Guidewire Software Inc (GWRE) 2013 Q4 法說會逐字稿

Good day, everyone, and welcome to the Guidewire fourth quarter and full-year fiscal 2013 earnings call.

Today's conference is being recorded.

And 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 2013 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 annual report on Form 10-K for the period ended July 31, 2012, and our quarterly report on Form 10-Q for the period ended April 30, 2013, both of 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.

Additionally, we are providing historical reconciliation data as well as recurring revenue calculations in the supplemental posted on our IR website available at ir.guidewire.com.

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 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 financial results and our fiscal 2014 outlook.

Thanks, Karen.

We ended fiscal 2013 with both revenue and profitability exceeding our expectations.

Total revenue in the fourth quarter of $96.9 million represents growth of 43% from a year ago.

Sales execution was important to this result, but more fundamentally, we believe it reflects the trend of P/C insurers confronting the structural limitations of their decades-old legacy systems and undertaking a core technology replacement cycle.

Expense wise, we continued to make substantial investments across all Company functions especially in sales and delivery, but our revenue upside in the quarter contributed to non-GAAP operating income of $26.5 million, representing a 27% non-GAAP operating margin that was well above our expectations.

We focus on recurring term license and maintenance revenue measured on a rolling four-quarter basis as a key metric to evaluate our progress.

For fiscal '13 this metric totaled $150.4 million, an increase of 44% from the $104.4 million at the end of fiscal '12.

This growth reflects overall sales momentum, returns on the investments I just referenced and the benefit of a couple large transactions with Tier 1 insurers in 2013 and at the end of fiscal 2012 that we have previously discussed.

We are in dialogue with additional Tier 1 insurers around the world and we aspire to count a disproportionate share of them as customers over time.

But by their nature, sales cycles with the Tier 1 are especially prolonged and hard to pin down to a specific quarter or even year.

Strategically, our goals in fiscal 2013 were number one, to advance our emerging leadership position especially in PolicyCenter and full InsuranceSuite market adoption.

Number two, to grow our sale and delivery capabilities on a global basis, especially in Europe and including the expansion of our global systems integrator ecosystem building our stature as the preferred solution to recommend.

And number three, to expand our product set with new licensable offerings leveraging the core operational platform that is Guidewire InsuranceSuite.

We see the solid progress that we made on all three counts as validating our investment strategy and we intend to continue our heightened growth investments into fiscal 2014.

Priority wise, we will focus in particular on expanding our global sales reach while leveraging the investments we have already made in R&D.

In contrast to the last several years, we plan actually to moderate investments in professional services because of the critical mass we have achieved in the organization and the increased traction we are seeing in the systems integrator ecosystem.

We believe this is the right strategy to continue driving shareholder value and we will detail these plans later in the call.

I want to turn now to the highlights of our fourth quarter and the full fiscal year.

Starting with sales, we had a number of noteworthy wins in the quarter including AIG Japan, the fourth largest insurer in the country with direct written premiums of about $7 billion.

AIG Japan selected PolicyCenter and BillingCenter as the unified platform to replace multiple older systems in a major transformation project encompassing all three of their major subsidiaries, American Home, AIU, Fuji Fire.

Catlin Group selected InsuranceSuite for full replacement of their legacy core systems in the US, an emerging leader in specialty lines and a large presence in the Lloyd's market Catlin was a great win for us with significant potential growth to their global operations in over 80 countries.

Another significant win for our full InsuranceSuite include our rating management and client data management modules was Radian Group, a major provider of mortgage insurance with nearly $1 billion in premiums.

We also attracted a number of customers with under $1 billion in premiums during the quarter with a mix of suite and single module deals.

In fiscal '13, sales activity was well balanced between new and existing customers and we ended the year with 158 customers, an increase of 17 core customers and 11 Millbrook customers who are not already Guidewire customers.

Notably, we continued our momentum with PolicyCenter and we saw growth in the number of customers that selected our full InsuranceSuite as well.

The total number of InsuranceSuite customers increased by over 50% to 34 from 22 a year ago over the course of the full year.

Of these 12, 8 selected the suite in its entirety in 2013 while the other 4 were existing customers who added products to create the full suite.

A significant portion of our new business in 2013 was also driven by the cross-selling of PolicyCenter and the full InsuranceSuite to customers with ClaimCenter which has been a strong anchor point from which we can further penetrate existing relationships.

We now have a total of 63 customers that have selected more than one Guidewire product, up approximately 40% from 46 a year ago.

We believe this provides good validation of our ability to grow existing relationships while leaving significant growth opportunity in the other greater than 50% of our customers with whom we have strategic relationships but who have only licensed one of our products to date.

Product wise, in fiscal '13 we added 15 new PolicyCenter customers, bringing our total PolicyCenter customer base to 50 at the end of the year.

For the last several years we have elevated winning the policy replacement land grab to our top strategic goal, so we are pleased with momentum in this most critical domain.

By coincidence, the number of ClaimCenter and BillingCenter customers also both increased by 15 each, bringing the total number of ClaimCenter customers to 131 and the total number of BillingCenter customers to 61.

The combination of new customer additions and a broadening of our reach within existing customers increased the total amount of premiums managed by Guidewire product to $234 billion at the end of fiscal '13.

Note that this number does not increase with upsell of additional products to existing customers, which is a meaningful component of our overall revenue growth.

Of the increase in our DWP metric, approximately 60% came from new customers and 40% from broader deployment over new lines of business and geographies at existing customers.

New customer acquisition does continue to be a key growth driver of course, and it's worth noting that less than 20% of global industry premiums are managed by one or more of our applications today.

During the quarter we built on our most important differentiator, our track record of successful implementation across all our products.

Most significantly we had our largest initial go live of PolicyCenter and BillingCenter to date at American Family, a $5.4 billion Tier 1 insurer.

Also notable in the quarter was [Alliance] UK, a major subsidiary of the world's largest P/C insurance group which went live with ClaimCenter on all business lines in June.

AXA Canada, who was recently acquired by Canada's largest insurer, Intact, also went live with ClaimCenter that month along with Citizens Property Insurance of Florida.

Overall for the year, 25 customers had production go lives, which is a record number of go lives in a single fiscal year, up significantly from 13 customers who went live during fiscal '12.

The performance of our global delivery teams enabled us to cross the symbolic threshold of bringing our 100th customer into live production several months ago.

During the year we invested significantly in our services organization while also redoubling our efforts to enable our systems integrator partners, especially for PolicyCenter, allowing us to focus on longer term recurring license and maintenance revenue.

In more mature geographies, such as the US, Canada and Australia, we are seeing a distinct trend of our customers awarding an increasing portion of their implementations to SI partners.

And our partner ecosystem continues to expand rapidly, over the year we added approximately 1000 consultants to total 3700 in Guidewire practices, a large and experienced ecosystem.

These trends have led to our decision to take our foot off the gas sooner than expected with respect to expanding our internal services resources.

Last quarter we discussed our acquisition of Millbrook, which provided key assets comprising our two data management offerings.

Guidewire DataHub is an operational data store that standardizes data for multiple sources and thereby enables more rapid data conversion and legacy system replacement.

Guidewire InfoCenter is a P/C specific data warehouse for PI and analytics.

Native integration with InsuranceSuite will both directly address PI needs and facilitate the adoption of InsuranceSuite itself.

Another major initiative this year has been Guidewire Live, a SaaS platform for hosted applications that leverage and complement InsuranceSuite.

Live has enjoyed positive reception from customers who are attracted to it's instant on, no implementation, try before you buy attributes.

We ended the year with 25 customers contributing data on a daily basis to Guidewire Live, and a subset of those are now paying us license after their trial period.

It's still very early days for Live, but adoption has been positive enough to justify our increasing investment in this platform going forward.

The strength of the fourth quarter and annual performance that I just reviewed is evidence that our investment, in sales, delivery and products are paying off especially as it relates to larger deal signings at both new and existing customers.

As such, we plan to continue our heightened level of investment in fiscal '14 with a particular focus on sales and marketing, which we believe will position Guidewire well to build on our momentum and maximize long-term value.

As Karen will detail in a moment, we are targeting full-year total revenue growth of 9% to 13% for fiscal '14, which takes into consideration our targeting a low level of services revenue for fiscal '14 due to a conscious choice to steer more to a partner services model.

As always, we are conservative in our forecasting of large transactions due to their unpredictable nature.

What is most important is the continued strong momentum of our recurring term license revenue which we expect to grow above 20% in fiscal '14.

From a profitability perspective we far outpaced our target operating margins throughout fiscal '13.

But as we start fiscal '14, we are again targeting a lower profit margin as we absorb the full-year cost of hiring this last year.

And we believe a continuation and expansion of our investment strategy in building sales capacity and building products will help us gain a disproportionate share of the long-term market opportunity to which we are singularly committed.

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 that our results for the fourth quarter exceeded our revenue and earnings expeditions.

Total revenue was $96.9 million, a 43% increase from the fourth quarter of fiscal 2012.

Within revenue, license revenue was $49.1 million, up 70% from a year ago.

Fourth-quarter revenue included $4.2 million in perpetual license revenue, up from $1.6 million in the fourth quarter of 2012.

Excluding the impact of perpetual licenses and the last catch-up license revenue of $3.2 million recorded in the first quarter of 2013, license revenue was up 48% from a year ago.

Maintenance revenue which is recognized ratably through the year was $9.9 million for the fourth quarter, up 26% from a year ago reflecting overall license growth trends.

Services revenue was $38 million, up 23% from a year ago reflecting the increase in numbers scale and complexity of projects we're 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 typically billed annually.

Recurring term license and maintenance revenue totaled $150.4 million in fiscal 2013, up 44% from $104.4 million for fiscal 2012.

With respect to geographic mix, the US represented 57% of revenue in the fourth quarter with 43% of revenue coming from outside the US.

For the full fiscal year, our US revenue was also 57% of total revenue while International was 43% compared to 45% of revenue from outside the US in fiscal 2012.

Though we are being successful in expanding our geographic reach, a couple of large domestic Tier 1 deals increased the overall contribution from customers based in the US compared to a year ago.

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.

Non-GAAP gross profit in the fourth quarter was $64 million, an increase of 54% on a year-over-year basis and producing a 66.1% non-GAAP gross margin.

Breaking that down, non-GAAP gross margin for license was 99.7%, maintenance was 81% and 18% -- 18.7% for services.

Overall, non-GAAP gross margin increased from 61.5% in the year-ago quarter largely due to an increase in high-margin license revenue as a percentage of total revenue compared to a year ago.

Turning to operating expenses, total non-GAAP operating expenses were $37.5 million in the fourth quarter, an increase of 18% compared to a year ago.

This resulted in non-GAAP operating income of $26.5 million, which was up 174% on a year-over-year basis and represented a non-GAAP operating margin of 27.3%.

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 $27.8 million in adjusted EBITDA, an increase of 167% compared to a year ago and represented adjusted EBITDA margin of 29%.

Adjusted EBITDA was above expectations and reflected our strong license activity in the fourth quarter.

Non-GAAP net income was $0.25 per share, which was well above our guidance of $0.13 to $0.14.

Looking at our results on a full-year basis, revenue of $300.6 million in fiscal 2013 was up 30% from the prior year.

For the full year, license and maintenance revenue represented 54% of revenue compared to 55% in 2012.

And as Marcus indicated, we expect that in fiscal 2014 we will see the revenue mix shift more toward license and maintenance from services.

Full-year non-GAAP gross margin was 60.8% compared to 62.4% in 2012.

A portion of the decrease in non-GAAP gross margin is related to costs associated with the operation of Guidewire Live, which is still in it's very early days from a revenue perspective.

We expect Guidewire Live to continue to be a modest drag on gross margins in fiscal 2014.

Non-GAAP operating income was $55.6 million and adjusted EBITDA was $60.1 million for the full-year, up 34% from a year ago and represented an adjusted EBITDA margin of approximately 20%.

Turning now to our balance sheet.

We ended the fourth quarter with $207.7 million in cash, cash equivalents and investments, up from $203.6 million at the end of the third quarter due to cash flow generated during the fourth quarter.

This was largely offset by the Millbrook acquisition which we completed during the quarter.

We generated operating cash flow of $24.4 million for the fourth quarter and $32.5 million for the full fiscal year.

Our current deferred revenue was $37.4 million and total deferred revenue was $41.2 million at the end of the fourth quarter, a decrease from $51.5 million at the end of the third quarter.

This was primarily from the -- the decrease was primarily due to the recognition of a 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 that 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 that the combination of this contracted business and our best-in-class renewal rates provides us with the high level of visibility toward 2014 revenue today.

Now I'd like to turn to our outlook for the first quarter and fiscal year 2014.

Our plan in 2014 is to continue following the strategy that drove much of our success in 2013, particularly as it relates to continued investments in sales and marketing.

We believe we are well staffed to continue enhancing existing products and bringing new technology to market.

As such, we will moderate R&D headcount grow substantially in 2014.

We will still see an increase in R&D expenses during fiscal 2014 as we absorb the full-year cost of the growth in headcount in fiscal 2013.

As it relates to services, we plan to pull back on additional investments in fiscal 2014 as the capabilities and credentials of our SI partners allow us to deploy a fewer number of Guidewire personnel on implementations.

In terms of headcount, we will be making a relatively small adjustment to our consulting team size.

However, since we have an increased investment in our Dublin-based distributed consulting center which provides a lower cost model for some of our customers, these measures will lead to a lower services mix and we expect them to have a positive impact on gross margin over time.

We anticipate total revenue for fiscal 2014 be in the range of $328.5 million to $340.5 million, an increase of 11% at the midpoint.

Within revenue, we believe that license revenue will increase approximately 19% and that maintenance will grow approximately 12%.

Most importantly, we expect term licenses to grow above 20%, which would be a strong performance against a difficult comparison caused by the incremental revenue contribution from new Tier 1 customers in 2013.

We expect perpetual license revenue to be similar to 2013 levels.

As a reminder, we do not include unusually large transactions in our outlook even when there are such opportunities in our pipeline.

We anticipate service revenues growth to slow to approximately 5% as system integrator partners take on more of the implementation effort.

We entered 2013 with expectations to deliver operating margins of approximately 9% for the year, representing a balance of profitability and increased investments to stake out a clear market leadership position.

While we achieved a fiscal 2013 non-GAAP operating margin that was double this level, largely due to a couple of large sales transactions, we believe our increased level investments in sales and marketing capacity continues to be the right call during 2014.

We expect full-year non-GAAP operating income in the range of $18.2 million to $22.2 million, representing non-GAAP operating margin of 6% at the midpoints of our revenue and operating income guidance.

We expect to achieve better margins beyond fiscal 2014 as we grow the contribution of license revenues as a percentage of total revenue, achieving results with our expanded sales team and gaining scale from our R&D products.

We anticipate adjusted EBITDA in the range of $25.5 million to $29.5 million in fiscal 2014.

And we anticipate non-GAAP net income in the range of $12.6 million to $15.3 million, or $0.20 to $0.24 per share based on a fully diluted share count of 64.3 million shares.

We anticipate an effective non-GAAP tax rate of approximately 31% for the full year.

On a GAAP basis, which includes $64.2 million of stock-based comp expense and $1.4 million in amortization of intangible assets, we anticipate a fiscal 2014 operating loss of between $47.4 million and $43.4 million, a net loss of $31.3 million to $28.6 million, or an EPS loss of $0.53 to $0.48 based on an estimated weighted average basic share count of 59.6 million shares.

We anticipate an effective GAAP tax rate of approximately 34% for the full year.

From a seasonal perspective, we expect quarterly revenue as a percentage of annual revenue to be similar to what we experienced in fiscal 2013 with the fourth quarter being the period that we naturally have a significant portion of our annual billings.

Based on timing of customer invoices and contracting activities, this is generally the basis for the recording of license revenue.

Looking at the first quarter of fiscal 2014, we anticipate total revenue to be in the range of $61.4 million to $63.4 million.

For the first quarter, we anticipate non-GAAP operating loss of between $15 million and $13 million for the first fiscal quarter and non-GAAP net loss of between $10.3 million and $9 million, or $0.18 to $0.15 loss per share based on estimated weighted average of basic share count of 58.3 million shares.

Our non-GAAP operating income and net income expectations exclude approximately $13.2 million in stock-based comp expense and $0.4 million in amortization of intangible assets in the first fiscal quarter.

Including these non-cash expenses, we anticipate a GAAP operating loss between $28.5 million and $26.5 million.

We anticipate a GAAP net loss between $18.8 million to $17.5 million, or an EPS loss of $0.32 to $0.30 per share.

We anticipate an effective non-GAAP tax rate of approximately 31% and a GAAP tax rate of approximately 34% in the first quarter.

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, while we are pleased to report quarter and full-year results ahead of expectations, we remain focused on the investments and execution necessary to build our emerging leadership position in the large market we serve.

We believe this leadership position will enable us to drive strong recurring revenue growth and expanding profitability in the years ahead.

Operator, can you now open the call for questions?

Certainly, thank you.

(Operator Instructions)

Nandan Amladi, Deutsche Bank.

The first question is on Millbrook.

Marcus, you cited the number of customers which were organic and also some that came via Millbrook.

Are any of the Millbrook customers candidates for selling your core product and how's your progress on that front?

Definitely the case.

They're all P/C carriers and therefore targets for our software and it's a very logical conversation for us to have with them.

That was not a primary motivator in the acquisition of course.

We were primarily motivated by expanding our product value proposition and to encompass the PI and data warehouse and ODS domains.

But the fact that they had some good customer relationships was a nice plus.

And a quick follow up if I might, obviously your DWP at $234 billion is pretty impressive.

But given that that number doesn't grow linearly with the number of customers, what are some of the other metrics that people can -- investors can track particularly as your product portfolio has grown?

Well we -- that's a trailing metric just like a number of other metrics we share, like the recurring four quarter license and maintenance growth.

During the Analyst Day we'll continue to update a metric that we've shared in the past which is what portion of wallet, if you will, of that -- of the premiums that are represented by our customers have licensed our software.

And that's a little bit more intricate calculation now since we have more products to sell to our customers.

But we think that a large portion of the total available market opportunity within our existing customer base is still ahead of us.

Thank you.

Sterling Auty, JPMorgan.

So I wanted to start with what changed from last quarter's call where you talked about fiscal '14 preliminary comfort with I think Street consensus was in the mid-340 range to now making the change primarily here on professional services.

Did something change in just the SI base?

Did something change in your customer buying behavior?

What's the driving force behind the strategic shift that you're undergoing?

First off, Sterling, you're absolutely right that the change in outlook and plan is really concentrated on the way we see professional services demand.

As we've been forthright from the very beginning, as a public Company our emphasis is on recurring license and maintenance revenue not on professional services which is an enabler to the former.

What's happened in the last couple of months I think has been mostly very encouraging in that our partners have really built up the credentials and the credibility to do the large majority or even the entirety of implementations of PolicyCenter and InsuranceSuite.

We -- in previous calls we've talked about how we've had to bring our SI partners up the enablement curve on those for PolicyCenter and the full suite as we did with ClaimCenter.

And the evidence is is that's happening faster than expected and that was reflected in the decisions of a number of our customers just in this last quarter to really rely heavily on SIs, ahead of our pattern in earlier in the year and before.

So that's actually quite encouraging because that's exactly what we have always wanted our business model to steer towards.

It's happening a little bit faster than we had planned even compared to a quarter ago, and we want to make the right adjustments mindful of that likely trend, the trend continuing and possibly even accelerating.

Then when you look at the comment about the increased investment, how much of that investment is headcount related versus other infrastructure that you may be putting in place to scale the business?

The reason I ask is relative to our estimates for example, sales and marketing was the biggest driver of margin upside.

And if that was all headcount, it would seem like you missed hiring plan by several dozen.

So why should we now look at 6% non-GAAP as the right operating margin?

What would make us believe that you'll be able to hit your hiring targets in 2014 to get down to that level?

I'll have a few comments on that and then Karen should weigh in as well.

Overall for '14 we have much more moderated headcount growth across all functions.

We talked about services, but that's definitely the case for product and for sales as well.

We had a huge year of hiring that was incidentally very much second half loaded or even Q4 tilted really across every function.

And of course now we bear the full-year cost of that into '14 which is the main driver of increased expense and therefore margin, the change in margin.

Karen, do you want to comment?

The other thing, Sterling, is it is sales and marketing and quite frankly we spent less on marketing than we were anticipating.

We had a reasonable budget included for Q4 with a number of activities.

And I think we were just a little over ambitious in thinking that we would spend as much of those marketing that -- those marketing dollars as well.

So we executed --

Okay and then --

Quite nicely to the headcount and growth.

So can you give us what the change in headcount was quarter over quarter so we can get a sense of what that incremental expense would look like that carries through for the full 2014?

Sure.

So sales and marketing ended at 177.

So we had a net addition of about 55 people during fiscal year 2013.

Okay.

And maybe, and if you want to do it off line, but total headcount was?

Happy to do it here.

Total headcount was 1149 which was a net addition of 312 people.

And last question and I'll turn it over, if I look at the Q1 guide and the idea of the loss, should what we be interpreting here is you had several go lives in the fourth quarter where the associated professional services revenue is not going to be contributing in the first quarter?

But of course you're probably not going to get rid of those heads, so you've got the burden on the expense side in addition to the hiring that you saw in the fourth quarter and that's why we're getting the first quarter impact that we are?

So we can talk about professional services and -- but there's a larger factor that's there.

So we do have an annual services meeting.

This year it happened to fall in the first quarter of August which takes the consulting team out of the field for a number of days, so they're not actually at our customer sites and billing.

So that leads to a natural drop off in the number of available days for these guys to work in Q1 compared to what they did in Q4 and in Q1 this year compared to what they did in Q1 last year.

The biggest reason for the loss really is the pattern of our license revenue.

As you'll note, we had a large increase in license revenue recorded in the fourth quarter.

The expectation for license revenue in the first quarter goes back down again to more seasonal -- the expected seasonal pattern there.

Most of our license contracts are clustered around the fourth quarter and that's -- that license revenue is what drives profit and margins.

Got it, thank you.

(Operator Instructions)

Brent Thill, UBS.

Marcus, to drill into this services strategy, it's fairly rare for customers to pull back as quickly as perhaps you're guiding to on the services side, it's going from you as the main contractor to the third party.

So I guess, what's flipping the switch?

And I would assume it's that the big SIs are finally up to speed, they've got big practices but we've rarely seen this so help us understand why you think this happens so quickly.

And if you could also fill in from an SI perspective, who do you see as the most staffed up (inaudible) comfortable to practice as it were, they've put them on par with your internal services capability?

Sure, let me answer the second part first.

The -- we've grown our services relationships with a number of the top SIs, that would be our Ernst & Young, PwC, Cap Gemini, IBM, and then also Cognizant, and a few others that are more regionally specific in Europe and Asia.

And we've seen growth in really every one of those services -- every one of those strategic relationships where they have trained more consultants and gotten them more than staff, shadowed them on our projects and so forth.

I neglected to mention Deloitte as well.

So it's actually not a discontinuous process, it's been fairly smooth.

And that's really reflected in the metric of total number of trained consultants in Guidewire practices at these partners.

And that's been a steady ascent that we monitor pretty closely as one of our operational metrics.

Of course the way the demand comes in in these projects isn't quite as smooth, right?

There are large projects that after a prolonged sales cycle and evaluation then gets decided and committed and then those resources are dialed in for what might be a multi-year horizon through multiple phases of a project, right?

And so that even though the underlying phenomenon is smooth and continuous, the way that it manifests itself in commitments for new services can actually be lumpy and that's a characteristic of our business overall.

A lot of continuous effort that then culminates in a big transaction which happens in our case tends to be clustered around Q4.

So that's the main dynamic that you see there.

All that said, it is happening a bit faster than we expected.

And really it's not a question of capability, or it's only partially a question of capability, it's also a question of credential.

Partners have to prove that they've done it before and had projects that went live that they -- customers that they got successfully to that key milestone.

And we've had a lot of good -- a lot of go lives this year that gave our partners some key credentials that they can take to new prospects, and that's been I think pretty compelling.

Okay, great.

And Karen, a quick follow up on sales, you hired I believe roughly 45% growth in sales this last fiscal year.

Is there a similar trajectory that you're anticipating for this fiscal year or maybe can you give us a range of how you think about that?

So hi, Brent.

I don't expect sales to grow -- sales and sales capacity to grow quite as fast as they did this year.

But it's still going to be a very strong increase in capacity.

Sales reps, sales consultants, inside sales and then probably a little bit of management out there as well.

Thank you.

Walter Pritchard, Citi.

Hi, guys, it's Ken Wong for Walter.

On this whole services strategy, it seems like it makes sense to go after the recurring revenue.

But in terms of the ramp from your partners, any sense for what the mix in terms of the revenue from services are from partners versus your own internal staff?

Or if not that metric, maybe you can give us a sense for how that trained consultant headcount has moved from last year versus this year?

So on the last point, trained consultant headcount went from 2700 to about 3700 in the present.

One metric I think you asked for Ken is a little bit hard for us to track, which is what -- of the total demand for services in the whole market, what portion of it goes to our consultants versus partners?

It's a little difficult to track that.

We have some guesses at it, but we're not privy to that full calculation on the part of our customers how they and we've -- there's always -- there's also a substantial number of additional services that always surround our projects that as the kind of work that we would never do that we don't really measure or have clear visibility into.

We do look very closely at the level of staffing and the percentage of the projects that we are doing consistently around the world.

And our ideal target is to do something like 10% to 15% of the work.

There are cases where we do less than that, cases where we do more and I would say qualitatively speaking we're seeing that number trend downward which is of course what we've always wanted to steer towards long term.

Got it.

And Karen, it seems like the tax rate was a little higher this quarter, is it purely because you guys exceeded on profitability so much or is there anything else pushing that number up?

In fiscal '14?

I think specific to Q4, it looks like it was -- looking at the model here it looks like it was pushing -- well it was definitely above the 30% that I guess we had in our model.

I'm wondering if that's specific because the quarter was -- you guys had so much upside in the quarter on the net income basis or if there's anything else under the surface there that was bumping that's up?

So fiscal '13, if you look at the full-year tax effect it was a little less than 11% for the full year and you do -- you always do a series of true ups in the fourth quarter.

Some of the biggest benefit that we actually get is the R&D tax credits and then foreign tax credits that we can -- that we apply against the US federal rate as well.

So that really benefited us in fiscal year '13.

Looking forward at FY '14, the R&D tax credits go away at the end of December so you actually can't project past those next few months there that Congress will reenact those R&D tax credits.

So that's really what our projection is based on.

All right great.

Thanks a lot, guys.

Brendan Barnicle, Pacific Crest Securities.

Marcus, you noted the strength you guys have seen and the acceleration around suites.

And as we think about next year, are we fundamentally going to see a shift in that mix that we have between suite and individual product sales going forward?

And are you -- have you changed the go to market strategy any as you've had more adoption of suites?

No change in market strategy.

We've always wanted to have every insurer adopt the entire platform, the entire InsuranceSuite.

A little bit of shading on that approach is that next year of course we want them to buy some of the new product offerings that we have in data management, we want them to start sending data to us through Guidewire Live and then of course become a paying customer for that.

We have a new set of offerings which I didn't mention in the main script, in the mobile -- in the mobility area that we want them to license and these are all offerings that really you can only license after you've gone through the hard work of implementing one of the core transactional systems that are in the suite.

So we want to -- we have every rep is trained and equipped to go and position the entire suite.

We don't have a product specific sales force in that sense.

And our overall message and value proposition is transformational at the level of the whole operating platform.

We've -- we are really pleased this year with the degree to which we were persuasive with that and have developed the proof points to make customers go from a platform they've had for 30 years and basically commit to doing all of their core transactional and operational systems on the suite.

And that was really encouraging and we want a lot more of that to happen in this year as well.

Great.

And then Karen you had talked about the R&D spending moderating.

Would we expect to see that down sequentially in Q1 from Q4?

It looks like in the past we've seen that and obviously [until] the marketing we typically see that so should we expect that again?

I wouldn't -- there's nothing internally that would focus -- that would put our attention to having R&D decline in the first quarter over the fourth quarter.

We had an awful lot of people in R&D last year and we'll see the full effect of those going into fiscal '14.

As a matter of fact, I would expect actually increases almost across the board going into first quarter compared to Q4.

Across the board you mean in sales and marketing as well in G&A as well?

Yes, a couple things.

So well let's talk about the three biggest categories.

G&A is pretty moderated so that's a small percentage of it.

It might go up a little bit because we actually do the audit for the fiscal year in the first quarter so we get a little bit of extra additional audit fees there.

But if I go across the board, so cost of services is higher in the first quarter because we have the annual service meeting, this year it happened to fall into August.

In sales and marketing we have our big connections users conference coming up in the first part of October.

It's a relatively expensive event and we expect attendance to be up about 25% to 30% this year over the prior year, so that will be a one-time expense hit in that first quarter.

And R&D, many of the R&D team actually intend to attend that as well and help put on that conference so there'll be some incremental costs associated for them as well.

Great.

And then lastly on the last call you talked about seasonality through the year where revenue would be low 40% first half for the year then the remainder in the second half, is that still the same or are we going are we going to be more 40%, 60% or any change there as it relates to the change in services?

So the biggest -- so services I think will be fairly moderate throughout the year, changes quarter to quarter outside of Q1 where we have pulled people out of the field for the service meetings, so I expect that to be a little bit lower.

We get a little seasonal adjustments for professional services because they tend not to work during Thanksgiving or Christmas or New Year's, so again there's less days to build -- to bill our customers and work at customer sites.

So that's the biggest difference in the services.

On the licensed side, we have -- if you look at the results this year, license revenue was heavily skewed toward the fourth quarter.

And that's because our initial contract periods and the anniversary dates of those term license contracts are really heavily clustered around the fourth quarter.

So it appears as very backend loaded and it's backend loaded just from the existing customer base not without consideration for new sales that will undoubtedly come more toward the back end of the year as well.

Great, thanks for the clarity.

Tom Roderick, Stifel.

Maybe turning to the idea of guidance where you don't include Tier 1 deals within the context of your guidance, can you speak at least qualitatively to the pipeline of opportunities you're seeing in the Tier 1 front?

Last year was a big year, maybe not the expectation you want to set that you're going to redo that year.

But in general can you talk about what the pipeline looks like?

And maybe adding on top of that, Marcus, you've been wearing that sales hat for a while now, is that a hat you want to keep wearing or is there a process of transition where you'd like to bring in some outside talent to help you with sales organization?

Thanks.

Thanks, Tom.

To your first question I think you captured the spirit of our remarks perfectly in that we just want to set expectations with our characteristic conservatism with respect to these big transactions.

It's the nature of the decision that we are -- that a company has to make especially a large one to make a very large capital investment on a big transformational project that they only do every couple decades.

And by its very nature, it's very hard to pin that down exactly to a given quarter and in some cases even over multiple quarters.

So we actually enter this year with a lot more conversations going on with that -- at that Tier 1 level than we've ever had before.

All kinds of good things have happened to support that.

The momentum we had with big decisions that were made last year, we had some huge go lives that happened that really helped.

Our largest customer Tokyo Marine went live a couple of months ago, American Family was a major Tier 1 personal lines insurer went live with PolicyCenter a couple months ago.

So these things are extremely helpful for the large Tier 1 conversations, but translating goes into consummated transaction is just an inherently, and this will always be the case, an inherently trickier task.

And we want to -- we don't want to increase the level of optimism that we bring to that forecasting challenge than where we were 12 months ago, right?

Even though a lot of the fundamentals in the business continue to improve.

To your second question, about my own role, I think it's inherent in our business that the companies when they make this decision, want to have a principal to principal relationship with us.

We're in very strategic dialogue, there's always a very strategic dialogue before a company makes this kind of choice.

And no matter what happens, even with the most brilliant sales team, I'm going to have a role as long as I'm in the position to make it clear that the Company is really committed to their success and that's been our signature in the market that we commit as a leadership team and as a whole Company to the success of these programs and we live up to every promise.

That said, the team is a lot larger than it was even just a year ago or two years ago and more professional sales management would be a great thing.

We've continued to add to that.

We have a great leader in Europe for example and out of the management level to North America which I think really helped that team's results this year and there's probably more recruiting of that sort ahead.

Great.

Maybe one last question for me, let me shift back to the idea of the big deal pipeline.

Undoubtedly these things are discussions that go on over a long period of time.

I would imagine that you have a handful of larger deals that you're in deep discussions on.

As you look at those, are those customers -- have they made the move to select various systems integrator partners hence perhaps that's part of the guidance when you look at the big deals that are about to close, there's already been an SI selected and therefore there's not the need for your services?

Or is this truly just a proactive maneuver to say, we've trained more SIs, we have more consultants out in the field that understand our product and now we can start to deemphasize our own?

I'm trying to get a feel for how much of this is two steps ahead of the curve versus just the customer selection process being a leading indicator of what's to come on the systems integrator side.

Yes, that latter set of themes is definitely true.

But yes and even in the big deal conversations that we're currently engaged in, it's a foregone conclusion that a systems integrator is going to do the large majority of the work.

We've proven that paradigm out now a number of times.

And even when the exact partner is not finalized yet, they're down to a handful of credible choices and it's just a foregone conclusion that one of them is going to do the large preponderance of the work and even for a huge project, the Guidewire involvement in that is going to be low single-digit headcount participation.

Very important, sometimes it will be over a period of years even as the whole program rolls out but in -- but the quantum of involvement will be really modest even for the very large projects.

And that's been validated now to a degree that we feel confident it's the paradigm by which these transactions will happen.

That's great.

Thank you very much.

Ladies and gentlemen, that concludes our question-and-answer session at this time.

I will turn the call back over to Marcus Ryu for final closing comments.

No further comments.

Thank you all for participating and look forward to our next conversation with each of you.

Good bye.

That does conclude our conference call for today, everyone, thank you all for your participation.