Guidewire Software Inc (GWRE) 2012 Q4 法說會逐字稿

Good day and welcome to the Guidewire fourth quarter and fiscal year 2012 earnings conference call.

As a reminder, today's conference is being recorded.

At this time, I'd like to turn the conference over to Karen Blasing, Chief Financial Officer.

Please go ahead.

Good afternoon and welcome to Guidewire Software's earnings conference call for the fourth quarter and full year fiscal 2012 which ended on July 31.

This is Karen Blasing, Chief Financial Officer of Guidewire and with me on the call is Marcus Ryu, Guidewire's Chief Executive Officer.

A complete disclosure of our results can be found in our press release issued today, as well as in our related Form 8-K furnished to the SEC.

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

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

During today's 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 important factors that could affect our actual results, please refer to our quarterly report for the period ended April 30, 2012 and the final prospectus for our follow-on offering which are on file with the SEC.

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

A reconciliation schedule showing GAAP versus non-GAAP results has been provided in our press release issued after the close of market today.

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

Please be advised that this additional detail may be 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 Marcus for his prepared remarks, and then I will provide details regarding our fourth quarter and full year results and our outlook for fiscal 2013.

Thanks, Karen, and welcome to all of you.

I am pleased to report that our fourth quarter was a strong finish to a very good year for Guidewire, including revenue and profitability that were again both ahead of our expectations.

Total revenue of $67.6 million grew 33% from a year ago and was $4.6 million above the high end of our guidance.

And similar to Q3, all revenue lines this quarter performed well.

As an enterprise we care most about growing our base of recurring revenue deriving from multi-year term licenses and ongoing maintenance agreements, both of which are billed annually and on which we have historically enjoyed extremely high renewal rates.

Our full year term license revenue was up 24% year over year and our rolling fourth quarter recurring revenue, which adds term license and annual maintenance together, totaled $104 million at the end of fiscal 2012, up 28% from $81.9 million at the end of fiscal 2011.

Our revenue upside flowed to the bottom line to produce non-GAAP operating income of $9.6 million in the quarter which was also above the high end of guidance and yielded a 14.3% non-GAAP operating margin.

Non-GAAP net income was $0.10 per share, $0.05 above the high end of guidance.

We ended the year with 837 employees, up 29% from a year ago.

Though headcount grew considerably during the quarter with an all time recruiting high of 68 new employees, we did not reach the even more aggressive headcount growth built into guidance and this contributed to our earnings upside.

We continue to recruit and have aggressive hiring plans across the Company.

A primary driver to our overall financial outperformance in the fourth quarter was our services revenue, which at $30.8 million was up 60% from a year ago, considerably ahead of plan and reflecting unexpectedly strong growth in the number and scale of our implementations.

As we shared in our last two calls, utilization rates are above our long-term targets, particularly as our systems integrator partners ramp up their knowledge and credentials in the policy and suite domains as they did with ClaimCenter over the last several years.

In the meanwhile, it is important to understand that our professional services form the foundation for our lifelong highly referenceable customer relationships which drive market share gains and which we believe will impose a formidable barrier to entry for new entrants.

Our services are also profitable and provide positive cash flow, and the demand for Guidewire services reflects our current momentum in replacing legacy policy systems; the largest segment of the multi-billion dollar market for insurance core systems software.

Our experience suggests that the complexity and criticality of policy replacement leads to this segment being several years behind claims, but upwards of 50% to 75% more valuable per unit of premium so we are very encouraged by the strong demand we are experiencing as exemplified by several strategic sales in the fourth quarter that I'd like to highlight.

First we signed one of our most significant European wins to date, a PolicyCenter and ClaimCenter deal with Aviva for their domestic commercial lines business.

Aviva is the largest insurer in the UK and our first PolicyCenter customer in Europe.

Based on experience with other multinational insurance customers such as AXA, Zurich, and QBE, we expect our relationship may expand over time to various subsidiaries in other countries.

As part of this sale for example, we also signed a policy and claims license with their large Canadian subsidiary, Aviva Canada.

Second, we signed a major enterprise deal for PolicyCenter and BillingCenter with the largest insurer in Poland called PZU.

PZU is a household name in Poland, insuring over 25 million people and with the second largest market capitalization on their stock exchange.

PZU is already serving as a great anchor reference in the Central and Eastern European markets which are growing faster than North America and Western Europe.

Third, we signed an enterprise PolicyCenter and BillingCenter deal with Santam, the largest insurer in South Africa.

Like the PZU win, Santam is further validation that PolicyCenter and BillingCenter are best-in-class solutions on a standalone basis, just as ClaimCenter is well recognized as the leading solution in the industry for claims.

Indeed, through the last four to six quarters, we lead with PolicyCenter or BillingCenter as often as ClaimCenter.

Of course, the pre-integrated and unified design of our insurance suite makes it especially compelling to license additional applications after the first.

There are great functional, architectural, and IT efficiency benefits to implementing our full suite.

A great example in Q4 was Amica Mutual, a very respected and longstanding ClaimCenter customer who licensed PolicyCenter in 2010 and just added an enterprise license of BillingCenter in Q4.

A fifth win in Q4 showcases a different approach that some carriers can take.

A license and implementation of the full insurance suite.

This was the approach of Pacifico Seguros, the number two insurer in Peru, who is undertaking a complete replacement of its legacy core systems with our suite.

Overall, we are underpenetrated in Latin America whose insurance market is growing faster than the English-speaking world, but this is a high profile and significant win for us in the region.

As you can tell from these examples we drove significant international expansion in fiscal 2010 with 10 new customers from outside the US, and we are now proud to have major customers in 16 countries, up from 12 last year.

In virtually all of these cases Guidewire is the first packaged software application they have licensed for a core system project.

And in each case, the proven suitability for multinational use and the global best practices embedded in the solution were crucial differentiators.

The new customer wins were very encouraging validation of our ambition to transform the $1.2 trillion global P&C insurance industry and not just in the English-speaking world.

Now I have saved the most significant Q4 win for last.

It was here in the US.

An enterprise license of PolicyCenter and BillingCenter to Nationwide Insurance, a market leading insurer with $17 billion in premiums and 16 million policy holders across virtually all lines of P&C insurance.

Nationwide had licensed ClaimCenter over a year ago and they are now our largest full insurance suite customer.

There is even deeper significance in this win.

To the best of our knowledge, Nationwide is the first Tier 1 insurer ever to buy a packaged software product to run its primary multi-billion dollar business lines.

Indeed, it is arguably the most significant milestone in market penetration and Guidewire's emerging leadership position since the Company's founding.

Okay let me take a step back from this quarter and take stock.

As promised in prior calls, I want to share a quantitative profile of our customer base.

Going forward, we intend to do this annually.

In terms of customer count, we added 30 new insurers to our customer community during fiscal 2012.

By way of comparison, it took us about five years to license our first 30 customers and fiscal 2012 nearly doubled our previous record annual customer acquisition performance.

We continue to have best-in-class renewal rates among our customer base, though we did have one small customer who never got started with their implementation and decided to cancel their project during the fourth quarter until they are able to move beyond company specific challenges.

Therefore, we ended the fourth quarter with 130 total customers.

Drilling down further, we added 17 new customers for PolicyCenter alone in fiscal 2012, nearly doubling our PolicyCenter customer base to 35 insurers.

BillingCenter and ClaimCenter also had excellent years with 24 customers adopting ClaimCenter and 15 customers adopting BillingCenter during the year.

We ended fiscal 2012 with 116 total ClaimCenter customers and 46 total BillingCenter customers.

In terms of the source of deals, our experience this year aligned with our dual goals of gaining new customers and deepening existing relationships.

In fiscal 2012, 6 of our 30 new customers bought more than one of our solutions and five licensed our full insurance suite, bringing the full number of insurance suite licenses to 22.

Of our 130 customers today, 44 have more than one Guidewire product.

We ended 2012 with 50 customers with over $1 billion in annual premiums, with eight of these customers carrying premiums of over $5 billion.

Our customers are well distributed among smaller -- our products our well distributed among smaller carriers as well with 80 customers under $1 billion in direct written premiums or DWP.

Across sizes of insurer and lines of business our customers are a quite representative cross section of the global industry, and because of our international momentum it is increasingly so on a geographic basis as well.

The total DWP being managed by Guidewire's products grew by 32% in the last year from $154 billion at the end of fiscal 2011 to $201 billion at the end of fiscal 2012.

We estimate approximately 17% of total global DWP is using or implementing at least one Guidewire application.

This growing market share is not only a byproduct of successful sales, it is also an asset that we can leverage in the development of new products measuring and driving best practices across the industry.

We plan to share some of our thinking and progress in that direction in late October at our annual user conference in San Francisco called Connections, which naturally we expect to be our largest event ever by a good margin.

It was at last year's Connection when we launched our offering as InsuranceSuite 7 comprised of PolicyCenter, BillingCenter, ClaimCenter, and several ancillary applications.

As the industry inevitably replaces its 30 plus year old green screen systems with modern software, it has given us overwhelming feedback that it wants an integrated suite that can be licensed and implemented modularly.

We believe it is a huge differentiator for us that we are the only technology player of scale that offers a unified, natively integrated, and upgradeable suite in this sense.

We continue to invest to insure that it keeps its lead as the best in the world.

An example of that investment over the last year is in our rating module which handles insurance product pricing as an optional component for PolicyCenter.

Of the 17 customers that licensed PolicyCenter in 2012, 15 of them also licensed the rating module versus licensing various third party options.

The other equally important differentiator is the consistency of our delivery of customer success.

In fiscal 2012, our global services team lead implementations of customers around the world (technical difficulty)including a full InsuranceSuite implementation and four other implementations that include PolicyCenter.

We also continue to improve the upgradeability -- (technical difficulty) -- with go lives of 12 post production upgrades including two PolicyCenter upgrades.

While our services team lead our implementations and typically assist in upgrades, we rely on our systems integrator partners for the majority of the work.

Going into fiscal 2013, those external Guidewire practices include over 2,700 consultants around the world.

As we look ahead, we plan to sustain our level of new investment in our products to extend our technology leadership and add new offerings.

At the same time, we plan to increase our investments in, one, our global services team to maintain our exemplary rate of customer success, especially in the newer domain of PolicyCenter.

And two, in our sales and marketing organization to capitalize on growing market interest and our sales pipeline.

Consequently, as Karen will detail, we do plan for lower operating margins in fiscal 2013 compared to the higher than expected margins delivered in fiscal 2012.

Our ambition is unchanged, to win in the land grab happening in our space over the next few years in order to create a large and highly profitable Company over the long-term.

Going into 2013, I believe we are better positioned than ever to fulfill this ambition based on our competitive position and market momentum.

Now I'll turn the call over to Karen to discuss our financial results and our outlook in more detail.

Karen?

Thank you, Marcus.

We're pleased to report results that exceeded our revenue and earnings expectations for the fourth quarter.

Total revenue was $67.6 million, a 33% increase from the fourth quarter of fiscal 2011.

Within revenue, license revenue was $28.9 million, up 11% from a year ago.

Fourth quarter revenue included $1.6 million in perpetual license revenue, down from $3.4 million in the fourth quarter of 2011 as we continue to focus on signing multi-year recurring term license agreements.

Excluding the impact of perpetual licenses, license revenue was up 21% from a year ago.

Maintenance revenue, which is recognized ratably through the year was $7.9 million for the fourth quarter, up 33% from a year ago reflecting overall license growth trends.

Services revenue was $30.8 million, up 61% from a year ago, reflecting the increase in number, scale, and complexity of projects we are engaged in.

Our high annual revenue visibility is driven by the recurring nature of our multi-year term licenses and ongoing maintenance agreements, both of which are billed annually.

Term license and maintenance revenue totaled $104.4 million for fiscal 2012, up 28% from $81.9 million for fiscal 2011.

With respect to geographic mix, the United States represented 51% of revenue in the fourth quarter, with 49% of revenue coming from outside the US.

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 full fiscal year, our US revenue was 55% of total revenue while international was 45%.

We will discuss our profitability measures on both a GAAP and non-GAAP basis and we have provided a reconciliation of GAAP to non-GAAP measures in our earnings press release issued today with the primary difference being stock-based compensation expenses as well as the release of a valuation allowance on deferred tax assets in the third quarter of 2011 and the expense of a litigation settlement in the fourth quarter of 2011.

Non-GAAP gross profit in the fourth quarter was $41.6 million, an increase of 28% on a year-over-year basis, and producing a 61.5% non-GAAP gross margin.

Breaking that down, gross margin for license was 99.7%, maintenance was 80.7%, and non-GAAP gross margin for services was 20.7%, higher than anticipated.

We do not believe the high services utilization rates we have been experiencing are sustainable over the near-term.

As a result, we continue to anticipate that service margins will decrease to the mid-teens range in the next several quarters as we increase staffing levels in our services organization to support a growing number of implementations, particularly for PolicyCenter.

Turning to operating expenses, total non-GAAP operating expenses were $31.9 million in the fourth quarter, an increase of 27% compared to a year ago.

This resulted in non-GAAP operating income of $9.6 million, which was up 31% on a year over year basis and represented a non-GAAP operating margin of 14.3%.

As in the third quarter, operating income was higher than our guidance due to revenue that was above our expectations and hiring that was slightly lower than the levels we had assumed in our guidance.

For the fourth quarter, we generated $10.4 million in adjusted EBITDA, an increase of 22% compared to a year ago and represented adjusted EBITDA margin of 15.4%.

While our longer term EBITDA margin target is in the 20% to 24% range, we continue to place a near-term focus on investing in our future growth and we can do -- (technical difficulty) -- delivering healthy profitability levels at the same time.

Non-GAAP pre-tax income was $9.6 million in the quarter and with a 33% effective tax rate, resulted in non-GAAP net income of $6.4 million in the fourth quarter.

Non-GAAP net income was $0.10 per share which was well above our guidance of $0.02 to $0.05.

Non-GAAP net income decreased from $11.2 million in the fourth quarter of 2011 primarily due to a full effective tax rate in fiscal 2012 as we recognized a tax benefit in the third quarter of 2011 due to the removal of a portion of a tax valuation allowance in the prior year.

Looking at our results on a full year basis, revenue of $232.1 million in fiscal 2012 was up 35% from prior year.

Full year non-GAAP gross margin was 62.4%, an increase from 61.2% in 2011.

Non-GAAP operating income was $41.9 million, up 78% from a year ago.

Non-GAAP net income was $27.1 million, down 4% from 2011 with a full effective tax rate in fiscal 2012 compared to a tax benefit in 2011.

Adjusted EBITDA was $44.8 million for the full year, up 74% from a year ago.

We are very pleased with our full year results that showed strong top line growth and profitability.

Turning now to our balance sheet.

We ended the fourth quarter with $205.7 million in cash and cash equivalents, up from $201.9 million at the end of the third quarter.

We generated $19.1 million in operating cash flow for the fourth quarter and $17.1 million for the fiscal year 2012.

Also as was anticipated, we used $12.4 million in cash to satisfy tax withholding obligations related to the vesting of the RSUs held by current or former employees which vested July 22 upon expiration of the IPO lockout period.

Our current deferred revenue was $52.9 million and total deferred revenue was $55.5 million at the end of the fourth quarter, a decrease from $61.2 million at the end of the third quarter.

This was primarily from the recognized (technical difficulty) license invoice from an existing customer that was billed in the third quarter but recognized in the fourth quarter.

As we have shared in the past, we do not believe the deferred revenue is a meaningful indicator of business activity during the quarter since we typically bill term license contracts annually and recognize the full annual payment upon the due date.

Further, our multi-year contracts combined with annual payment terms mean that a significant amount of our contractually committed fees are not visible on our balance sheet.

We believe the combination of this contracted business and our best-in-class renewal rates provides us with a high level of visibility toward 2013 revenue today.

Now I'd like to turn to our outlook for the first quarter and fiscal year 2013.

We believe that we have been successful in driving near and longer-term top line growth with investments we have been making in our business.

As Marcus described, our plan is to continue this proven strategy, and as appropriate, amplify investments in selected areas to help drive our long-term growth and to strengthen our leading market share position.

We anticipate total revenue in the range of $276 million to $288 million, an increase of 21% at the midpoint.

There are two fundamental principles embedded in our revenue guidance.

First, we will continue to drive new licenses to a recurring term based model.

While perpetual license revenue increased to $22 million during fiscal 2012, our guidance assumes a much lower absolute level of new perpetual licenses during 2013.

Second, we anticipate our services revenue to continue to grow significantly through 2013 to service our recent and anticipated new customer wins, particularly in support of PolicyCenter implementations.

We currently expect our services mix to be in the mid 40s range for fiscal 2013.

In terms of profitability, while we achieved 18% non-GAAP operating margins in fiscal 2012, we are increasing our investments in product, sales, and services as Marcus described.

We expect full year non-cash GAAP operating income in the range of $20 million to $29 million representing non-GAAP operating margin of 9% at the midpoint of our revenue and operating income guidance.

We anticipate adjusted EBITDA in the range of $28 million to $35 million in fiscal 2013, and we anticipate non-GAAP net income in the range of $14.3 million to $18.8 million or $0.23 to $0.30 per share based on a fully diluted share count of 63.3 million shares.

On a GAAP basis which includes 36.5 million of stock-based compensation expense, we anticipate a fiscal 2013 operating loss of between $14.5 million and $7.5 million, a net income loss of $9.5 million to $5 million, or an EPS loss of $0.17 to $0.09 based on an estimated weighted average share count of 55.5 million shares.

We anticipate an effective tax rate of approximately 35% for the full year.

Looking at the first quarter of fiscal 2013, we anticipate total revenue to be in the range of $59 million to $62 million.

First quarter revenue includes one historic transaction valued at about $4.9 million for which we anticipate our customer achieving and implementation milestone triggering revenue recognition.

This transaction is the last historical transaction for which we expect any catch-up revenue.

For comparison purposes, the first quarter of fiscal 2012 included catch-up revenue of $1.8 million.

For the first quarter, we anticipate a GAAP operating income of a loss of between $7.2 million and $4.7 million.

We anticipate a GAAP net income of a loss of $4.7 million to a $3 million loss or an EPS loss of $0.09 to $0.06 per share.

Based on an estimated weighted average share count of 54.5 million shares, we anticipate an effective tax rate of approximately 35% in the first quarter.

Our GAAP operating income and net income per share expectations include $6.7 million in stock-based compensation expense.

Based non-cash expense, we anticipate non-GAAP operating income of between a loss of $0.5 million to a gain of $2 million for the first fiscal quarter, and non-GAAP net income of between a loss of $0.3 million to income of $1.3 million or roughly breakeven to $0.02 per share.

We expect to use cash during our first quarter as we typically use cash in the first half of the year and rebuild cash balances from operations during the second half of the fiscal year.

In summary, we are pleased to report fourth quarter and full year results that exceeded expectations.

We believe our continued investments will enable Guidewire to capitalize on the significant opportunities in front of us which we expect to drive strong revenue growth and expanding profitability in the years ahead.

Operator, can you now open the call for questions?

Certainly.

(Operator Instructions)

Thomas Ernst, Deutsche Bank.

So it looks like your number of policy wins I think is a big surprise, you're at 35, you've essentially doubled since the IPO timeframe and this is driving the services work.

The question would be with these -- first, how are these service deployments going?

I know I ask you this every quarter, but it looks like they're clearly more service intensive.

Are you finding success in all of the deployments or are you finding any challenges that drag these out?

And do you think you'll have all of these 35 customers successful when all is said and done?

Right.

Thus far, all projects are on track.

One thing I always tell any customer contemplating one of these core system projects in the sales process is that be prepared for an extremely demanding project.

It will be very difficult.

There will be moments of pain.

And it doesn't happen by itself.

So all of these -- every one of our implementations are very, very demanding and that's just the nature of what it is that we're doing.

PolicyCenter isn't intrinsically more difficult than the Claims project, it's just larger.

And I wouldn't characterize the projects as being more services intensive.

It's just that the aggregate amount of work to be done on a program for Policy is just larger.

And while we're doing the same proportion of that work, 10% to 15% is our usual target, that in aggregate it sits on a larger base.

So our current projects are on track.

And in fact, it would make it extremely challenging to win new customers for Policy if the existing customers, both those in implementation and in live production, weren't to testify very enthusiastically in their own words.

If that weren't the case, we would not do well in the market.

Okay.

Maybe more specifically on this, what is happening to the trend for time to revenue, the policy and the larger suite type deals?

How long does it take you to go live and start recognizing revenue and how does that evolve over time?

So just first a clarification, whether or not it's Policy or Claims, at this point we invoice generally 30 days within the execution of the contract so we are getting paid license just on the start of the implementation and that's across all our products.

That wasn't always true historically when there was a little bit more complexity, but certainly for the last --

Two full years.

-- last two full years and certainly going forward that's our expectation and model, and we recognize accordingly on a unified revenue model.

There is a subtlety that we've called out before, and I think you might be alluding to this, Tom, which is that in many cases a Policy project will start with a portion of the business as opposed to the full enterprise.

And this is especially the case where you have a complex business with different lines of commercial lines, personal lines, specialty lines that's a bit distinct from each other.

And in this case we'll win the new customer, but they will license it for a portion of their business and pay us only for that amount of premium, but treat that first project as foundational and then the subsequent lines of business in a way are much more routine once they've done that first one.

So in that sense, the license base is smaller in the beginning than it might become over time, and we see that a lot in Policy.

And are you finding any trend towards faster expansion in those fields or is it still early customers?

We've been pleasantly surprised in general by stimulating conversations about the second product or third product earlier than some of our historical experience and I think that just reflects the overall maturity of our products.

And Nationwide which is the largest deal we talked about in the script there, they are not live with Claims yet.

And yet they have made essentially an enterprise commitment now for Policy, which was not something that we would have expected to happen say two or three years ago.

So in that sense there is a bit of acceleration and I think it just reflects the improving profile that we can present customers.

Last question for me then I'll let others ask.

I know you give the numbers once a year on the number of wins in Policy, et cetera, but how is the momentum through the year?

Do you feel like it's stable, building, decelerating?

What's the overall momentum as you exit the year and enter this new one?

We feel great about the momentum.

We have clearly the strongest pipeline that the Company has ever enjoyed, lots of factors going into that.

One, we have more feet on the street.

I think our marketing is getting better and more substantial and more pervasive and out there.

I believe there's some reason to be optimistic about our competitive position that we never want to get arrogant or complacent about that, but lots of factors working in our favor there that have helped the output which is a much stronger pipeline than we've ever had.

Sterling Auty, JPMorgan.

Wanted to start with you mentioned the emphasis on the term versus the perpetual and the perpetual performance this fiscal year.

Can you give us a sense of what we should be thinking about in terms of the trends quantified at least in terms of should term -- or I'm sorry, should perpetual license revenue actually be down year over year and the growth made up by term or what should be the trend that we should think about?

Yes, Sterling.

The perpetual licenses, we recognized $22.3 million in FY '12.

Embedded in our guidance, we have assumed a much lower number of license revenue from perpetuals in 2013.

So it is dampening down the effect of full license growth.

We do anticipate that our term license growth will be substantive -- substantially above the blended license growth.

We think it's really important for the Company to try to still pursue this term license model.

Maybe, Marcus, if you can share with us why we think it's a benefit to customers as well?

One thing I'd add to Karen's comments, Sterling, is that it's always been the philosophy of the Company to have a recurring revenue model based on term licenses.

That's really from day one 11 years ago.

The difference now is I think we've become substantially more persuasive in that.

Again, not 100% of the time, but steadily better.

And I think three factors have contributed to that.

One it's become much more norm in the market within the sales force and others.

Number two, I think we have a bit more market stature today than we've ever had before.

And number three, the central value proposition of a term license is that we continue to innovate and improve the product.

And it's much easier to argue for that when you have a track record of doing so as opposed to making promises about the future.

So for all of those reasons we've been pleased with our ability to generally drive much more term license and we are modeling that we are going to continue improving on that trend in this year.

Okay.

On the deferred revenue, you gave some commentary in your prepared remarks as to why we shouldn't look at it as an indicator as compared to maybe another traditional SaaS companies, but in looking at your business and what you see from your side is there a pattern or a trend in deferred revenue that we should expect over the course of fiscal '13?

Typically, you will see our deferred maintenance revenue of which we've broken out for you in the Qs and we will do so again in the 10-K.

Deferred maintenance will continue to go up.

If you look at it particularly on a quarter over quarter basis, so Q4 over Q4, and that is because we typically invoice our customers for maintenance upfront on an annual basis and recognize that maintenance revenue over the next 12 months.

So it should be a good indicator of the growing customer base.

Our deferred license revenue has a different characteristic to it particularly because there's very little of deferred license revenue left from the old historic revenue recognition that was much more driven by our customers implementation schedules than our selling efforts.

Now since the beginning of FY '11, all sales -- and through FY '12 all sales are on a unified revenue model so it more closely reflects the sales efforts of our team rather than the customer implementation schedules.

But we do have license revenue that will sit in deferred revenue for generally a fairly short amount of time.

When we sign a contract with a customer we typically will give them 30 to 60 day invoice terms for the first payment.

And we do need to delay revenue recognition from the time until that invoice due date, okay?

So sometimes that straddles the quarter and you will see deferred license revenue go up just in that period and then be recognized in the next subsequent period.

Got it.

And last question, can you give us a sense in terms of the 68 employees that you hired, how did they get applied versus R&D versus sales and marketing?

What's your general thoughts around the hiring and investment by functional area for 2013?

And is there a level where you say, you know what, we would expect the peak investment to hit about such and such quarter and then from there we should then expect operating leverage to show through?

We don't have a peak quarter to share with you yet, Sterling, but in terms of the emphasis by function, a lot of the emphasis -- the heaviest emphasis by far is in sales and then services because we never want to be gated in our ability to win a new customer by an implementation shortfall.

And then we have had growth in the development line as well, but at a somewhat slower rate.

And that pattern we plan to extend into this year as well.

So the heaviest growth on a percentage term by far is in sales followed by services and then very modest increase on G&A.

Tom Roderick, Stifel Nicolaus.

So I wanted to learn a little bit more just about what you're seeing on the sales cycle side of Policy and maybe Nationwide is a good place to dig in.

Can you talk a little bit about how long that conversation was going on for; who else you had to compete against?

Obviously, if they're considering as the first Tier 1 to evaluate a third party policy decision, I'm gathering they looked at other vendor's solutions.

So maybe if you could just talk about how long that took you, how long -- how many iterations, and who you went up against?

That would be really helpful, thank you.

Sure, the total evaluation time was about a year which is somewhat faster, but that's because we were able to shortcut or rather had already invested in the get-to-know-you period and they're our Claims customer and so they had done a lot of due diligence on us as a company and as leaders of the Company and so forth, and in the technology because of course it's shared between our products.

So we were able to shortcut a lot of that stuff, but it was still about a year long conversation and negotiation before we had an executed contract.

Competitively, I think this is implied in your question, we actually did not compete with any real third party, with any other software vendors.

They had sort of concluded that the market had nothing to offer to a carrier of their scale and so the alternative -- the default alternative was that they would proceed with what they call legacy modernization with their own internal IT resources.

And this is typically what we see at the upper end of the market, the real behemoths that are in the industry, they're $10 billion plus, that they have large IT organizations accustomed to building -- adding new layers of code on that 30 year old system.

So it was a bit of a different kind of sales cycle than we have in other sectors of the market, but we have ultimately I think a very compelling value proposition for them that showed that there was a lot for that group of people to do, as opposed to reinventing the wheel and building the core software.

And we expect to see that pattern repeated at other Tier 1s.

In fact, we're in a lot of those other conversations right now.

That's great.

And Karen, maybe a follow-up question for you on Nationwide itself.

That $15 billion in direct written premium, it would seem like this is a pretty sizeable monetary deal.

How are you thinking about the inclusion of that deal with respect to your 2013 guidance, when does that start kicking in both from a services and license perspective?

There is no Nationwide revenue in 2012.

All of the revenue that we expect to start would really happen in 2013.

And this is a customer, simply because of the size as well, where typically we would do annual invoices in advance so we may have a pretty significant license benefit in any one quarter.

During the negotiations with Nationwide it made the most sense for all parties actually to do quarterly invoicing instead of this annual in advance.

So I expect both the license revenue to start to be recognized in the first quarter, but it won't hit as a one quarter item.

It will come in much more evenly over the year, and I also expect our services revenue to really start and ramp up here pretty quickly as well.

Okay, that's great.

Last question for me, just thinking about the mix of perpetual versus term, and term, the growth is very good this quarter.

So we're drawing down off of these tougher comps on the perpetual.

But just as we think forward going into the model, what are you still selling perpetually?

What can customers buy on that front in a perpetual license and how much longer will that impact the model in any material fashion?

Or do we wind all the way down on perpetual as we get to the end of 2013?

Well it's certainly -- that would be ideal.

We don't think that it's realistic to assume that we'll get to zero in the year, so we have a much lower expectation in absolute terms, not just in proportion of license, but in absolute terms in perpetual license new bookings for the year than we did last year -- than we achieved last year.

And so that's -- and we have all kinds of internal incentives and so forth to make sure that we're all singing from the same hymn book as they say.

The one thing I'd like to add a little bit to that is we do have longstanding contracts with some of our customers who may have bought from Guidewire on a perpetual license basis for the first product or the first line of business that they were doing an implementation on.

Like as not, when they're going to buy a new product or they're going to expand their business with Guidewire as well, they'll -- we'll reach back into that existing customer contract and really just kind of accept orders under those existing contracts.

So it's very difficult to be 100% -- to move the organization to 100% term licensing when many -- when some of our existing customers have already been able to successfully buy perpetuals from us.

So those are the most of the residuals.

Right, what Karen described is the primary case where we would sell another perpetual, a customer who has already licensed ClaimCenter historically and on a perpetual basis, which is a minority of our customer base but there are still some out there that we want to upsell to.

Brendan Barnicle, Pacific Crest Securities.

I was wondering and maybe I missed it, if you had any commentary on backlog at all?

I thought at the year end that was something you were going to share with us like you were the updates on the customer count?

Brendan, we really, in looking at backlog, so much of our contractually committed licenses from our existing customers is completely off balance sheet, right?

So you see sitting in deferred amounts that are really just waiting for a short time period to be recognized as earned revenue.

But the concept of backlog to a software company and a term software company I find it a little foreign in that -- so I think the best way to look at our existing base of business is how we recommended looking at that four quarter rolling revenue metric that includes all of the term licenses which we expect to be recurring and a very high renewal rate -- (technical difficulty) -- and then all of the maintenance revenue, both from our term licenses as well as our perpetuals because again, we expect those fees to be charged to our customers and recognized as revenue year over year over year.

Great.

And then if I could just delve into the Q1 guidance a little bit more, should we be assuming that services revenue would be up sequentially and that the license component overall term as well as perpetual would be up year over year?

So yes, we do expect our services revenue to be up in Q1 over Q4.

And again, we do not expect a large amount at all of perpetual licenses to be recognized in the first quarter.

So given the perpetual component that we had a year ago, should we be assuming that Q1 license total revenue -- total license revenue is down year over year.

Yes, that's our expectation.

Perpetual license revenue in the first quarter of '12 was $8.5 million.

We don't expect anywhere near that size of a number for perpetual licenses in this first quarter -- (multiple speakers).

Great.

And then just lastly, on our services gross margin, since you guys are still hiring, is that going to hit that mid-teens number immediately in Q1 or do you expect us to continue to decline as we go through the year?

It will continue to decline as we go through the year.

Alex Naddaff who runs our services organization has a very aggressive recruiting campaign that he's had going on really for the last three or four quarters.

And all of his team members are very highly utilized today.

So he's working at this point to recruit to get more of a bench into his team.

But it will take a few quarters actually for that to start to impact on the service margins.

But again to be clear, the main driver there we see is the lower utilization that we're targeting or the more normalized utilization I should say, rather than an even more accelerated services ramp.

It's really our targeting a return to the long-term utilization range.

Walter Pritchard, Citi.

This is Ken Wong for Walter Pritchard.

Just a quick question on your product pipeline.

Can you give us a sense for what percent of the pipeline has multiple products versus what that percentage might have looked like last year?

The product pipeline, you mean in --?

Just your sales pipeline.

I guess just looking into your pipeline what percent of that customer base or just a relative percent compared to last year has multiple products?

I follow your question now.

I don't have a percentage to share with you, but I can tell you that a larger proportion of our conversations definitely are multi-product.

And in fact, our overall go-to-market is multi-product and full suite.

We expressly train our sales organization to deliver a suite-based total new operating platform kind of message as opposed to hunt around for who might want a new claim system.

So it's on almost every deal, we're having a multi-product conversation.

And is that something that you guys are approaching the customer with or are you seeing the customer actually come to you guys looking for that type of offering?

Actually it's a lot the latter.

I think it's both of them because it's a message that suits us because we don't think there's any other player of any scale that can do that and can offer that credibly.

And then secondly, it just makes so much logical sense that a lot of customers are already right there and wanting that.

Got you.

And Karen, you guys with the 837 heads that you guys are at now, you guys indicated you're below what you were looking for.

Any sense for what the target was?

Is it like 850, 900?

We were targeting to hire probably -- I would say, and it sounds like a little wide of a range, but between 60 and 90 people.

And when your hiring as aggressively as we are -- so we hired 68 and so we were within our target range.

I'd say the area that we still want to hire more is certainly in the sales team and increasingly in professional services as well.

Okay.

And lastly, you guys mentioned that one small customer that cancelled their deployment.

Was that macro-based or you mentioned it was company specific, but just want a little more color there?

Sure.

It's very, very company specific.

They never actually started the implementation.

The implementation was delayed several times for entirely for internal reasons.

I think they had some management changes along the way.

And then finally, I think the last wave of management came in and said we need to get our own house in order before we can be undertaking any kind of big, big program and let's just -- and naturally, we've tried to prevail on them, but they had made a categorical decision that they needed to fix some of their internal stuff.

And they're very small.

They're at -- among our smallest customers.

And that does conclude our question-and-answer session.

I'd now like to turn the call back over to Marcus Ryu for any additional or closing remarks.

Thank you all for participating on our call today.

We are now focused on extending our momentum into the current year which we believe we're entering in a stronger position than at any other time in our history.

So thank you again and goodbye.

And once again that does conclude today's call.

We do appreciate everyone's participation.