Guidewire Software Inc (GWRE) 2015 Q1 法說會逐字稿

Good day and welcome to the Guidewire first-quarter FY15 earnings conference call.

Today's conference is being recorded.

At this time, I would 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 first quarter of FY15, which ended on October 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, 2014, which is 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 have been provided in our press release issued after the close of market today.

Additionally, we are providing detailed reconciliation data as well as recurring revenue calculations in a supplement posted on our IR website at IR.

Guidewire.com.

Finally, at times in our prepared remarks 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 on our first quarter FY15 financial results and our outlook for the second quarter in FY15.

Thanks, Karen.

We're off to a solid start in FY15, with first quarter revenue and profitability that exceeded our expectations.

Total revenue of $79.7 million increased 20% from a year ago, with strength primarily in license and maintenance revenue.

As always, our business model focuses on recurring revenue from term licenses and maintenance.

On a trailing four-quarter basis, this revenue totaled $195 million, an increase of 31% from a year ago.

We continue to make great strides in our journey to enable the transformation of the P&C insurance lifecycle and thereby the $2 trillion global P&C industry itself.

Our game plan for 2015 is straightforward.

First and foremost, to extend our distinctive track record of customer success.

Second, continue to cultivate our large community of system integrator partners to carry the preponderance of implementation work.

Third, increased R&D investment in InsuranceSuite to drive differentiation and to new solutions with native integration to the suite.

And fourth, use the combination of the first three elements to continue to win market share as insurers invest in their future.

During the first quarter we made progress in each of these areas.

On the sales front, we saw continued momentum with InsuranceSuite and our newer offerings and further expanded our global reach.

For example, Republic Group, a multi-line regional insurer based in Dallas, selected full InsuranceSuite, Rating Management and our Data Management and Business Intelligence solutions, DataHub and InfoCenter, for their entire business, both personal and commercial lines.

InsuranceSuite was also selected by State Trust, a life insurer who has recently expanded to P&C insurance through the acquisition of several P&C carriers in Latin America.

State Trust also licensed our Rating Management, Reinsurance Management and Client Data Management modules as well as our mobile and portal offerings, placing them among the broadest adopters of our software.

Hartford Steam Boiler, who went live with ClaimCenter in FY14, elected to become a full InsuranceSuite customer, licensing PolicyCenter and BillingCenter.

They also selected Rating Management, Reinsurance Management and Client Data Management, as well as DataHub and InfoCenter.

Guide One, a customer based in Des Moines, extended their Guidewire relationship as one of our early adopters of Guidewire Live apps soon after going live with PolicyCenter.

We also continued to expand our relationship with large multinational insurers during the first quarter.

Zurich Insurance, one of the largest multinational insurers in the industry, expanded their ClaimCenter license from its use in Canada, Japan and the UK now to Zurich, Italy as well.

Direct Assurance, a subsidiary of Axa France, has licensed ClaimCenter with Axa subsidiaries in five countries now using at least one Guidewire application.

Our global success in the quarter went beyond these deals in Italy and France to include sales in six countries outside of the US.

State Trust selected Guidewire for operations in the Dominican Republic and El Salvador.

Seguros BBVA [Bancomerica], our second customer in Mexico, has selected ClaimCenter and La Capitale Insurance in Quebec selected BillingCenter and Client Data Management, joining numerous other Canadian insurers as Guidewire customers.

On the implementation front, we extended our track record with multiple major go-lives across all three components of InsuranceSuite.

These included a full InsuranceSuite go live at Confluence, Oklahoma, ClaimCenter go-lives at Unipol, Italy, Texas Municipal League and Westfield Insurance, a BillingCenter go live at Enumclaw Insurance and PolicyCenter go lives at Guide One and Nationwide.

The last of these is particularly significant as it represents a major milestone in that tier one insurer's full transformation of their core operating environment, as well as the first go-live PolicyCenter at an insurer with over $10 billion in premiums.

Just after the end of the quarter, we held our annual user conference, Guidewire Connections.

This year we had a record 1,300 attendees participate, with customer and prospect attendance up 24%.

We're pleased to see that Connections has evolved into a major technology event for the P&C industry.

At Connections this year, we made three commitments to the audience that are worth reiterating here.

First, our mission asserts a singular focus on the P&C industry for an indefinite horizon as we see tremendous runway for our growth in serving this market for years to come.

The large majority of the industry still runs on legacy core systems and those who have embarked on the journey still have multiple systems and initiatives to follow.

Secondly, we are committed to lowering the total cost of ownership of our solutions, primarily InsuranceSuite, by building out greater content and capabilities for specific lines of business and geographic regions.

And lastly we are committed to serving an agenda beyond just legacy replacement, namely transformation of the entire P&C lifecycle through key new capabilities, including business driven product definition, digital distribution, omni-channel self-service and predictive analytics.

We're a technology Company and fulfilling these large multi-year commitments entails investing heavily in R&D to grow the organization by up to a third this fiscal year.

We're pleased that our hiring activity in the first quarter has us on track to this goal and we're especially pleased that after a very demanding search, we can welcome a key new leader onto the team.

[Ali Harell Lemoom] will be starting next week as SVP of Products, reporting to me and responsible for our entire development organization.

Ali joins us from Serena Software, where he also had the title of SVP of Products and directed a product suite for application lifecycle management.

He brings great experience in managing a large multi-product engineering organization, serving as a technology peer to CIOs of large companies and in building both on-premise and cloud-based enterprise solutions.

In summary, we are pleased with the start to our year, with continued sales momentum, implementation success and customer validated strategic clarity.

We're confident that we are well-positioned to build on our emerging leadership of our chosen market, leading the long-term transformation of the global P&C insurance industry.

I'll turn it over now to Karen for more detail on our financial results and outlook.

Thank you, Marcus.

Our results for the first quarter exceeded our revenue and earnings expectations.

Total revenue was $79.7 million, a 20% increase from the first quarter of FY14.

Within revenue, license revenue was $28.8 million, up 53% from a year ago.

Nearly all of license revenue was term-based, as perpetual license revenue was relatively insignificant in Q1 of both FY14 and FY15.

In the first quarter, term license revenue benefited from early payments and even without these payments, license revenue would have been above guidance.

Term license revenue also benefited from a customer who we signed in the first quarter of last year, but whose license revenue wasn't recognized until the second quarter of last fiscal year.

Excluding the impact of these two timing factors, total license revenue would have increased 30% from a year ago.

As expected, revenue in the first quarter included the recognition of certain long-term deferred revenue that had reached recognition milestones.

This contributed $1.4 million to license revenue in the first quarter and will repeat as a recurring term license revenue in the future.

Maintenance revenue was $12.5 million in the first quarter, up 30% from a year ago, reflecting overall license growth trends.

Services revenue was $38.4 million, up 1% from a year ago, reflecting our commitment to transfer an increasing portion of the implementation effort to our SI partners as their engagement levels continued to increase.

As such, license and maintenance represents 52% of revenue in the first quarter, compared with 43% a year ago.

Our focus on generating highly visible recurring term license and maintenance revenue was also reflected in the rolling four-quarter trends, which totaled $195.1 million, an increase of 31% from a year ago.

Geographically, the US represented 49% of revenue in the first quarter, with 51% of revenue coming from outside the US.

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 expense.

Non-GAAP gross profit in the first quarter was $48.2 million, an increase of 51% on a year-over-year basis and representing a 60.4% non-GAAP gross margin, compared to 48% in the year-ago quarter.

Breaking that down, in the first quarter non-GAAP gross margin for license was 97.7%, maintenance was 84.3% and 24.6% for services.

While we are pleased with our year-over-year improvement in services margins, on a quarter-to-quarter basis, we could see variations in gross margin levels due to shifts in timing of revenue and expenses over the course of the year.

Overall, our non-GAAP gross margin increase is a result of our shift in revenue mix toward higher-margin license and maintenance revenue as we rely more on our SI partners for service implementations.

In addition, we have made improvements in maintenance and services gross margin levels.

Turning to operating expenses, total non-GAAP operating expenses were $39.5 million in the first quarter, an increase of 13% compared to a year ago.

This resulted in non-GAAP operating income of $8.7 million, compared to a non-GAAP loss from operations of $3.1 million a year ago.

Non-GAAP operating margin was 10.9% in the first quarter, above expectations due to revenue upside and expenses that were slightly below expectations.

Also note that our Connections Conference occurred this November, meaning that a significant portion of its expenses will be incurred in Q2 of this year as opposed to Q1, which was the case in FY14.

Non-GAAP net income was $5.7 million, or $0.08 per share, also above guidance, compared to a non-GAAP net loss of $2 million, or $0.03 per share, in the first quarter of FY14.

Turning now to our balance sheet, we ended the first quarter with $631 million in cash, cash equivalents and investments, down from $647.8 million at the end of the fourth quarter, primarily due to operating cash outflows of $5.5 million during the first quarter, affected by seasonal annual employee bonus payments and higher commission payments.

Our total deferred revenue was $46.9 million at the end of the first quarter, compared to $55.3 million at the end of the fourth quarter.

As a reminder, 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 a high level of visibility toward full-year revenue today.

Turning to guidance, we are increasing our full-year revenue and profitability expectations to reflect our strong first quarter performance.

While our recurring term license model and multi-year deals provide us with high visibility on a full-year basis, our term license revenue from existing contracts and anticipated new business continues to be second-half weighted and concentrated in Q4.

Additionally, as mentioned in the Q1 recap, our guidance reflects two timing factors.

The first, early payments that were due in Q2 but received in Q1.

And two, term license revenue from agreements signed in FY14, the first quarter, where initially the revenue was earned in FY14, the second quarter, but now the revenue is earned in Q1.

With this in mind, in the second quarter we anticipate total revenue to be in the range of $81.6 million to $88.6 million, an increase of 2% from the year-ago period at the midpoint.

Within revenue, we expect license revenue to be in the range of $36.2 million to $40.2 million, maintenance revenue of $11.4 million to $12.4 million and services revenue of $34 million to $36 million.

At the midpoint, this would represent a sequential decrease in services revenue resulting from fewer working days, due to holidays and the completion of certain large projects.

For the second quarter we anticipate non-GAAP operating income to be between $10 million and $13 million, non-GAAP net income of between $6.5 million and $8.5 million, or $0.09 to $0.12 per share, based on an estimated weighted average diluted share count of 71.9 million shares.

We anticipate GAAP net loss to be between $3.7 million to a $1.1 million loss, or an EPS loss of $0.05 to $0.02, based on an estimated weighted average basic share count of 69.9 million shares.

For the full year FY15, we anticipate total revenue to be in the range of $366.7 million to $382.4 million, representing an increase of 7% over FY14 at the midpoint.

We are increasing the midpoint of our guidance range by $1.5 million despite recent foreign exchange headwinds that we expect to impact our growth by 100 to 300 basis points.

In line with historical seasonality, we expect a softer Q3 and a stronger Q4, which reflects both our existing contracts as well as anticipated new business.

Within revenue, we believe that license revenue will be in the range of $170.3 million to $180 million, an increase of 12% to 18% from FY14.

We continue to anticipate that term license revenue will grow at approximately 20% in 2015 and the perpetual license revenue will be insignificant.

We expect maintenance revenue to be in the range of $48.4 million to $50.4 million, an annual increase of 18% at the midpoint.

We expect services revenue to be in the range of $148 million to $152 million, down slightly from 2014 as we complete a few large PolicyCenter implementations and engage more heavily with our system integrator partners on recent wins.

With respect to expenses, we continue to invest in our sales expansion, though at a moderated growth pace as compared to FY14, and we are on track with our increased R&D investments this year that are focused on enhancing existing products and new technology offerings.

From a profitability perspective, for the full year we expect non-GAAP operating income in the range of $47.5 million to $55.5 million, which would produce a non-GAAP operating margin of 14% at the midpoints of our revenue and operating income outlook; non-GAAP net income in the range of $30.9 million to $36.1 million, or $0.43 to $0.50 per share, based on an estimated weighted average diluted share count of 72.1 million shares; GAAP net loss of $6.7 million to income of $0.1 million, or an EPS loss of $0.10 per share, to break even based on an estimated weighted average basic share count of 70.4 million shares.

Our non-GAAP effective tax rate for the year is expected to be 35% and the GAAP effective tax rate is expected to be 15%.

Keep in mind there are a number of factors, including R&D tax credits, which might influence the rate and as such it could vary from our expectations.

In summary, we are off to a strong start in FY15, with top and bottom line results that exceeded expectations.

We are excited about the opportunity to continue leading the transformation of the P&C insurance industry with our modern flexible software and solutions and remain confident that our leadership will enable us to continue delivering strong growth and expansion in the years ahead.

Operator, can you now open the call for questions?

Of course.

(Operator Instructions)

Nandan Amladi, Deutsche Bank.

Clearly your services revenue came within expectations of keeping it flat year-on-year, but what are you doing to make sure that your implementations and the quality of the implementations isn't impacted as you share more of the work with the system integration community?

You correctly note, Nandan, that, that the customer success referenceability, the long-term relationship, that these are the most important assets of the Company and they require sustained management attention at all times.

That's been true for our whole history and will always be true regardless of the mix of services division of labor between us and our SI partners.

A couple of things have helped as we continue to mature our model.

The first is that we have an increasingly veteran services organization ourselves, with better and better tooling for implementation and a more and more refined methodology that we apply.

We share all of that very transparently with our partners, who are also coming up the enablement and experience curve across many implementations and, in some cases, are building their own proprietary assets to help them with their own methodologies.

Things like accelerators, estimation tools, and the like.

So there is a process of collective learning and experience that has helped make our projects not only more efficient but also more conformant to a best practice model that we've evolved now through almost 200 implementations.

All that said, every project is unique and very, very demanding and we have a system of oversight at a management level on every program to make sure that they remain on track and thus far that's been the case.

Thanks.

And a quick follow-up if I might.

At the recent Guidewire's Connection Conference, obviously you had record attendance but how was the lead generation activity?

How many prospects were there this year relative to conferences in past years?

I don't know an exact number, but we had a very robust growth in both customer participation and prospects.

I'd say they both increased proportionately to the total attendance count.

It's by far the most important sales event for us over the year.

It does -- so not so much because of a lot of sales activity that we initiate at the conference, but simply from the tremendous rapport and information experience sharing that happens between our customers and prospective customers, which of course we do everything to facilitate.

So we make enormous progress in our sales cycles every year at Connections and this year was probably the best ever in that regard.

Thank you.

Sterling Auty, JPMorgan.

Let's go into, just so we have clarification, the two items on the license side.

Karen, can you remind us again of the amount of the impact to last year's timing?

And then what was the -- I know you gave us the 30% benchmark, but if you could give us a little bit more color, what was the pull-forward in terms of the early payment this year?

You bet.

So the total amount of both the early payments that came in from Q1, as well as the term license revenue that was recognized in Q2 of last year that was recognized in Q1 of this year, is about $4.3 million combined.

Okay.

And the early payment for this year?

Can you give us just that component of it?

Sterling, my preference would be to not.

That is because there's one contract, actually, that was recognized in Q2 of last year and then recognized in Q1 of this year, and for confidentiality for our customers, we'd prefer not to give the exact amount of that contract.

What I can tell you, it was roughly three-quarters one way, between two-thirds and three-quarters was the contract and the balance of it was the early payments.

Okay.

All right.

You'll see by the end of the first half that of course it all equals out.

So first half Q1 and Q2 combined compared to Q1 and Q2 last year, there will be no seasonal difference between those.

It's just important to note them between the timing of these quarters.

Okay.

I got you.

I got you.

Then, in terms of the -- on the services side, what was the comment that you made about, wasn't there some long-term deferred revenue that got recognized?

Did that come into the services and did that help the services margins in the quarter?

It did.

In the call that we had in September with our fourth quarter results, when we had provided guidance for our first-quarter revenue as well, we had noted at that point that we had a contract sitting in the balance sheet that we believe was going to be brought into earned revenue in the first quarter, and in fact that happened.

The break out of that is, the total amount of it is about $4 million.

Roughly $1.5 million of that came into license revenue.

About $400,000 of it came into maintenance revenue.

And then about $1.9 million came into services.

So it did improve the services margins by roughly 3% to 4%.

And that's where you're saying when we look at it, the margins going forward are like when we look to next quarter, we need to adjust for that but you're still seeing on the year-over-year, you'll still see improvement?

Absolute improvement.

No question about it.

Okay.

Last housekeeping.

The FX impact, you mentioned a 1% to 3% headwind on the full year that you are absorbing but still increasing the guide.

But any sense of what the FX impact was in the quarter?

Pretty minimal.

Most of our revenue that happens to fall into the first quarter, a lot of that is based in US dollars.

As a matter of fact, the preponderance of our revenue really is based in US dollars.

We have some amount that's in euros, some in sterling, and a little bit in other less noted currencies as well.

But we've had very little impact in the first quarter.

All right.

Great.

Last one.

Marcus, just on your front, when you look at the opportunities, especially in that Tier 1 pipeline, for the remainder of the year, what's driving the sales cycles at this point?

You've enjoyed a little bit of a decent, let's say a hardening margin in P&C for the last several years.

How do you think about this fiscal year in that pipeline in terms of the IT budgets versus pressures to go ahead and get those decisions made and get moving on transformation?

Right.

As always, there is a complex matrix of factors that every enterprise, Tier 1 or not, has to wrestle with.

In the Tier 1 sector in particular, we are in dogged pursuit of many of them.

Some of these conversations are pretty mature in that we've been talking to insurers in some cases for multiple years before we get call them our customer.

We remain optimistic and hopeful that we're going to get some of those converted.

The way we see it is an inevitability in every case and in aggregate, though at times it can be frustrating to pin it down to a specific quarter, as we've talked about in previous calls.

As you've noted, there's been a modest improvement in the macro conditions for insurers and I think most large Tier 1 insurers would describe a small improvement due to macro factors, which is obviously a helpful fact but not a huge driver.

The most important driver by far is just the sheer obsolescence of the legacy environments combined with a recognition that the consumers now want to interact, transact and be served in a very different way than they have been traditionally by insurers and that any insurer operating entirely on a legacy platform is woefully out of position.

Got it.

Thank you.

Brent Thill, UBS.

Marcus, on the sales hiring, I recognize that 2013 was a big hiring year.

You tapped the brakes in terms of hiring in 2014 and then you're sending the signal of tapping the brakes even a little bit more in favor of R&D.

But the big question I get is in the market this as early as yours and clearly you're a leader in your market.

Why slow that rate at the pace that you're slowing it to?

What are you looking for to inflect that back up?

Is this just the year of R&D and then sales and marketing gets a bigger lift as we go into FY16?

It would be great to get your thoughts.

I appreciate the question.

As you noted, just to be explicit, we are continuing investment in our in sales in every region across pretty much every sales function.

That's presales, direct sales reps, sales management, et cetera, and that's because we do see an expanding frontier of opportunity around the world and we need more sales coverage to achieve that.

The last two years, in particular 2013, as you noted, was a bit more of a surge, recognizing that we were behind the level of coverage that we thought was warranted given the maturity of the market and our position within it.

I think we've more or less normalized that but still have a steady amount of sales hiring ahead and that's going to continue indefinitely.

To your question about when do we accelerate that more, there are a couple are couple of natural governors that we deal with as we become an international company.

For example, there are a number of geographies, Germany comes to mind, where we're in a lot of conversations but there's just a natural limit on the pace at which insurers will adopt.

Not so much because of cultural attributes, though there are some of those factors, but because they want to see the experience of the early adopters before you get the proverbial mass-market to follow behind.

Having too much sales coverage is kind of pushing on a rope until you have a lot of proof points to establish and that goes not just by geography but by product area as well.

So right now, we're about a 1.5, 2 years into a lot of new products initiatives that have early adopters.

Those projects are going well and there are a lot of success stories to tell.

We had some early versions of those to share at Connections, but we'll have a lot more in the coming quarters.

Those are big catalysts, of course, to the next wave of adoption and a more mass-market approach to distribution.

Great.

Just a quick follow-up for Karen on the initial duration, or existing duration, of your contracts there.

Are you still seeing roughly a five-year average?

Are there any change there?

I'm just curious at least on some of the initial signings of new clients.

Are you starting to see more of the suite taken up upfront rather than the modular approach that maybe you saw in the past?

So a couple things.

One, the duration seems to be about the same.

I think most people, it seems, in the insurance world from a technology standpoint think about a five-year horizon and so that tends to be what the minimum contract length is that they are requesting of us.

It's not on our behest.

Honestly, we would pay the sales reps anything if it's three years or longer so it's really reflective of our customers' commitment to the use of our products for a long time.

The second question you asked?

I'm sorry.

Just on what you're seeing in terms of the uptake of the multiple products versus the modular basis out of the gate.

Yes.

It has changed a bit over time and it's really reflective more of the size of the carrier.

We see mid-sized carriers typically now buying the full InsuranceSuite if they're a first time customer for us, but we see customers who bought one product, or maybe for a single line of business a while ago, coming back and buying that second product with it as well.

I think it's a nice healthy mix of customers buying the full suite and committing up front or making more staggered approaches of that as well.

But the impetus of your question, Brent, is we think was right on the money that we're really encouraged by the number of insurers who can see the value of a unified platform delivered by one design team, by one delivery team, one product team.

That's a very key part of our growth hypothesis going forward, that we can build additional products that support other dimensions of the insurance lifecycle beyond the traditional purview of the legacy system and have very rapid adoption and perhaps, if we are very successful, even diminishing cost of sales.

Not to get ahead of it, but that's part of the aspiration here.

We think we see some early proof points that are confirmatory of that.

Great.

Thank you.

I'd like to elaborate a little bit on the sales question that you had on the number of salespeople.

We are tapping on the brakes slightly, but I want to emphasize slightly.

Total sales and marketing personnel went up about 23% in 2014 over FY13 and there's only a few percentage points difference on what our expectations are for this year, so please rest assured that we are still putting our foot on the gas even though it's maybe not down quite as hard as it had been in the last couple years.

Perfect.

Thanks.

Walter Pritchard, Citi.

Karen, just wanted to make sure, on the guidance from last quarter, you had guided, I think, $23 million to $27 million and I had my notes that, that had included some of this -- I had in my notes $1.8 million.

I'm just trying to square your comment with you were above the guidance with the $4.3 million overage that you had from the two factors and just trying to make sure I'm clear on what was included in the guidance last quarter.

That's right.

Included in the guidance, yes, was the about $1.8 million that was coming off the balance sheet as from deferred revenue into earned revenue.

That was included in the guidance.

The -- there was a little bit of early payments in Q1 of this year that was not expected, but we also did outperform on the new business compared to what we had included in the guidance as well.

Got it.

Just as we look throughout the year, you did talk a little bit about the January quarter and the compares from last year.

Are there any other amounts that you have that are deferred scheduled to come off that are unusual that we should know about in either -- other than what you've talked about in Q2, Q3 or Q4?

No.

Not a thing.

Okay.

Great.

Thanks for clarifying.

Tom Roderick, Stifel.

Marcus, could I get away from the core InsuranceSuite for a second and talk about some of the other products?

Seems to be you're mentioning a little bit more frequently things like the DataHub, the Rating and Reinsurance engines.

Can you talk about what sort of incremental uptake or any sort of momentum shift you're seeing with those newer products?

What is the inclusion of those products in some of the deals you mentioned doing to ASPs in the cases where they're adopted?

Right.

It's slightly different for each of the product areas.

One point of clarification is that Reinsurance and Rating are actually components of PolicyCenter.

They are aspects of functionality that can be turned on or off modularly whereas Guidewire Data Management, DataHub and InfoCenter or Guidewire Live or our portal offerings, are really additional pieces of software that get implemented.

In terms of adoption, we're seeing pretty robust uptake on all of those by our customers.

I wouldn't single out any particular one of them as being more vigorously adopted or others that are lagging behind.

I mean, all of them we have followed a similar curve of early adopters who find it very compelling and are willing to take a bit of advanced risk to getting more and more mainstreamed and now you see in the case of something like Reinsurance or Rating, it's just the norm that gets included in a typical sale.

In terms of ASP influence, it's highly variable.

There are cases where it can make a material difference.

One of the large deals that we announced last year, Data Management was a significant component of the license price.

I don't know the exact percentage but definitely a double-digit percentage.

In other cases, their use of it is more provisional or experimental to start with and with an intention to expand its use if it's proven out, but we still include it as part of the initial sale because obviously, we want to -- we welcome the early adoption in some of these cases.

So it's a little bit early for some of the products to call both the pricing and their contribution to ASP, but it's meaningful and if you were to look at our multi-year aspirations for our growth plan, new products play a meaningful wedge of that growth.

Great.

Maybe one more question just following up on the product section itself.

You announced a new SVP of Products.

Does this signal the addition of a new leader of that group?

Does that signal any sort of philosophical shift with the way you bring products to market, developments, support them, anything that we should understand from that hiring as the way it might impact your organization?

No sea change to proclaim.

We will actually be -- I anticipate that we will be hiring additional veteran product leaders to the team.

We have now a 350 person development organization with a very complex, or an increasingly complex portfolio of products that require more and more development leadership and experience from the outside.

The technology approach that we take to each domain may differ.

InsuranceSuite has traditionally been a large-scale, on-premise, highly configured, highly integrated solution and that was appropriate for -- and it remains appropriate for the kind of problem that it addresses.

It's quite a different story for something like Guidewire Live, where you're dealing with data visualization on a standard data set and that's the perfect kind of solution to have instant on delivered in a cloud multi-tenant modality.

We need to leverage all of those different approaches specific to each functional domain and it's very useful to have people with expertise in those different technologies as part of the team.

Perfect.

Thanks very much.

Brendan Barnicle, Pacific Crest Securities.

Marcus, I wanted to follow-up on a question Brent had asked a bit earlier.

In your prepared comments, you talked about one of the big resistance points still being getting people to move off of their legacy systems and I was wondering, what it is that holds them back and how you can accelerate that almost cultural change in attitude, particularly given how many leading vendors you've got on your platform now?

Right.

It's a central fact about our business, and this has always been the case, that there is a very high switching cost to adoption and of transition from a legacy core operating platform that has 80% to 90% of the internal employees of a company living within every day and that houses all of the core transactional data, all of the financials, all of the mission critical data, the products, the customer records, et cetera.

This is just not an easy thing to transition away from.

It's not so much a technology problem as it is just a complexity data mapping challenge and integration challenge.

So how do we accelerate that?

How do we improve that?

Increasingly, with a more and more disciplined and efficient and expert methodology for implementation, as I mentioned earlier.

But another theme that I described in the prepared remarks that we underscored to our audience at Connections is that we want to lower the total cost of ownership with a more and more complete closer and closer to ready to go out-of-the-box solution.

That requires more engineering effort, because the product has to have comprehensive content for every line of business, for every variation, for every geography that we're in as opposed to expecting all of that, or a large portion of that, to get configured in a given implementation.

That's a long-term commitment that we're making as an organization, really to the industry, that we want to continuously elevate the completeness of the product right out of the box.

That lowers adoption costs.

That lowers transition cost and total cost of ownership.

All of those things are the biggest contributor to driving adoption speed.

Great.

Then I had one follow-up.

We saw really nice acceleration in your rolling four-quarters recurring revenue that looked like the highest level we've seen in over a year.

Obviously, that was somewhat impacted by the couple of items that Karen called out, but was there anything us that was driving that?

Is that Connections?

Is that seasonality?

I was surprised at that kind of strength in this quarter.

No, I wouldn't attribute it to Connections in particular.

It was, again, a great event but some of the benefits of that event are going to play out in coming quarters.

I think we advanced a number of significant deals that won't -- they didn't close this quarter and probably won't close next quarter and we have a lot of work to get closed within the fiscal year, but that's just the nature of our business.

How it plays out on a quarter-to-quarter basis is always a bit of a guessing game for us and that's why we try to take a conservative approach to forecasting and guidance.

Very mindful of that fact.

The other thing that makes a difference is less perpetual licenses.

We have been quite successful through our sales team and influencing our customers to buy on a term license basis so that all benefits in that recurring license as well.

That's a great point by Karen.

It's not -- the general recognition by the industry, and indeed by CIOs across all industries, that a perpetual license model for large-scale enterprise software is not a winning model, has been helpful to us.

We don't get all the credit for that, but we certainly tried to harness that recognition because it's aligned with our business model and I think we've been pretty successful at it over the last few years, which has been great.

Great.

Thanks a lot.

Alex Zukin, Stephens.

Congratulations on a great quarter.

Marcus, one for you, maybe commenting on competitve environment that you're seeing out there with respect to win rates and particularly as it relates to your confidence level or increase in your confidence level in Tier 1 pipeline?

No major changes to report in the competitive landscape.

As we've said in many an earnings call, Accenture is our single largest competitor but not our only one.

I would say at the upper tier, the larger the insurer the more likely it is that Accenture will be our primary external competitor, though in some cases we compete with some form of inaction, which is not so much a full custom development of something comparable to InsuranceSuite but might be an incremental measure taken on a legacy platform which patches it up for a year two.

We consider that a loss.

It's certainly disappointed when that happens.

That's a very real competitor as well.

So no real changes.

I would say that we steadily improve our differentiation and, most importantly, our track record of references.

Customers, the size of our customer community, the echo chamber effect of having more and more players in the industry who have made the commitment to a Guidewire application, all these things I think just continue to help our cause.

Got it.

That's very helpful.

One other question.

Talking about the Tier 1 pipeline, do you feel like you're seeing customers that have a wait-and-see approach, that they'd rather somebody, another large carrier, take the plunge before them and you feel that they may be a wave coming at some point, or is it a steady type of one or two or three a year, whatever that dynamic is that plays out?

Right.

The insurers are acutely conscious, especially at the upper tier, of the actions of their peer group.

In many cases, the executive team will be formed by people who have had experience at other carriers of comparable size, so they're all -- nothing goes unnoticed.

Obviously, every success or failure is duly registered as an indicator of what they should do as they confront the inevitability of having to replace their own core platform.

We do think of it as a wave of inevitability, but not necessarily one that we can call or time very well or one that all happens within a given year.

If you were, by other measures in addition to just the financial ones, if you were to look at the frequency with which large insurers are discussing, and the seriousness with which they're discussing, the need to replace their core operating platform, I think that's been highly encouraging and as predicted.

That's also reflected in the number of conversations that we have.

Of course, it's our job to convert that into real projects.

In many cases there, the challenge is not so much what's happening externally as just the challenge to build the institutional will to make a big capital investment.

There's no avoiding the fact that it takes a big capital investment to do one of these projects, of which our license is actually a small portion.

Got it.

Perfect.

Thanks again for taking the questions.

This does conclude our question-and-answer session.

I will now turn the call back to Marcus Ryu for closing remarks.

No other remarks.

Thank you all for participating on our call today, and goodbye.

This does conclude today's conference call.

Thank you again for your participation and have a wonderful day.