Guidewire Software Inc (GWRE) 2015 Q3 法說會逐字稿

Good day, everyone.

Welcome to the Guidewire third quarter FY15 earnings conference.

Today's call is being recorded.

At this time I'd like to turn the conference over to Mr. Richard Hart, Chief Financial Officer.

Please go ahead, sir.

Good afternoon, and welcome to Guidewire Software's earnings call for the third quarter of FY15 which ended on April 30.

I'm Richard Hart, 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 ir.guidewire.com.

As a reminder, today's call is being recorded and the 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 be not reflected upon as representing our views as of any subsequent date.

We disclaim any obligation to update 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 we issued today and 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 10K for the period ended July 31, 2015.

And subsequent Form 10-Qs 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 Press Release issued after the close of market today.

Additionally we are providing detail reconciliation data, as well as recurring revenue calculations in the supplements posted on our website 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 and 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.

I'll turn over the call to Marcus for his prepared remarks, and then I will provide details on our third quarter of FY15 and our outlook for the fourth quarter and the full fiscal year.

Thanks, Richard.

Our third-quarter results were at the high end or above expectations for revenue and profitability.

Total revenue was $85.4 million, with license revenue in the upper half of our guidance range and services revenue exceeded expectations.

Our stronger-than-expected services revenue was driven by higher- than-anticipated demand for senior Guidewire personnel on implementation projects that were initiated in the quarter which were due, in turn, to increasing sales of our newer products which typically require a higher ratio of Guidewire project involvement.

Services revenue can vary quarter to quarter due to the product and geographic mix of new and completing implementations; however, I reaffirm our expectations that services revenue will continue to decline over time as a percentage of total revenue.

On a rolling four-quarter basis, recurring term license and maintenance revenue was $209 million, an increase of 26% from a year ago.

We continue to target term license revenue growth of approximately 20% in FY15, despite foreign exchange headwinds which we expect will reduce our year-on-year term license growth by over three percentage points.

Before I speak in detail of the progress we made in the third quarter, it is important for me to note that the complexion of our end-of-year pipeline is somewhat unique this year due to the maturation of discussions with a significantly higher number than usual of Tier 1 prospective clients; to wit, we expect to finalize agreements in the quarter with at least three Tier 1 clients, i.e., insurers with at least $5 billion in direct written premiums.

This is in contrast to the past when we have secured no more than one or at most two new Tier 1 customers in a given quarter.

This potential is very exciting for us, considering the significant lifetime value of a Tier 1 customer relationship, but as I've often mentioned, our initial transactions with very large customers have variable aspects that can complicate near-term revenue visibility.

Large insurers tend to evaluate our product portfolio very comprehensively across multiple different business units but then tend to stagger their purchasing decisions, sometimes choosing to initially license and implement one of our applications or perhaps multiple applications, but in a particular geography or for a specific line of business.

It can be difficult to determine until the end of our negotiating cycle what those final licensing decisions will be for an initial project, even when we have insight into our clients' ultimate objective, because they themselves are making a complicated decision after an extensive evaluation process.

It is important to keep this dynamic in mind as we offer our perspective on the end of this year and as these relationships advance next year.

With the unprecedented breadth of opportunities in front of us and progress already made, we are confident we can continue to deliver term license revenue growth in excess of 20% in FY16, even though initial revenue from license agreements completed in the fourth quarter may be limited in scope.

I now turn to review our third quarter, during which we made additional progress toward our strategic and product objectives; namely, customer success, R&D leadership, implementation ecosystems and product expansion.

We expanded the breadth and engagement of our customer community with sales of InsuranceSuite and new products to both new and existing customers.

In the latter category, where expansion to full InsuranceSuite licenses by three customers, including New Mexico Mutual Group, the largest provider of work comp insurance in New Mexico, GuideOne Insurance, one of the largest church insurers in the US, and Aviva Canada, the Canadian arm of the large multi-national insurer.

Indeed, Aviva Canada reflected our continuing strength in helping Canadian insurers transform their operation.

For example, Royal and Sun Alliance Insurance, a general insurer with more than $2 billion in direct written premiums, selected ClaimCenter in Canada.

Workplace Safety and Insurance Board, an existing customer in Ontario, selected Data Hub, our operational data store, and Manitoba-based Red River Mutual licensed InsuranceSuite as well as our Data Management and portal products.

Red River Mutual represents the third customer to engage with one of our SI partners to deploy a cloud-based solution, a trend we anticipate seeing more of in the Tier 3 and 4 segments of our market.

During the quarter we also witnessed continuing momentum for our newer Data Management and digital interaction products with a total of seven customers licensing these new offerings in the quarter.

In addition to Workplace Safety and Insurance Board in Red River, which I just mentioned, Indiana-based Brotherhood Mutual Insurance and Tokyo Marine North America both licensed our Data Management solutions.

Philadelphia Insurance, First Insurance of Hawaii and Michigan- based auto and [R loaners] all began leveraging our Guidewire Live platform to gain more value from our claims solution.

We also extended our distinctive track record of customer success with significant production go-lives at seven customers in three countries, while continuing to leverage our community of systems integrator partners to carry the preponderance of implementation efforts.

ING Belgium went live on ClaimCenter for their homeowners' business.

Travelers Canada went live on BillingCenter for multiple product lines and Princeton Holdings in Ontario went live with ClaimCenter for their personal auto, homeowners and Canadian surety lines of business, and the Co-operators went live with PolicyCenter on their personal auto line of business.

In the US, Tokyo Marine North America went live with ClaimCenter across all lines of business in all 50 states.

Wawanesa, which was already live on ClaimCenter, is now live on full InsuranceSuite, including policy and billing.

And Catlin Group, a multi-national commercial insurer, went live with a full InsuranceSuite and our [vading] and client Data Management products.

These successful deployments have helped us gain further recognition from industry analysts.

In their MarketScape report on worldwide policy administration systems published in May, IDC ranked Guidewire as the clear market leader for policy systems.

Key to this position, of course, is a sustained commitment to technology leadership.

This, in turn, requires architectural investment in our products motivated by three important themes.

First, reducing the total cost of deployment and ownership for our customers, especially for InsuranceSuite.

Among the many efforts to this end is our recently launched Ready for Guidewire program, which validates accelerators developed by members of our PartnerConnect program.

Second, we are committed to facilitating the long-term transitions to multiple delivery models, including private and public cloud.

Third, we need to fuel and mature multiple new products developed by our teams working on our data and analytics and our digital interaction offerings.

News from these teams in the quarter includes the introduction and first [few] license sales of (inaudible), the newest addition to our SaaS-based Guidewire Live platform.

Spotlight integrates geovisualization and public and proprietary risk modeling into the decision-making workflow for underwriters using PolicyCenter, so that they can assess a properties risk without having to consult disparate data sources.

We also released the next version of business intelligence for InsuranceSuite.

This newest release features more advanced reporting solutions characterized by dashboards that deliver timely operational metrics to insurance executives on browsers and mobile devices.

To maintain our technology leadership, we continue to invest significantly in Research and Development, and we have largely achieved the hiring goals we outlined at the beginning of this fiscal year.

As we look to next year, we will continue to make additional investments in R&D.

We've been very pleased by the caliber of talent we've been able to recruit with a value proposition of technically interesting work and a quality engineering culture, reflected by such recognition as being named one of the best places to work in the Bay Area for the sixth year in a row.

In summary, we delivered solid results in the third quarter and are well-positioned to complete our objectives for the year.

The initial transactions we expect to complete with a record number of new Tier 1 customers in the quarter is supported by our growing pipeline.

Successfully concluding these sales processes will open the door to multiple additional sales opportunities.

That, combined with the momentum of InsuranceSuite and our newer products, provides us with confidence we can generate term license revenue growth of 20% or better in FY16 as we continue to capitalize on our long-term opportunity serving the global property and casualty insurance industry.

With that, let me now turn the call over to Richard.

Thank you, Marcus.

As Marcus mentioned, we achieved solid results in our third fiscal quarter exceeding our total revenue out look and coming in at the high end of earnings expectations.

Total revenue was $85.4 million, above the high end of our guidance.

License revenue was$ 33.3 million in the quarter, of which term license represented $30.8 million, 9% higher than the third quarter of 2014.

We, as others, have been impacted negatively by foreign currency rate declines relative to the dollar in the third quarter.

Changes to currency rates from the same period last year, reduced term license revenue by approximately $1.8 million.

We also noted in our last call that recognition of $2.9 million in term license revenues was accelerated into the second quarter and of this amount, $1 million was term license we were scheduled to recognize this quarter.

Absent these effects, term license revenues would have increased 19% year-over-year.

Maintenance revenue was $12.2 million for the third quarter, up 17% from a year ago.

Services revenues of $40 million were above our expectations.

We have consistently expressed our perspective that services revenues will fluctuate from quarter to quarter, depending on how capacity utilization may be affected by customer decisions to extend existing projects or accelerate new ones during the quarter.

In addition, we have noted the implementation of new products require more Guidewire resources and will continue to do so until our partners can come up to speed.

In this quarter, both dynamics work to deliver services revenues above our outlook.

Nevertheless, services revenues were roughly flat compared to a year ago, consistent with our long-term strategy to decrease services revenues as a percentage of total revenue.

The declining services trend is more apparent on a year-to-date basis with services revenues representing 44% of total revenues, down from 50% a year ago.

We remain focused on driving growth and recurring term license and maintenance revenues, which reached $209 million on a rolling four- quarter basis, an increase of 26% from a year ago.

Turning to our profitability metrics, we will discuss these on both a GAAP and non-GAAP basis when 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 third quarter was $52 million, an increase of 5% on a year-over-year basis and representing a 61% non-GAAP gross margin, slightly higher from a year ago.

Breaking that down in the third quarter, non-GAAP gross margin for license was 98%, for maintenance it was 84%, and for services it was 23%.

We expect that gross margins as a whole will continue to trend upward as our mix of revenue shifts over time away from services revenues.

Turning to operating expenses, total non-GAAP operating expenses were $46 million in the third quarter, an increase of 19% compared to a year ago.

A substantial portion of this increase was attributable to higher R&D expenses as we largely achieved our hiring goals set out at the beginning of the year.

The resulting non-GAAP operating income of$ 6.1 million was at the high end of our outlook and non-GAAP operating margin was 7.1% in the quarter.

Turning now to our balance sheet.

We ended the third quarter with $643.8 million in cash, cash equivalents and investments, up from $627.2 million at the end of the second quarter, primarily due to operating cash inflows of $26.6 million during the third quarter.

Our total deferred revenue was $63.8 million at the end of the third quarter, compared to $52.5 million at the end of the second quarter.

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

Further deferred revenues do not reflect our multi-year contracts, which typically range from three to five years in length.

We believe this contracted business, combined with our best-in-class renewal rates, provides us with a high level of visibility towards future revenue.

As we look to our fourth quarter, Marcus noted the sales activity that we are currently experiencing and our enthusiasm by the prospect of establishing relationships with multiple Tier 1 companies and of the long-term value these companies represent.

At the same time, as we continue to state, it is difficult to predict which particular combination of application line of business or geography will inform their initial license.

We have a proven track record, however, that shows successful initial implementations lead to meaningful expansions over time.

We see the same process playing out with several Tier 1 insurers that we expect to advance during the fourth quarter.

The following outlook for the fourth quarter therefore takes these factors into consideration.

We anticipate total revenue to be in the range of $119.3 million to $123.3 million.

Within revenue, we expect license revenue to be in the range of $67.2 million to $71.2 million.

Maintenance revenue of $12.6 million to $13.6 million, and services revenue of $38 million to $40 million.

Operating expenses will increase in Q4 to reflect the full impact of third quarter hires, as well as some additional hiring that we anticipate making in the fourth quarter, and the expected FX of higher sales commissions due to higher revenue.

For the fourth quarter we anticipate non-GAAP operating income to be between $24.8 million and $30.8 million, and non-GAAP net income to be between $16.4 million and $20.3 million, or $0.23 to $0.28 per share, based on an estimated diluted weighted average share count of 72.6 million shares.

We anticipate GAAP net income of between $3.2 million to $4.8 million or $0.04 to $0.07 per share.

For the full fiscal year, therefore, we anticipate total revenue to be in the range of $374 million to $378 million.

This increases our mid-point by more than $5 million compared to our previous outlook and represents an increase of 7% over FY14 at the mid-point.

To put our current view of the full fiscal year into further perspective versus our initial outlook, if it were not for absorbing an FX headwind of approximately $10 million, of which approximately $6 million impacted license revenue, our current total revenue outlook would have been $6 million above the high end of our initial outlook for the year.

Within revenue, we expect total license revenue to be in the range of $173 million to $177 million, an increase of 14% to 17% from FY14, with growth below historical levels due to negative currency impacts of more than three percentage points and continuing trends of decreasing perpetual revenue.

Even with this FX headwind, we continue to target term license growth of 20% for the year, however.

We expect maintenance revenue to be in the range of $49.5 million to $50.5 million, representing growth of 19% from a year ago.

We expect services revenue to be in the range of $150 million to $152 million, which is in line with our original outlook for the year for a small decline in services revenue as we continue our trend of shifting implementation efforts to our SI partners.

From a profitability perspective for the full year, we expect non-GAAP operating income in the range of $57 million to $63 million, which would produce a non-GAAP operating margin of 16% at the mid-points of our revenue and operating income outlook, consistent with our prior outlook, but well above our initial view for the year of 12%.

Non-GAAP net income in the range of $37.4 million to $41.3 million or $0.52 to $0.57 per share, based on an estimated diluted average share count of 72.1 million shares.

GAAP net income of $1.2 million to $2.9 million or $0.02 to $0.04 per share.

Looking beyond FY15, based on our strong relationships with existing customers and recent business activity with new customers, we are increasingly confident in our ability to deliver term license revenue growth of 20% or more for the year 2016.

We expect that our mix of higher margin license and maintenance revenue will continue to grow as a portion of our revenue and help fund additional R&D investments to enhance existing products and bring additional technologies to market.

In summary, we delivered a solid third quarter, exceeding our total revenue guidance and coming in at the high end of (inaudible)expectations.

We are making progress on all of our FY15 objectives and we believe we are positioned to close the year with record Tier 1 customer activity.

As we look to FY16 and beyond, we're very encouraged by a combination of strong customer interest and exciting product pipeline, the increasing leverage from our partner ecosystem, and the growing recognition of our innovation and market leadership with insurers of all sizes around the globe.

Operator, we are now ready to take questions.

Thank you.

(Operator Instructions)

Sterling Auty with JPMorgan.

Thanks.

Hi, guys.

Hi, Sterling.

Since I'm first up, let's hit a couple of these areas that I'm already getting e-mails and I think is on everybody's minds.

Let's talk first about the guidance for the fourth quarter.

Put into context for us the impact on license revenue that -- how you're kind of gauging or looking at the probability of the Tier 1 business closing.

And, like you said, the moving parts of it versus the FX versus anything else, because I think a lot of people are looking at what you did with the total full-year license guide, the bottom end came up but the top end came down, and I think that's making some people nervous.

So, Sterling, I think Marcus has mentioned this on several occasions.

When you have a pipeline like we do of very significant Tier 1 customers, there's an added uncertainty of exactly how those initial licenses are going to be or are going to come in-house and how many of those Tier 1 companies will license in the quarter.

We feel very good.

We have more Tier 1s than we have ever had before, but that uncertainty requires us to have a slightly conservative perspective when we give guidance.

So we feel very comfortable right now that the guidance we've given is something we can easily achieve.

The currency impact is something I think we need to take a little bit in a different way.

We have about $10 million of total revenue impact from FX, so if you look at the currency rates last year when we gave guidance to the currency rates in the fourth quarter where we sit today, that 10% has driven down our growth by about 3.5%.

I think that has to be taken separately from the guidance for the fourth quarter, because we know what the currency impact is and during the last quarter's call, we told people that we were starting to edge at the high end of that 100 to 300 basis-point range and, therefore, part of that currency impact had already been taken into account.

Got you.

And then maybe on the margin side and then I'll just jump back in the queue.

You talked about the continued investment in R&D, which would be negative for margins in 2016.

You're talking about the revenue mix still moving more towards license which is positive for margins overall.

How do we balance these two out?

And I know you aren't going to give us guidance for next year, but can you at least maybe directionally tell us margins down, flat, or up?

I think we feel very comfortable at the 16% operating margins that we've delivered this year we can deliver next year.

So I definitely do not think we will operate this Company and put anymore pressure on our margins.

To the extent that we make additional investments in R&D, which we are planning to make, I think those will balance out with efficiencies in other parts of the business.

Got it.

Thank you.

Brent Thill with UBS.

Thanks.

Marcus, just on -- you mentioned these big transactions and I'm curious, you were a little more specific around the number of transactions.

Does that state that you feel these are such late-stage deals that you feel more confident to call these are coming in or is there something else that's going on?

I'm just curious why you called out the specific number?

Well, reading through our transcripts from previous earnings calls, I think we came to feel we were being a little bit coy about these conversations.

It's a frequent topic of interest among investors to know how these conversations at the top end of the market have been going, because they obviously represent a large portion of the total demand in the industry we serve.

And we've always said that we're advancing a lot of these conversations and they've been going very well and that we are hopeful of them culminating in actual transactions.

And it seemed fair to provide a little bit more clarity and specificity, given that they are going to be, in all likelihood, a very material part of the bookings achievement in the last quarter of the year.

The uncertainty element I mentioned, both in the prepared remarks and Richard underscored, is still the case, in that with the Tier 1 conversation -- well, in any sales situation, you'll have at lost two areas of uncertainty which is are we going to win the deal and exactly when will it be executed?

With a Tier 1, there's a third dimension of uncertainty, which is exactly what will they license on what schedule?

And that's just inherent in the fact that you have a very big enterprise contemplating a major transformation with lots of different angles of attack.

So we're grappling with the final stages of a number of those conversations here in the fourth quarter, and they'll obviously have a material impact on exactly where we end up.

But we feel very positive about them and we wouldn't be so specific about a number, first, if we didn't have more than that number in play and if they weren't going well.

And, Richard, just on the license guidance range, I think that's where maybe some of the controversy is relative to when you look at last Q4.

You haven't assumed a lot of those deals in that guidance closing in Q4 sounds like?

I guess the better way to suggest what we did was kind of probability weight, not only whether or not they would land in Q4, but also what the constitution of those transactions would ultimately be, so we've put a certain amount of conservatism in our set of expectations.

One quick follow-up on the earnings number, this is the first time I can recall that you haven't come ahead of the high end was relative to your guidance.

Was there something on the expense side that maybe caught you off-guard or is this FX?

Actually FX doesn't play here because FX is -- there's a hedge for FX where the effect on FX, from an operating income perspective, is only about $2.5 million.

But if we spent any more than you anticipated, it was because our hiring during the quarter was higher than we anticipated for R&D.

Okay, great, thank you so much.

We're a little ahead of plan, Brent.

Great, thank you.

Tom Rodrick.

Yes, hi, Matt Van Vliet on for Tom.

First question, on some of the newer products or the non-InsuranceSuite products.

Where are those trending in terms of total revenue mix or total bookings mix as we're looking forward and seemingly seeing a lot more uptake?

(Inaudible) very strong, and I'd say we're probably a little ahead of where we had hoped to be in terms of the attach rate that we're enjoying with the newer products and our customers, in particular in Data Management domain, which is encouraging.

It is a -- they are contributing to our total bookings amount, but it's still obviously a relatively small minority of the total bookings that we anticipate for this year, growing both in absolute and relative terms into next year.

In terms of revenue, it's important to keep in mind some of the products, like the Guidewire Live products, are sold on a SaaS basis and, therefore, all the license revenue is ratable as opposed to what we have traditionally called the heartbeat model where an entire year of revenue is recognized on the signing and then on the anniversary date.

But that's a relatively minor effect given the total bookings quantum is still a small minority of the total bookings for the Company.

And on the Guidewire Live product, I know you've talked about it before, kind of the number of customers you have on there that are both providing data and then also how many are maybe paying for the actual product?

Do you have any update there in terms of either numbers or growth or just directionally helping us out there?

Sure.

We'll be specific with the numbers and the metrics at year-end, as we've done each year, we kind of stick to the discipline of updating customer accounts and other kind of market metrics on an annual basis.

I can tell you qualitatively that adoption has been good and that we will be getting a lot of participation from our customers in sending us data on a continuous basis.

The big difference that we think we can now undertake is that, with Spotlight, we're talking about underwriting or policy-related data as opposed to just claims data, which has been all that Guidewire Live applications addressed up to this point.

So that's a pretty meaningful expansion of scope for us and therefore, new sales opportunities with all our PolicyCenter customers going forward.

And then lastly touching on some of the Tier 1 pipeline.

How many of those deals are at least in question with the entire suite versus maybe just one or two of the major elements?

We have a very exciting spectrum of pursuits in the Tier 1, including all of our products, including newer products, especially Data Management.

And then also incidentally in all three theatres, so Tier 1 conversations in North America, in EMEA, and in APAC, which is also highly encouraging to us.

Great, thank you.

From Pacific Crest Securities, Brendan Barnicle.

Thanks so much.

Richard, just a quick follow-up.

If we look at the rolling four quarters, should we be adding back the $10 million in FX impact to sort of normalize that on a comparisons basis?

Actually, that's an interesting question, and one that I hadn't considered.

But I think if you look at the effect of FX on a quarter-by-quarter basis, it would be a good way of looking at the effect on growth that FX has had on us, so that I think you would have to add back, on a quarter-by-quarter basis, about $2 million and $4 million in Q4, and I think you would get to that 3.5% impact on growth.

Great.

And then also can you remind us again why you guys have made this stock compensation accounting change?

Actually that was a decision that was made before I came on board, but I think, if I remember correctly, it was a change that more clearly reflected both the benchmarks in our industry, how they were doing business, and was (technical difficulty) expensed stock-based compensation over time.

So primarily it was a decision to bring this in line with our peers.

Great.

And then, Marcus, in addition to Guidewire Live, you mentioned some cloud-based, I think, sales situations.

Are those situations ones where the SI is running the application for the client and you're just supplying the software or is it a combination of Guidewire Live?

Just wondering -- you mentioned in the script and I wasn't familiar with that situation.

Sure.

Well, really the cloud can be thought of, first and foremost, as a delivery option, so instead of having the application sit on an enterprise's server in their data center, it's managed by some third party.

And that's not just a matter of keeping the machines running, it's also the care and the feeding and the adaptation of the application over time.

So this is particularly attractive to the smaller organizations with smaller IT departments and there's growing demand in the market for that.

Our current approach to it is to partner closely with a number of our SI partners who have offered their variations on deploying in that mode and we've had a couple of announcements of customers that have chosen to license our software that way.

And that's a model in which they have our software under a traditional license model, but they have a separate relationship with our systems integrator partner that covers all the care and feeding of that application in the cloud.

Terrific.

Thanks for the clarity.

Appreciate it, guys.

Brendan, just one clarification.

I mentioned $10 million.

That was the FX affect on our total revenue.

If you were looking at our rolling four quarters, that really impacts only license and maintenance, and the effect on license and maintenance was more $6 million over the course of the year.

So should that $6 million be spread equally or weighted more towards the back end of the year?

It will be weighted more towards the back end of the year.

Okay, great.

Thank you.

Walter Pritchard with Citi.

Hi, thanks.

I guess, Marcus, for you on the -- I just want, Richard, on the clarification on the sort of looking into 2016, you didn't make any comment on maintenance and you've talked in the past, including your releases, about the rolling or the trailing 12 months recurring revenue.

Is there some sort of relationship we should expect that would change with maintenance as we look at next year?

Not that I have considered, no.

Okay.

And then just, Marcus, on the term license, I guess we look at the rate you've grown term license, the last couple years its actually been comfortably north of the 20%, sounds like you have some nice customer traction coming on that should impact the numbers next year.

Should we think about that 20% as kind of a minimum or how should we think about that, given what you've done in the last couple years and some incremental business here on top of that?

I think the most forthright way that I could respond to that is to say it's a target that we've set for the whole Company and it's part of our identity we will be a 20% recurring revenue grower as an organization.

That's the central business metric and that's the way that we discuss it internally.

So it was appropriate to keep that consistent with how we talk externally.

Obviously, we aim for as high as we can go, but it would be very, very disappointing indeed if we were not to achieve that.

Okay, great, that makes sense.

Thank you.

From Deutsche Bank, Nandan Amladi.

Hi, good afternoon.

Thanks for taking my question.

So, Marcus, you touched on this at the beginning of the call in your script.

But as larger projects -- as customers make larger commitments and some customers perhaps want you involved in the implementations as we saw this quarter, how will that impact your transition to the SI community that you plan to open in the next several years?

Actually that transition is going just fine.

And that includes some of our larger customer relationships.

So a number of the Tier 1 implementations that we have underway or are in Phase II or Phase III of the program have actually very modest Guidewire involvement, small single-digit number of Guidewire, full time consultants.

Now we never want that number to drop to zero.

That's not good for anyone.

But it's very healthy to keep it at a small number and it's actually not materially different between small and large customers, or at least it doesn't fit the pattern that you might naively expect.

We have some very large projects where the systems integrators are performing the vast preponderance of the work.

The main driver of higher Guidewire services involvement tends to be newer products.

We talked in the past, you'll recall, about the kind of enablement curve that SIs have to go up, they did it with ClaimCenter and then they did it with Policy and BillingCenter, and now they're doing it with Data Management, and we hope future new products as well.

And then, secondly, a geographic dimension in that systems integrators are often not enabled to the same degree in geographies where we have fewer customers, for obvious reasons.

And it's a kind of typical pattern where, in the newer country or geography where we have less of an install base, we are doing a somewhat heavier percentage of the work.

So when we close deals that meet those characteristics, there's kind of uptick in services demand from us.

Thanks.

And then you said you met your headcount target, particularly for R&D.

What does that do to your pace of product releases as we look into FY16?

Yes, that, in a way, was a pleasant operational surprise or I should say, it's something that we, like many technology companies, have been challenged with, which is to meet our operational recruiting ambitions.

And this is a year we've actually done it on the R&D team, so a lot of credit goes to the HR and recruiting teams that have achieved it this year.

And that's part of a larger program of accelerating -- well, both expanding and accelerating our product development trajectory.

And we've set a number of pretty ambitious internal goals about accelerating the pace at which we deliver both new releases of existing products as well as introduce new products in -- especially in the newer product families for us, so Data Analytics and in digital interaction, so it's not the sole driver of that.

There are other organizational changes and improvements that we have to undertake, additional leadership, et cetera, but clearly having the capacity to undertake much a broader portfolio of products is essential as well.

And I think we have the team to do that now.

Thank you.

Alex Zukin with Stephens.

Hey, guys, thanks for taking my questions.

Just first one for me, given the Tier 1 pipeline commentary, I was wondering if you could talk qualitatively about the Tier 2 and Tier 3 pipeline?

Kind of how do you ensure that the Tier 1 deals don't take up too much of your attention?

It's always a challenge.

In terms of executive bandwidth, a Tier 2, Tier 3 or even Tier 4 customer can be just as demanding, because it's important to remember that the significance of the decision on behalf of the principals that our customer are just as consequential, right, for a small customer as it is for a huge customer, right?

And we take that responsibility seriously and we have to invest a lot of principal-to-principal conversation, even with companies with less premiums than those in the Tier 1.

In terms of a sales force's focus, it has not really made a difference, because a lot of these conversations are ones that have gone on, in some cases, for years.

And sometimes they have a stop-and-start quality or sometimes they even can get to the altar and then not get completed for reasons beyond our control.

That's happened multiple times in our past, it's just part of the market we operate in.

And so we treat every customer or new prospect pursued as a long- term journey, and it's a bit of a coincidence that there's a clustering of some of the largest ones that we've been involved in kind of coming to fruition or we anticipate coming to fruition in this current quarter.

Got it, that's helpful.

And just a follow-up.

Is it possible to quantify high levels?

How much DWP these Tier 1 customers could potentially represent?

It's a very wide spectrum, so if you were to add up the total numbers that go under the logos that we are in conversation with, it's a very large number indeed.

But, again, back to the same commentary we've referred to a couple times now, exactly what will be in the frame of an initial license, there's quite a wide range of possibility on what could be in the initial license.

And in some cases, a relationship could be structured such that they commit to a program of rollout over time and it's essentially or, in fact, legally committed to, but then the licensing that goes along with that follows a natural curve as they bring on more premium or commit to more of that premium as the project evolves.

So the total scope in question, the total premium that I think we're beginning to now have access to, should we fulfill our plans for the quarter, is very material to our -- relative to our current base.

Got it.

And then just the last one with respect to these three Tier 1 deals, does that at all impact how quickly you can diversify a way on the services line?

I don't necessarily see that as related.

There are just too many other variables in question.

But I will say that when we -- for obvious reasons, when we secure a new Tier 1 relationship, it makes a very big difference to the SI partner that's involved in that and they are typically very heavily involved in the sales pursuit.

And they tend to invest disproportionately heavily in winning those opportunities because they see it as an opportunity to grow a long term -- a really, really long term and strategic relationship that will be important for their practices.

So we get a lot of SI focus and collaboration on these very large opportunities and that's good for our partnership and the ecosystem.

Got it.

Well, congratulations and happy hunting guys.

Thank you.

Justin Furby with William Blair & Company.

Hi, guys, thanks for taking my questions.

Marcus, I was just curious if you could provide your assessment in terms of where you are with your cloud strategy relative to the competitors out there?

And how reliant going forward are you going to be on your partners with that strategy?

And I guess maybe a second -- a follow-up to that is if you look at the opportunity set today, just curious what percentage of that, in terms of core systems, would you say involve insurers that are really interested in cloud and maybe what did that look like a year ago?

Right.

Let me take the second part of your question first.

I'd say 100% of insurers have an interest in the cloud at some level in their enterprise, right?

And many, many of them, including the largest and more traditional of them, have already embraced SaaS applications somewhere in their environment, right?

Of course, the real question is how do they think about SaaS and cloud-based deployments for their core transactional systems of record?

Their mission-critical insurance systems, the area we focus on.

And there you're going to see a very, very wide spectrum, from organizations that say they would like to accelerate a transition to that world as soon as possible, if only there were suitable applications that met all their other criteria, to those who say, you know, not even close, this is proprietary data, these are our most important systems, it's going to be a long time before we would contemplate that.

So a wide spectrum, but an unmistakable directionality to it.

And we see ourselves actually as potentially one of the catalysts of that happening faster than some in the industry might currently be thinking.

Now the first part of your question was, I think, kind of really more competitively.

Our competitors operate in the same world that we do.

They're hearing the same things we are hearing.

Some of them -- well, first of all, most of our competitors tend to focus on the smaller tier of the market and that's not to disparage them.

We care about that tier just as much, but they tend to focus there where those conversations have maybe more of an appetite to look for kind of transfer of IT responsibility entirely to the vendor.

And so some of our competitors have taken that seriously and really hitched their wagon to that kind of message.

We see, I think, a more complex picture in the industry including especially the very large carriers for whom that's not really an option or not until a huge number of other requirements are met.

And that's a long ways off for everyone, including us.

So in recap I'd say we embrace the inevitability.

We're actually trying to accelerate the pace at which the industry moves towards that.

We have elements of our product portfolio that are already entirely SaaS cloud native, and you'll see more and more components of our total product portfolio move in that direction as well, but it's a long journey with lots of twists and turns.

Okay, great, and then one more for Richard, if I can.

In the first half of FY16, Richard, you faced some pretty tough compares for this LTN metric of term and maintenance?

And it seems like there could be a few quarters there where you actually dip below that 20% for that particular metric.

I'm just wondering if that's the right way to think about it for the first half of 2016?

Thanks.

So we haven't started really modeling 2016 in any particular way, both on top line and bottom line.

We're starting to have some idea.

We're just going into our planning stages, so I can't speak intelligently about where the rolling four- quarter average will run to.

But obviously, the rolling four-quarter average is a derivative number to our basic goal of driving term license growth of 20% year-over-year.

So that number over time will be affected by how successful we are and what the timing of those transactions are that will drive us to that 20% growth.

The timing of those particular transactions in any particular quarter is going to drive that number in different ways.

Okay, great, thanks.

At this time I'll turn the conference back to you all for closing remarks.

No closing remarks.

Thank you for participating.

Thank you.

That will conclude today's conference.

Again, thank you all for joining us.