responsible for upgrading that application and keeping it current. And I think that that upgrade, the rapid upgrades that are associated with Software-as-a-Service offerings.

In the long run, I think that that’s really what’s going to end up being very transformational for this industry.

And so I really look at moving an instance of Guidewire to a cloud platform is really just the first step in a logical progression towards a more of a Software-as-a-Service, cloud-based service that is continually being upgraded and enhanced without the necessity for a customer to have to worry about all of the work involved in upgrading a software application like Guidewire.

So I think it’s a positive thing. I think that there is a whole host of questions that a carrier goes through in order to become comfortable with running core application in a cloud platform. And I think to the extent that they’re making that decision either directly or through a managed services partner.

I think that that’s a positive step in the right direction. But I think that ultimately, if you think the real long-term vision of what we want to achieve here is that there is more a software as a service like model, where we’re providing that core policy claims and billing service to a insurance carrier.

Does that make sense?.

Yes. Super helpful, thanks..

Your next question comes from the line of Bhavan Suri with William Blair. Please proceed with your question..

Hey guys, thanks for taking my question and congrats. I want to just follow up on the previous question a little bit, but talk about sort of the Tier 1 sort of large guys and sort of their willingness to move the cloud.

So, if I have just separated a little bit and say, you have sort of billings and you have claims, and then you have policy, which is kind of the big calculation engine thing.

Is there a way to modularize that, where pieces can move the cloud and something like policy, which is kind of a lot more complex maybe? And then the other two pieces stays on premise for a little longer, is that a way to get them more interest in the cloud or am I thinking this the wrong way?.

No, you’re not thinking about the wrong way.

I think the thing you got to realize about core systems in Guidewire is that every implementation that we do, ends up being integrated to other systems inside of a carrier’s enterprise architecture, sometimes those things will be on-prem and sometimes those things will be other cloud-based offerings, but it is not inconceivable that components of that overall solution would be migrated to cloud-based services independently of one another.

That is how a very significant maybe, even all historically, Guidewire customers would implement, right, is you do one of these things at a time, you do different lines of business one after the other.

And all of these things have to work in unison, and the environments that they’re running into the extent that they’re open, which certainly cloud environments sort of necessarily support, it facilitates the type of step-based approach to cloud migration that you’re describing?.

Yes. especially, given the integration, if you take P&C VIN numbers and all sorts of databases. Yes, cool. And then a quick follow-up for me, on the partner side, you talked a little bit in the past about sort of the DevConnect solution partner network. You’ve obviously worked with the larger SIs.

Just some update on sort of how that’s progressing and sort of when we were at the conference, you had a lot of sort of SIs talking about interest in the cloud.

Just sort of how that’s playing out in sort of your investments in that space to drive further sort of SI DevConnect solution partner network growth to offset some of the services in your side. Would love to get some color there? Thank you..

Well, I think, yes, I’d say the answer for that question kind of relates back to one of the things I just said, which is that a Guidewire implementation and core implementation is always going to connect to other applications and other services.

And so to the extent that we open it up, we make it easier for customers and partners to integrate to Guidewire, we can reduce the implementation expense, the deployment expense of these transitions. That’s going to be beneficial to everyone. It was a big part of our Connections messages.

This investments on the Guidewire side around DevConnect in creating an open surface area of APIs and SDKs that partners and customers can connect to in order to facilitate faster integration of applications into Guidewire.

I think that all of that is very, very strategic to us to the extent that it reduces the expense and the time necessary to deploy one of these implementations. We saw a lot of momentum in Connections year-over-year in terms of the applications ecosystem, the momentum that we have behind DevConnect were very positive around.

It’s a big part of our R&D roadmap and focus is just expanding the service area around, which these partners can connect using DevConnect into core and build add-ons that customers can deploy via marketplace.

I’m very, very bullish about the potential for that model to have a positive impact for our customers in terms of how easy it is for them to deploy these new cloud-based implementations..

Got you. Got you. That’s awesome. Thank you for taking my questions, guys, congrats..

Yes. thank you..

Your next question comes from the line of Rishi Jaluria with D.A. Davidson. Please proceed with your question..

All right, thanks for taking my questions. Maybe, I just wanted to follow up a little bit on InsuranceNow, Mike. I mean I think the roadmap that was laid out at the conference was really encouraging and customers were – I think, pretty positive on it.

Maybe, I just wanted to understand in terms of getting InsuranceNow kind of back on track or at least up to your expectations, is that roadmap kind of indicative of what needs to be done from a product perspective to get it on board and maybe, alongside that, are there any changes in the go-to-market side and sales execution side on InsuranceNow to kind of regain meaningful traction with that product? And then I’ve got a follow-up for Curtis..

Yes. So – thanks for the question. I guess I’d reiterate what I said a little bit before.

And I think customers want to know that we’re committed to the product, right, and I think that that commitment comes, starts with me, it starts with the other product executives of the company, it’s validated by the release of these new capabilities, which is most visible in the completely enhanced user experience and like we highlighted the new approach, the implementation, which we’re calling InsuranceNow GO.

That sort of creates the clarity; I think that prospects need in order to make a decision about going with InsuranceNow as a core platform. The changes that we made in the approach to selling the product in the alignment of our sales organization around specifically selling that, we just put that in place at the beginning of the year, right.

So, we’ve had one quarter under our belt of operating that way. And as you’re probably and hopefully aware, the decision cycles for these implementations very often will last significantly longer than three months, right.

So, I’m very positive on the changes we’ve made, the commitment that we’ve signaled and delivered and also, the pipeline that we’ve created just based on that change in our approach to distribution.

But like I said, really, this is going to take the whole year to play itself out before we were able to assess completely whether or not those changes in those business initiatives are having the types of results that we would expect.

But just clearly, given the fact that we’re highlighting it here and the work we’ve done and the announcements that we’ve made at Connections, I think it ought to be clear to everybody that we’re committed to this product line..

Got it. That’s helpful. And then Curtis, going back to the ARR question. I think if I’m not mistaken, I think it’s the first time you’re giving us ARR, at least from a quarterly perspective.

Maybe, just – and helping us with our models, can you help us understand how should we just be thinking about seasonality of ARR, should it be similar to how recurring revenue may have been under 605 or anything like that and maybe, finally, it was up $3 million sequentially. What was the growth in ARR year-over-year? Thanks..

Yes. So, this is the first quarter that we are reporting, we talked about at Analyst Day, we will be reporting ARR on a quarterly basis this year going forward. We did not report it last year.

So that we won’t be providing those year-over-year comparisons, but when we go through 12 months of this year, you’ll be able to see those year-over-year comparisons going forward. In terms of seasonality, Q1, it’s always seasonally low for us; this Q1 is similar to our past Q1 when we looked at it across the board, revenue, ARR and other metrics.

So, I think we would continue to have you focus on the annual number; we reconfirmed that growth rate, the 14% to 16% ARR growth expected this year versus last year and we’ll provide the quarterly updates again, in Q2. So, you can get a sense for how much progress we’re making..

Got it. All right, thank you..

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to Mr. Mike Rosenbaum for closing remarks..

All right, thank you. Thank you all for participating on the call. Just want to reiterate how excited I am to be here and have the opportunity to participate in this transformation. and so thanks all for participating and have a good evening..

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation..