Guidewire Software Inc (GWRE) 2012 Q2 法說會逐字稿

Good day, and welcome to the Guidewire second quarter 2012 earnings conference call.

Today's call is being recorded.

At this time I would like to the conference over to Karen Blasing.

Please go ahead.

Good afternoon, and welcome to Guidewire Software's earnings conference call for the second quarter of fiscal 2012, which ended on January 31.

I am Karen Blasing, Chief Financial Officer of Guidewire, and with neon the call is Marcus Ryu, Guidewire's Chief Executive Officer.

A more complete disclosure about results can be found in our press release issued about an hour ago, as well as in our related Form 8-K furnished to the SEC earlier today.

To access the press release and the financial details, please see the investor relations section of our website.

As a reminder, today's call is being recorded, and it replay will be available following the conclusion of the call.

During the call, we will make statements related to our business that may be considered forward-looking under federal securities laws.

These statements reflect our views only as of today and should not be reflected upon as representing our views as of any subsequent date.

We disclaim any obligation to update any forward-looking statements or outlook.

These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations.

These risks are summarized in the press release that we issued today.

For a further discussion of the material risks and other material factors that can affect our actual results, please refer to those contained in the final prospectus for our IPO, which is on file with the Securities and Exchange Commission.

Also, during the course of today's call we will refer to certain non-GAAP financial measures.

There is a reconciliation schedule showing GAAP versus non-GAAP results currently available in our press release issued after the close of the market today.

Finally, at times in our prepared comments or responses to your questions we may offer incremental metrics to provide greater insight into the dynamics of our business or our quarterly results.

Please be advised that this additional detail maybe one-time in nature and we may or may not provide an update in the future.

With that, let me turn the call over to markets for his prepared remarks and then I will provide details regarding our second-quarter results and our outlook for the rest of fiscal 2012.

Thanks, Karen.

And welcome to all of you joining us on our first earnings call as a public company.

We are pleased with our second-quarter financial results, which were better than we expected in both revenue and profitability.

We believe our results reflect the strength of secular market demand as well as the leadership position derived from Guidewire's differentiated technology and our track record of customer success.

For those of you new to the Guidewire story, we are an enterprise software company focused exclusively on primary insurance companies in the property-casualty or P&C insurance industry.

P&C insurance is ubiquitous and mostly mandatory, providing for a resilient global industry with $1.2 trillion in annual revenues globally.

The landscape is highly competitive, with most insurers operating on thin profit margins that motivate them to find new ways to improve productivity and efficiency.

Guidewire offers the next generation software suite that fully replaces the legacy green screen systems on which the P&C industry runs its most important functions today -- underwriting and policy management, billing, and claims.

These legacy systems tend to be over 30 years old, are written in obsolete languages like COBOL, and today lock insurance companies into old ways of doing business.

Our thesis is that the global insurance industry will need to redirect an increasing portion of the $14.5 billion it spent each year on its legacy core system environments to a new generation of technology.

We believe this transition is inevitable and that Guidewire is emerging today as the technology leader enabling it.

P&C insurers using our core system software are now able to pursue new growth opportunities, reduce their costs, and improve customer service in ways that are simply not possible with hardcoded legacy systems and visit business logic from the 1980s.

The transition is in its early days and we have an enormous opportunity before us to transform one of the largest industries in the global economy.

Our successful IPO at the end of January provides us with the increased capital to execute our growth strategy.

We have a strong balance sheet with nearly $170 million in cash and no debt, and we can now benefit from the stature and visibility of being a public company.

These attributes bolster our aspiration to serve as a strategic technology partner of the industry's largest players and ultimately to be the clear global market share leader for this category of software.

As a check point on that journey, we report now on our second-quarter FY '12 financial results.

Our Q2 revenue was $55.1 million, a 30% increase from the second quarter of fiscal 2011.

From a profitability perspective, our non-GAAP operating income was $11.6 million, and it led to non-GAAP net income per share of $0.16.

As I mentioned a moment ago, these results were significantly ahead of our expectations and there were a few drivers to our strong revenue performance which also flowed through to our bottom-line results.

As background, I underscore that our business model is based primarily on multiyear term-based contracts with annually recurring license fees and monthly recurring maintenance fees.

This model provides us with excellent revenue visibility from our current customer contracts for both short- and long-term time horizons.

We recognize revenue for our term based contracts based on the earlier of an annual invoiced due date or the receipt of cash.

We also occasionally agree to perpetual licenses when demanded by our customers under certain conditions, which we estimate that about 10% of our transactions.

There were three primary drivers to or better than expected second-quarter revenue performance.

First, an early annual payment from an existing term-based customer, which contributed several million dollars to our Q2 revenue that should be considered an acceleration of revenue that we were expecting in Q3.

Second, shortened sales cycles in a few situations, though it is not something that we consider a trend.

And third, the overall solid underlying momentum of our business.

As a result of our second-quarter performance combined with our positive view on the second half of the fiscal year, we have increased our revenue and profitability expectations for the full year of fiscal '12.

At the same time, we believe now is the time to increase investments in the business to capitalize on our momentum and market opportunity.

All of these factors are taken into consideration in the guidance that Karen will provide in just a moment.

Before that, I want to share a bit more color on about some of the events of the last quarter.

First, the second quarter was notable for us in the breadth of our sales progress.

We added multiple insurers with great diversity in size, business line, and geography to our customer list.

Also, you will recall that we license three core applications in the Guidewire InsuranceSuite -- PolicyCenter, BillingCenter and ClaimCenter.

This quarter we closed deals representing licenses for one, two, and all three of these applications.

In particular, we had excellent uptake of our PolicyCenter product.

This is exactly what we want to see since achieving leadership in policy is central to Guidewire's mission and growth.

PolicyCenter carries the highest license value of any of our applications, which is driven by the fact that it is the most strategic core system that runs the business of the P&C insurer.

Consequently, policy system replacement are larger and implementations are more demanding, which in turn requires more professional services from Guidewire and our system integrator ecosystem.

The need for Guidewire resources is especially true internationally, where we are doing well and see strong demand in the future.

We are increasing our rate of investment and building out our professional services team to meet this strong demand.

Let me provide if you examples of customer wins from the quarter.

One example of a full suite sale in the second quarter is SBI Insurance in Japan.

SBI started operations in January 2008 as an Internet-based insurer.

They are an agile organization that has chosen to license our entire InsuranceSuite, in fact our first suite sale in Japan, starting with a greenfield implementation for a new product they want to bring to market and with a roadmap to expand all of their product lines to our platform.

Another suite deal in the second quarter was with SafeAuto, a direct-to-consumer auto insurance provider conducting business in 16 states across the US.

They stated that they would have selected PolicyCenter, BillingCenter and ClaimCenter separately based on the strength of each application over time, but they purchased our full suite in one transaction because they realize the benefits associated with having all three systems on a common technology platform.

Also in Japan we signed a key new customer in Mitsui Direct.

This win was significant as it represented our fourth Japanese customer and because Mitsui Direct is a fast-growing subsidiary of one of the three mega insurers who dominate Japan's P&C market.

We were evaluated against internal options in this situation.

However, like a growing number of P&C companies, Mitsui Direct saw the clear benefit of cutting over from legacy system to a new generation platform delivered as a standard and upgradable software product.

Overall, we were pleased with our sales performance for the quarter, with new customers adding to the over 100 that we have today across the globe, including many household names like Geico, American Family and Nationwide in the US and AXA in Zuerich internationally.

We have a fully internationalized product offering in a very global orientation of the business.

In fact, three of the four largest insurers in Australia, six of the top 10 in Canada and insurers from the top three in the UK, Italy, Brazil, Finland, Russia and Japan are included in our customer list.

Despite our scale and growth, we are still under-penetrated with respect to our overall target market.

We estimate that we have about another 1000 insurance companies to sell to around the world.

In addition, many of our customers still have only one of our three major applications, and we estimate that we have captured about a quarter of the revenue potential within our customer base for just our current products.

That fact, combined with the very large majority of the industry that still needs to make the transition from those legacy green screens is why we see ourselves that just the beginning of our market opportunity.

At Guidewire, we measure our success by that of our customers.

Over the company's history, we have had zero attrition among our recurring contracts with insurance companies and have successfully implemented customers 100% of the time in over 150 projects.

We continue to build on that track record of delivering and 100% customer referencability in this quarter, as we have in each prior quarter.

This continues to be a crucial differentiator for Guidewire in the P&C industry, especially when centered against the history of large-scale project failures like by both other technology vendors, and internal development initiatives.

These failures of the past are indicative of the significant barriers to entry and success in our market.

We build and deliver mission-critical software applications supporting complex insurance-specific business processes.

As the transactional systems of record at the heart of insurance companies, our software must perform at extreme levels of scalability for thousands of concurrent users handling millions of complex transactions.

Many others have tried to address this major market opportunity, but, simply put, it is extremely difficult to build, sell and implement this kind of software.

We embrace that difficulty and have delivered consistent customer success despite it.

That track record is a major factor in why leading systems integrators, such as IBM, Price Waterhouse Coopers, Capgemini and Ernst & Young continue to build out their Guidewire practices, which total over 2000 professionals today.

In summary, we are pleased with this quarter's results and see it as indicative of both strong underlying demand and our emerging leadership position.

Looking ahead, we are in an 18- to 24-month period of conscious investment to extend that leadership position in all three of the dimensions that matter to an enterprise software company area -- First, leadership in product, especially in PolicyCenter; Second, leadership in customer success, including our global professional services organization, again with an emphasis on policy transformation projects; and third, leadership in sales in all geographies.

We are at an important stage in the development of our market, insurers worldwide are increasingly responding to the competitive necessity of transitioning to the next generation of software to run their businesses.

We believe that our strong market position, customer momentum, and focused investments will help ensure that Guidewire is the ultimate winner in our market.

Now let me pass the call back over to Karen for more details on our financial performance and outlook.

Karen.

Thanks, Marcus.

As previously highlighted, our second-quarter revenue and profitability were ahead of our expectations for the quarter.

It is important for investors to understand our business model in order to put our results in proper perspective as well as for thinking about our future performance.

Starting with our revenue model, which in every license and maintenance revenue from annual billings on multiyear contracts.

Our term license revenue for annual payments is generally recognized on the invoice due date, though in rare situations it can also occur on cash payment if that is to occur before an invoice is due.

We also generate services revenue that relates to customer implementations of our products.

It is important to appreciate that while Guidewire has excellent long-term revenue visibility from our existing customers as a result of our multiyear contracts and best-in-class renewal rates, there can be a level of variability on a quarter-to-quarter basis based on the size of our transactions combined with the timing of revenue recognition.

With that as background, let me review our second-quarter results.

Total revenue was $55.1 million, a 30% increase from the second quarter of fiscal 2011.

As Marcus mentioned, our strong topline Q2 results benefited from shortened sales cycles on certain transactions and early payment of a term license invoice that was actually do in the third quarter and strong overall business momentum.

Within revenue, license revenue was $25.7 million, up 29% from a year ago.

$19.8 million or 77% of our second-quarter license revenue was from renewable term-based contracts while the remaining $5.9 million or 23% was from perpetual license contracts.

Maintenance revenue was a $6.8 million for the second quarter, up 31%, and services revenue was $22.6 million, up 32% from a year ago.

Due to the potential for quarter-to-quarter variability, we believe revenue received from our annual term licenses and all maintenance contracts are often the best measure of the health of our business.

For this reason, we evaluate our rolling four quarter recurring revenue as an important metric.

On that basis, term license and maintenance revenue totaled $96.3 million in the four quarters ended January 31, 2012, up 32% from $72.8 million for the comparable 12-month period ended January 31, 2011.

And with respect to geographic mix, the US represented $30.9 million of our second-quarter revenue or 56% of total revenue.

International represented the remaining $24.2 million or 44% of our total revenue.

Our geographic mix can be variable on a quarter-to-quarter basis depending on the timing of larger transactions and the associated revenue recognition.

For the first month -- first six months of this year, our US revenue was 59% of total revenue, while international was 41%.

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

With that said, for the second quarter our non-GAAP gross profit was $35.5 million, an increase of 35% on a year-over-year basis and producing a 64% non-GAAP gross margin.

Breaking that down, gross margins for license was 99%.

Maintenance was 82%.

And non-GAAP is margin for services was 20%.

Services margin can vary from quarter to quarter as revenue fluctuates with the number of ongoing implementations and overall utilization rate.

The biggest impact to current service margins relates to the fact that we are ramping our consultant headcount to meet customer demand from recent and expected wins.

This additional headcount dampens our service margins as it typically takes four to five months before we train new service personnel on our products and methodologies and then get them onto billable projects.

As we look forward, we anticipate that license gross margins will remain in the 98% range and maintenance gross margins should stabilize at approximately 80%.

We expect non-GAAP services margins will decrease to the low to mid teens for the next several quarters based on the hiring I just spoke to.

Our longer-term target for overall gross margins is 68% to 72%.

Turning to operating expenses, total non-GAAP operating expenses were $23.9 million in the second quarter, an increase of 23% compared to a year ago.

This resulted in a non-GAAP operating income of $11.6 million which was up 69% on a year-over-year basis, and a non-GAAP operating margin of 21%.

For the second quarter, we generated $12.3 million in adjusted EBITDA, representing a 22% adjusted EBITDA margin and growth of 69% on a year-over-year basis.

Our second-quarter margins performance was at the midpoint of our long-term target for adjusted EBITDA margins in the range of 20% to 24%.

So we expect quarter-to-quarter fluctuations driven by the seasonality of revenue as well as the timing of contracts and revenue recognition, which we benefited from in this most recent second quarter.

Our non-GAAP pretax income was $11.4 million in the quarter, and with the 32% effective tax rate resulting in non-GAAP net income of $7.8 million in the second quarter.

With the pro forma average weighted diluted share count of 48.8 million shares outstanding, non-GAAP net income was $0.16 per share.

For comparison purposes, our second-quarter GAAP operating income was $5.4 million.

Net income was $3.7 million and net income per share was $0.06.

As I mentioned earlier, we had a reconciliation table to our non-GAAP results included in our press release.

Turning to some of the highlights on our balance sheet, we ended the second quarter with $169.6 million in cash and equivalents, up $138.4 million from the end of our first quarter, driven primarily by IPO proceeds of $119.3 million after considering underwriting discounts and expenses as well as strong billings and collections during the quarter.

Our Accounts Receivable DSO for the quarter was 58, which is within our historic range of 45 to 60 days.

Our current deferred revenue was $46.4 million and total deferred revenue was $61.4 million at the end of the second quarter.

It is important to understand that our deferred revenue balance is not a meaningful indicator of business activity during the quarter.

This is because we typically bill term license contracts annually and recognize the full annual payment upon the due date.

Further, contracts that are signed, build and due within the quarter do not appear in deferred revenue at all.

Much of our contractually committed fees are not visible on our balance sheet as a result of our multiyear contracts combined with annual payment terms.

If you combined our contracted business with the fact that we have best-in-class renewal rates, we typically have good visibility into a large portion of our next-year revenue at the start of any given fiscal year.

Let me finish with some thoughts regarding our financial outlook.

As Marcus indicated earlier, we had increased both our revenue and profitability expectations were the old year fiscal 2012.

At the same time we are increasing investments in the business based on our second-quarter upside and our ongoing positive view of the business.

In particular, we are increasing staffing in our services organization to meet current and anticipated demand, especially related to our PolicyCenter applications and full-suite implementations.

Because it takes several months for these resources to become productive, our increased services hiring will reduce our services gross margins in the second half of the year.

Importantly, there is no change in our long-term focus to continue passing more services work to our system integrator partners, which Marcus highlighted earlier, but it is something that will play out over time.

We are also increasing investment to expand our technology and product leadership in addition to sales and marketing as we look to expand our global awareness and sales capacity.

All things considered, we currently anticipate full-year fiscal 2012 revenue in the range of $216 million to $222 million, which represents an increase of 25% to 29% from fiscal 2011.

From a profitability perspective, we anticipate fiscal 2012 non-GAAP operating income in the range of $18 million to $24 million and non-GAAP EPS of $0.21 to $0.28 per share based on an average diluted share count of 56 million shares.

For the second half of fiscal 2012, we expect to have fully diluted weighted average shares outstanding of approximately $61 million for both the third and fourth quarters.

Turning to the third quarter of fiscal 2012, we currently anticipate revenue in the range of $50 million to $53 million.

This represents an increase of 12% to 19% on a year-over-year basis and is down from the $55 million level limit just quarter.

As we previously covered, our second-quarter fiscal 2012 results benefited from the timing of customer transactions and payments.

Our model provides good visibility, but our license revenue has seasonality due to the invoicing of our current and expected new customers.

In particular, our second and fourth quarters typically have higher license revenue than the other quarters.

Therefore, while we are confident in solid growth on an annual basis, we expect that sequential quarterly revenue, especially license, will show more variation.

Turning to the third-quarter profitability, we anticipate non-GAAP operating income in the range of breakeven to an operating loss of $3 million with non-GAAP EPS in the range of breakeven to a loss of $0.04 per share.

This is based on an estimated 61 million fully diluted weighted average shares outstanding, as mentioned a moment ago.

In summary, we are pleased with our second-quarter results and are optimistic about our prospects for the remainder of fiscal 2012.

This is reflected by our strong revenue and profitability guidance for the fiscal year, in addition to the fact that we are increasing investments in the business to capitalize on the momentum of our market and Guidewire's leadership position.

Operator, can you now open the call for questions?

(Operator Instructions) Sterling Auty, JPMorgan.

I got a couple questions, and then I'll get back in the queue.

The first one is housekeeping.

You mentioned the term payment that came a little bit earlier than you would have expected.

It was characterized as a couple million.

Can you give us the exact amount or are you going to just leave it as the high-level couple million?

It was a couple million, and it was a couple weeks early.

Okay, and then Marcus, during your prepared remarks it sounded like you went through a couple of new customer wins.

I think you might just be updating the total customer count once a year, but can you just give us a flavor?

Did you have -- was it more than just the ones that you mentioned that were new customer wins in the quarter?

Yes, we were just highlighting a couple that exemplify the trend that we are very encouraged by, which is adoption both of the PolicyCenter product and of our full InsuranceSuite.

But that was just a sampling from multiple other transactions that happened in the quarter.

Okay, and last question and I'll jump back in the queue, we've talked about in the past the idea of possibly seeing a hardening in the P&C market.

You mentioned the shorter sales cycle that you started to see.

You're not quite ready to call it a trend, but are those two correlated?

Are you starting to see improvement in your customers' end markets and that is why you're starting to see some shorter decision-making or is there something else that might be driving to shorter sales cycles?

It is premature to speculate on a trend, but there is no question that times are beginning to look up cautiously for the global P&C industry, especially here in North America.

It has actually been a very rough few years leading up to this to this point, and most of the industry that we talk to are cautiously optimistic in seeing premium growth, whereas things have been pretty flat for the last couple of years.

The way we see it, that can only be a positive.

However, whether that is was a relevant factor or our continuing emerging leadership in the market was a factor or just good luck in the specific transactions in question, it's kind of hard to separate those threads.

But we like the fact that the industry is feeling optimistic about the future.

All right, great.

Thank you.

Tom Ernst, Deutsche Bank.

Good afternoon.

Thanks for taking my question.

Just a couple questions here as well and I'll let others ask.

The suite wins are particularly encouraging.

So you are still executing when your first couple dozen suite-type customers.

How are the deployments going for those customers you've already won?

Are you discovering that on policy in particular, one of the more complex products are your customers successful there or are you finding any that are having any problems?

Anything to call out in terms of the go-lives?

Absolutely nothing to call out in terms of a difference in our trend of making every single customer successful, every project successful.

We do have quite a few policy customers already either in implementation or in a live production including some very fairly substantial ones in total volume that are definitely in the upper decile of the total industry.

So we feel just as confident as ever.

The one point that we took pains to underscore in the prepared remarks is that with this faster adoption of PolicyCenter, which is exactly what we want to see, there is greater demand for our services involvement because as you noted, Tom, these are very substantial projects that are about -- that have been touched the most important system that exists in an insurance company.

So there is a lot more effort involved, and that is exactly what we expect.

Any changes in behavior out of either your customers or competitors because of your public offering?

Good or bad?

What did you observe?

Well, it has definitely been very well-received by our customers, who, again, because these are mission-critical systems they like anything that speaks to, that substantiate our longevity as a partner.

They are seeing these as multiyear, multi-decade kinds of relationships.

So our longevity and a strong balance sheet and the transparency that comes with being public are all very positive.

Again, too early to say.

We've only been public a number of weeks here, whether it is going to have a hugely positive impact on our sales efforts.

But it is definitely a positive.

Competitively speaking, the industry has taken note.

There have been a number of articles in various industry publications that -- some of which expressed some surprise at just how much larger we were than most of the vendors that have served this industry traditionally and in the present.

So I think that is also conducive to our ongoing success.

Okay, final question for me.

We saw an uptick in the growth rate of your normalized recurring revenues, so if I normalize for the small amount of catch-up revenue that in compare period in this period, it showed a several point uptick.

But I guess most of the most or all of that would be the early recognition from term contract you were expecting next quarter.

The question for you is, the high 30s kind of 40% growth rate we've seen here in the recent few quarters in term business, do you feel like your whole pipeline and business lead to opportunities developing that rate?

I don't think we are ready to assign a percentage to the growth in the pipeline, though it is certainly the strongest it has ever been.

And the pipeline, like our sales results this quarter, are also exactly what we want to see in terms of being representative across the whole segment -- the whole industry that we want to serve.

And by representative, I mean by size of customer from the smaller end of $100 million to $300 million in premium to some really large names at the upper-end Tier 1 level across lines of business and of course by product and geography.

So our pipeline has been growing pretty uniformly in all of those areas, which is exactly what we want to see.

And quantitatively, supports the growth aspirations that we've had and that are embedded in our guidance going forward.

I guess a better way to word that qualitatively.

Is there pipeline development natural ex-that one kind of early term recognition that you got this quarter from next quarter?

Certainly.

Okay.

Thanks again.

Walter Pritchard, Citi.

Thanks.

Karen, I'm wondering if you could talk about the license services makes that you're expecting for the second half.

It does sound like you are ramping up investment in that area, and I'm just wondering how we should expect that to trend going forward.

Thanks, Walter.

We do expect actually that the service mix is going to be a slightly higher percentage of the total revenue in Q3 and Q4 then maybe we were anticipating earlier.

It is one of the reasons that we overachieved in our second quarter results is our service revenue came in very strong as our team was completely act capacity and fully utilized for that.

So what has given us confidence actually to increase the number of consultants to service that demand.

It got it.

And then understanding your comments on deferred revenue and not being an indicator, but looking at what we expected especially on the long-term side, which I think would be sort of more stable, that number came in $3 million or $4 million lower than we were expecting.

I was just wondering, did that have something to do with the early recognition, or was that driven by licenses or services?

It is really -- it did not have anything to do with the early recognition, and quite frankly that would have been actually considered in short-term deferred revenue from the moment it was invoiced until it was actually paid.

We invoiced it in the second quarter.

It was due in the third quarter, but the customer went ahead and paid it in the second quarter anyway.

Our customers pay on time and this one actually paid a little bit earlier.

So on the deferred revenue on the long-term basis, one of the reasons that we have been cautious about spending a lot of time on our deferred revenue as it is not really a good indicator of how much revenue is expected in the future periods simply because a lot more reflects on when the billing cycle is of our annual license fees charged to those customers.

So if we invoice them one quarter, it sits in that deferred revenue from that time period until it is recognized when the invoice is due.

So I guess another way of asking that, if long-term deferred would have been sort of an $18 million, $19 million as we expected instead of a $14 million, $15 million, where would that have ended up?

Where would that have come out?

Would that have been license or service?

In this case it would have been a small component of both, probably license and service.

Okay, got it.

And then just last housekeeping question I think you guys are in the process of moving headquarters.

Your CapEx I think we thought would be impacted by that and it looks like it was a little bit lower.

Did you defer the move, or was there some moving part there related to CapEx being a little lower than we were expecting?

We haven't started to spend the capital yet on the move, so we are relocating our headquarters at the end of July of this current year.

We are expecting to incur move expenses, as well as paying a little bit of double rent on our current facility, as well as the new facility over the next -- in Q3 and Q4.

The capital expenditure here will really start to happen here in the next couple months as we do a modest amount of tenant improvements in that new facility.

Okay, great.

Thanks very much.

(Operator Instructions) Brendan Barnicle, Pacific Crest Securities.

Thanks so much for taking my question.

A couple things.

Marcus, you noted the strength that you saw in PolicyCenter in the quarter.

Anything in particular that is accounting for that acceleration right now, and is that the acceleration we look towards as we model the remainder of the year?

There are multiple factors -- and here I am venturing a little bit into speculation because -- or generalization, I should say, because the circumstances of each individual company can vary.

But there are a number of factors that have been supportive of additional PolicyCenter demand in our view.

Number one is the increasing maturation of our product and how it plays in the sales cycle.

Number two is the testimony of customers that are now live or much deeper into their implementation over time, so that is exactly the pattern that we saw with ClaimCenter and it is being replicated again here in policy.

And third, there is the secular factors that have made investment by insurance companies in their policy system just a strategic imperative, and part of that is competitive and part of that is just optimism about being able to -- about what now technology enables in terms of offering insurance in a superior fashion than has been -- as the status quo has been for the last few decades.

Great.

That's helpful.

And Marcus, any change in pricing that you noticed at all, any of the products during the quarter?

That's interesting.

We do measure pricing, but it is a metric that we are very circumspect about -- not only about sharing, but about drawing any conclusions about it internally.

And that is because there is a wide variation in the size of our customers and target customers and therefore in our transactions.

So pricing it can bounce around a bit just depending on the scale of the transactions that we happen to get done in a given quarter.

On the whole, though, I will say that we fully expect that -- well, we aspire to have the same experience of every successful enterprise software company, which is having more of a say in how their products get priced in the market.

It is quite different today than when we started 10 years ago.

Great.

And then given the amount of data that you guys now are amassing in your systems, what is the prospect for you to do something like big data to leverage that a little more fully?

Definitely an area we are thinking about.

We are not in a position to get specific today, but it is certainly an area that we are intensely interested in.

And then lastly, Karen, any additional ways to think about interest income for the remaining quarters?

This quarter was the first quarter you benefited from the IPO proceeds.

Is that about the rate that we should model going forward?

And also any additional color on how to think about cash taxes for the remainder of the year?

So interest income, we are a very safe investment, and those safe investments are not paying very good interest income today.

So even though we have $170 million in cash in the bank, it is quite honestly almost peanuts as to what we are earning as interest income.

So I think you could expect a little more than we had in our second quarter because the IPO proceeds didn't come in until the end of January.

But don't get carried away on that.

The second question you had?

It was related to tax, cash taxes (multiple speakers)

Yes, cash taxes, exactly.

Cash taxes.

So we are a cash taxpayer in foreign jurisdictions, as well as in some states.

So I think the kind of cash tax rate kind of on an expected income right now is probably less than 20% on the amount of cash that we will actually spend.

Terrific.

Thanks for the help.

Tom Roderick, Stifel Nicolaus.

Good afternoon.

Maybe I can start with a question just on the R&D side.

I guess it is sort of a rare software company that we see growing your pace that is spending more in R&D than sales and marketing.

So it seems like that is an area that your customers are probably pretty pleased to see you spending on.

Can you give us a little bit of help in terms of how we ought to think about that R&D evolving over the next few quarters and in the next few years where you get leverage on it?

And then in the near term from a product perspective now that you have got the full suite out and have for almost a year now, what other releases should we look for functionality enhancements should we look for in the product as we get into the summer months and the fall?

First on the question of R&D, we are a product-based Company, and our core asset that we bring to the market a superior software offering to anything else out there.

We are continuing to invest, but that investment was really initiated or that heightened level of investment was really initiated some quarters ago.

We are still in the midst of it but kind of approaching the tail end of that acceleration in R&D investment and the impact of that of course is now being kind of fully realized as we have all of those people on board.

That was really motivated by the imperative that we have for product leadership and to win in this land grab, particularly in the policy domain.

I want to underscore that we also have investments in sales and distribution, and if anything, we are sort of gradually turning the dial more in terms of accelerated investment on the sales side from R&D, not -- these are two extremes, but that is the direction away that is what we are doing, and I think that reflects the confidence and the maturity and the competitive position that we are in now with our products and our overall value proposition.

The other question you asked was about investment in further product.

We will always be investing further in the current products that we offer because that is the expectation that the market has of us, it is just essential to stay abreast of current events in technology and so forth as well as to continue to deepen our value proposition and the value that our products create.

But we are definitely exploring other license-generating product areas.

We are, -- really in the last year or so, we've begun to sell sort of add-on modules to the three big core applications.

Those include areas like reinsurance and customer data management, which do carry some additional license above and beyond just the base PolicyCenter, ClaimCenter, and BillingCenter products.

There are more of those certainly possible out there in the full solutions space, but we are also considering other sectors of product growth that are adjacent to what we have today.

That's helpful.

And Karen, maybe just to be more specific, should we ought to think about this R&D spend kind of staying at the 20% plus range as a percentage of revenue for the next few quarters or should that go up or pull in a little bit, just any guidance on that specific figure.

I think you will see it go up in little bit in Q3 and Q4.

We are not really getting much fresh guidance into 2013 yet, and that is because we hired quite a number of additional engineers in our second quarter.

We will say the full cost of those engineers in Q3 and Q4, so you will see the absolute dollar amounts go up a little bit in research and development.

Okay, okay.

And Karen, maybe one last quick follow-up for you.

Can you actually repeat the term license trailing 12 months figure, and do you have the recent kind of three- or four-quarter trendline on that figure?

I do.

Hang on a quick moment.

Sorry, you are hearing me flipping papers.

I apologize for the extra noise here.

Maybe while you're looking for that, Karen, I could slip in one last one to Marcus here just in terms of the suite sale and thinking about the pipeline on the suite sale.

Curious for what -- what the generation of that pipeline is looking like.

You had a big attendance and big attendance increase at your user conference this year.

How well is the message getting out as far as the full suite sale?

Is it being driven by policy?

Just kind of curious for how well these policy decisions are coming to the forefront in the marketplace.

I would say the PolicyCenter demand is heated.

ClaimCenter demand at least in the recent period, the last six months or so -- and that interest has never been higher.

In fact, it was faster than we expected it to be, a bit.

As for the entire suite, there has been significant demand for thinking more strategically about the products or about the whole core system replacement problem as one that is best delivered through a complete suite with a full platform that enables all of the core transactional functions.

We have in fact seen some of our competitors start to mimic our fundamental market positioning about the best solution design being an integrated suite of applications that could be implemented individually, and it has been partially gratifying, partially annoying to see our competitors essentially repackage their offerings in that same model.

Fair enough, fair enough.

Tom, I have those numbers now.

Starting in January 31, 2011, the four-quarter recurring revenue was $72.8 million.

On April 30, 2011 $75 million.

July of 2011, $81.9 million.

October 31, 2011, $88 million.

And then the most recent quarter ended January 31, 2012 was $96.3 million.

Perfect.

That's great.

Thank you guys very much.

I appreciate it.

Sterling Auty, JPMorgan.

A couple quick follow-ups.

Karen, what was the total headcount at the end of the quarter?

Roughly 730 employees.

Okay.

Is there a target for the end of the year?

I can't remember if you quoted one or not.

We haven't quoted one.

We haven't gotten that far.

Roughly we've been adding about 50 people a quarter.

Okay.

Marcus, I think both you and Karen commented that just because you are hiring services it is not that you are not trying to again make your partners successful in have them become a bigger part.

Along those along those lines, can you give us an update in terms of where the Capgeminis and others are in there go uptake in terms of training as consultants and where they are in the whole process of moving more of the business to them?

We are seeing the same level of intense interest by the ecosystem to get enabled on Guidewire's technology.

That is across all four of the major systems integrators who are partners as well as a few other opportunistic ones.

There is -- one of the ways we measure that are the number of consultants that -- consultants outside of Guidewire that are certified on our technology as well as involved in surrounding practices, and that number has been steadily increasing pretty much every month.

So the increased involvement of our services folks on projects is additive to the demand that we see for those systems integrator resources at the same time.

There is no -- there isn't any change of strategy whatsoever in the desire to have a very healthy ecosystem that really is highly incented to see us succeed and have a large installed base.

All right, great.

Thank you, guys.

That concludes our question-and-answer session.

I would like to turn the conference back to Marcus Ryu for any closing remarks.

We are very excited about the opportunity ahead of us.

We believe we are emerging as a leader in our market and we believe we are in the right place at the right time to address a major underserved technology need and to build a very successful company in the process over the long term.

We are approaching this opportunity with the same values that have brought us thus far.

Thank you all for joining us on our first conference call as a public company.

Thank you, everyone.

That does conclude today's conference.

We thank you for your participation.