Guidewire Software Inc (GWRE) 2015 Q4 法說會逐字稿

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

Today's conference is being recorded.

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

Please go ahead.

Good afternoon, and welcome to Guidewire Software's earnings conference call for the fourth quarter and FY15, which ended on July 31.

My name is Richard Hart, I'm the 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, and our subsequent quarterly reports on Form 10-Q, which are also 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 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 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 on our fourth quarter and fiscal year financial results and our outlook for Q1 and FY16.

Thanks, Richard.

We started with year with several straightforward objectives, to widen the distance between us and our competitors in product capability and implementation success; to mature and drive the adoption of our newer offerings outside of InsuranceSuite; and to expand our customer community, including cementing our emerging leadership position with the largest insurers worldwide.

Our fourth-quarter results exceeded our expectations for both revenue and profitability, and featured progress on all of these dimensions.

We signed 12 new customers during the quarter, including several large carriers and a number of Tier 1 insurers, ahead of the goal we presented on last quarter's call.

In addition, we made great progress ramping the adoption of our newer products.

Measuring our overall market progress at year end, we report that our customers in aggregate have $289 billion of their direct written premiums under license, an increase of 11% from $260 billion at the end of FY14.

This metric counts our customers' premiums only once, even if they license more than one of our core applications, and it often reflects only a portion of their total enterprise premiums, especially for larger customers.

Consequently, we draw equal encouragement from both the leading share of industry represented by our customer base, and the considerable opportunity we have before us in the $2 trillion industry we serve.

Reflecting our emphasis on recurring revenue, we have tracked trailing 12-month term license and maintenance revenue as a metric since the Company went public.

For Q4, this metric grew 21% to $219 million.

It's worth noting that since we focus on term licenses as our preferred model, and since perpetual licenses have decreased from 23% of license revenue in FY12 to 5% of license revenue in FY15, we expect maintenance revenue growth to continue to lag term license growth, as it has for several quarters.

By coincidence, in FY15, term license revenue increased also by 21%.

We remain confident that we can continue to deliver annualized term license revenue growth of 20% or more in FY16 and beyond, although we also expect variability on a quarter-to-quarter basis.

In terms of new logos, we were selected by 24 new customers during the course of the year, ending with 207 customers who have selected at least one Guidewire product.

New customers accounted for a majority of our bookings for the year, as they did in 2014.

Meanwhile, existing customers expanded their use of additional lines of business, and adopted additional products.

During the year, we increased the number of customers who have selected more than one Guidewire core application from 82 a year ago to 99 at the end of the year, and those who licensed our full InsuranceSuite grew from 48 to 71.

Breaking down our 207 customers by core application, we now have 95 PolicyCenter customers, up from 69 a year ago; 170 ClaimCenter customers, up from 151 a year ago; and 102 BillingCenter customers, up from 82 at the end of the last fiscal year.

Our most important asset in attracting new customers for InsuranceSuite is our track record of successful implementation, to which the fourth quarter contributed with several important milestones.

Basler, our first key customer in Switzerland, and respected domestic insurer, went live with PolicyCenter and BillingCenter.

Republic Indemnity, one of the leading workers' compensation insurance providers in the Western US, went live with PolicyCenter, as did Promutuel in Canada.

Texas Windstorm Insurance Association is now live on PolicyCenter, in addition to BillingCenter.

We also completed major follow-on deployments at Aviva UK and Aviva Canada, as well as at Admiral France.

Overall for the year, we extended our total number of customers in live production on one or more InsuranceSuite applications to 140 customers, up from 127 at the end of FY14.

Now for over two years, we have been investing to expand our footprint beyond InsuranceSuite, while of course leveraging its central position in the IT landscape for a P&C insurer.

One vector of expansion has been in the data arena, responding to insurers' demand for operational visibility and analytic insights.

In FY15, we added 21 insurers to our roster of Data Management customers.

We did so in part by more effectively expanding our sales process to include our DataHub and InfoCenter products, almost doubling this attach rate to about a quarter of core application sales.

We also added seven new customers as adopters of our Guidewire Live platform for data syndication and visualization, bringing to 30% the portion of our operational customers who have licensed and are actively contributing data to at least one Guidewire Live application.

To date, we have focused on data from our customers' claims operations, but in the latter half of the year, we introduced Spotlight, a Live application drawing data from PolicyCenter, internal, and third party sources, to the benefit of underwriters.

Customer feedback to date is encouraging about the appeal of Live applications, as SaaS-based instant-on tools for data insight and context, and we see many opportunity to expand its reach.

The other vector of product expansion has been towards solutions for digital engagement, a major new area of demand in an era of rising digital expectations.

We have built multiple digital portals, enabling insurance customers and agents to interact and transact directly with insurers' core InsuranceSuite systems.

These digital portals respond to the very strong demand from virtually every insurer to bring to market new digital and omnichannel models for sales to and servicing of their policyholders.

Our digital portal efforts resulted in an addition of 19 new customers for the year.

Overall, we were pleased that for the first time in FY15, sales in Data Management, Guidewire Live applications and portals represented more than 10% of new bookings.

We're still in the early stages of them maturing and realizing the potential of these new products, and indeed others that we aspire to deliver on the data and digital frontiers.

Strong customer demand, the centrality of InsuranceSuite in our customers' environments, and our progress during the year all argue for continued investments in these areas.

Now, let me turn to highlight some specific wins in the fourth quarter.

Our global reach was demonstrated in the quarter, as we closed transactions with several large international insurers.

First, a major validation of the readiness of InsuranceSuite to serve the global industry's largest players, Sompo Japan Nipponkoa licensed PolicyCenter and rating management for commercial lines.

Sompo Japan is the second-largest P&C insurer in the country, with $16 billion in premiums, and they Tokyo Marine and Nichido Fire as our second Tier 1 insurer there.

In an equally strategic significant transaction for us in Continental Europe, Zurich Germany, a $2.5 billion carrier, became our first full InsuranceSuite customer in the country, and among the seven locations in our relationship with Zurich's multinational enterprise.

In Latin America, we licensed our first complete InsuranceSuite customer, with Caixa Seguros, a top-ten player in Brazil, with $1.4 billion in premiums, and a recognized technology thought leader in the region, licensed all of our core modules, as well as rating management, reinsurance management and digital portals.

Also in Latin America, San Cristobal Seguros, a $400 million Argentinian insurer, expanded our Guidewire relationship from ClaimCenter to the full suite, with PolicyCenter, BillingCenter, Customer Data Management and rating, bringing our InsuranceSuite customer count in the region to five.

We also added two customers in Belgium, AXA Belgium and Touring Assurance To bring our customer count in Belgium to four, and we completed a follow-on sale to P&V Assurance, making them an InsuranceSuite and Data Management customer.

I must emphasize that we serve all members of our customer community with an absolute commitment to their success, and that as a vertically-specialized company, we regard every segment of the industry as vital to our business.

Indeed, we have significantly more Tier 3 and Tier 4 customers than we do Tier 1 and Tier 2, and their needs strongly influence our product direction and go-to-market.

That said, during last quarter's call, we highlighted our advanced engagement with a larger than usual number of Tier 1 insurers.

Initial sales cycles of Tier 1 insurers tend to be longer, especially competitive, and when successful, they can naturally lead to additional sales opportunities within a large enterprise.

Additionally, the size and complexity of a Tier 1 insurer's business often impacts how they license our products.

As we have described in the past, Tier 1 clients tend to evaluate all of our products for potential use across their enterprise, but typically focus on particular lines of business and/or InsuranceSuite modules as they commence their relationship.

One additional idiosyncrasy in this part of the market is that Tier 1 deployment cycles during a transformation program can be very extended, such that we will sometimes agree to structure license payments that increase over time, to recognize the reality of these stage deployments.

With that background, I'm pleased to report that we converted five Tier 1 insurers into new customers this quarter, a record performance in this regard.

In addition to Sompo Japan, we licensed software to State Farm, Zurich North America, Chubb, and as was previously announced last month, Farmers Insurance.

All of these insurers selected PolicyCenter as the heart of their initial implementation, and all negotiated master license agreements, envisioning, and in several cases, committing to expansion of our subsequent phases after a contained start with a single business line.

The average penetration into these five large insurers is less than 5% of the total potential license opportunities available to us with our current products.

And since each of them represents over $10 billion in premiums, we believe they represent a set of major expansion opportunities for us in the years ahead.

I'd like to now briefly touch on two other drivers of our business to which we dedicate significant management attention, services, and research and development.

With regard to services, you will note our continued confidence in our partners, as we increasingly leverage their skills and commitment.

Our implementation capacity continued to expand in FY15, as we ended the year with more than 5,500 trained consultants, up over 25% from the end of 2014.

The growth in the scale and credentials of this ecosystem notwithstanding, we continue to play a leading role in every implementation.

And believe that our customers will continue to value our product knowledge and our counsel on how to execute a successful transformation program.

With this proviso, we expect to continue to reduce services revenue as a percentage of total revenue, toward our longer term goal of approximately 30%.

We are also leveraging our partners to drive new and more efficient ways to deliver our software.

Our recently announced insurance cloud solutions partner program, formalizes the defined and repeatable model for our partners to offer our software as a managed service, typically in a private cloud model, together with their differentiated content and services.

Our investment in development will continue in FY16, as we continue to build differentiation, and reduce the total cost of ownership of InsuranceSuite, expand our Data Management and digital interaction offerings, as well as invest in new initiatives.

Strategically, our goals for 2016 are continuous with our trajectory to this point.

We will pursue our land and expand strategy to attract new customers and deepen existing relationships for InsuranceSuite.

We will continue to invest in new products pre-integrated into InsuranceSuite that serve the strong and multifaceted demands for data, analytics and digital engagement, which we are optimistic about contributing meaningfully to total revenue over time.

Finally, we'll continue the leverage of our growing SI ecosystem to scale implementation capacity while improving our margin profile, some of which improvement we will use to partially fund our R&D investments in FY16.

From the Company's founding, we have aspired to be the preeminent technology Company serving the global P&C industry, and we believe that we advanced our claim to that stature in FY15.

We look forward to FY16 with confidence in our sales, product and delivery capabilities, to widen the lead further, and to deliver on our goal of 20% or better term license growth.

I now turn the call over to Richard, for details on our financial results.

Thanks, Marcus.

We delivered a strong performance in the fourth quarter, exceeding our revenue and earnings expectations.

Total revenue in the quarter was $125.9 million, of which licensed revenue was $73.4 million, above our guidance range of $67.2 million to $71.2 million.

Within licensed revenue, term license was $68.6 million for the quarter, an increase of 16% from a year ago, and perpetual license came in at $4.8 million, a 27% decline from the year-ago period.

Maintenance revenue was $13.2 million for the quarter, up 10% from a year ago, reflecting the back end weighting of new license and maintenance activity in the fourth quarter.

Services revenue was $39.4 million, down 3% from a year ago, as our strategic partner engagement model with SIs continued to gain momentum.

For the fiscal year, total revenue was $380.5 million, of which licensed revenue totaled $179.2 million, above our guidance range of $173 million to $177 million.

Within licensed revenue, term license revenue was $169.4 million, up 21% from FY14, and perpetual license revenue declined 18% to $9.8 million, which as I've stated, is in line with our focus on reducing perpetual license over time.

Maintenance revenue grew to $50 million from FY15, up 19% year-over-year.

Recurring revenue, comprising term license and maintenance revenue, totaled $219.4 million in FY15, up 21% from a year ago.

Such growth would have been in excess of 24%, had the adverse impact of foreign exchange not reduced growth by over 300 basis points.

We typically discuss recurring revenue on a rolling four-quarter basis, as a way to underscore the steady growth of recurring revenues, a trend that we believe may at times be difficult to discern, due to the seasonal variability of our quarterly revenues.

As Marcus mentioned, maintenance revenue has lagged term license growth, as perpetual licenses have declined.

In addition, we anticipate that maintenance revenues, which are recognized ratably over the maintenance term, will be negatively impacted by the delayed effects of the currency impacts that affected license revenues in FY15.

Further, Q1 and Q2 of 2015 were elevated due to timing of one-time revenue events, and make for a more challenging compare in 2016.

These dynamics will lead to our rolling four-quarter average to grow below 20% for the first half of the year, rebounding by the end of the fiscal year.

In addition, it is important to note that historically, a minority of our term license agreements had featured annual payments that increase over the term of the license.

We refer to these transactions as ramp transactions, and they are typically limited to our larger and more complex transactions, which have deployment calendars that can last well more than two years.

The schedule of increasing annual payments over a typical five-year term is designed to reflect the long and incremental deployment schedule, and related value that characterizes these engagements.

The mix of large transactions this year resulted in a significantly higher number of transactions, which included ramp terms, and consequently affected a larger portion of our term license revenue.

To help you calibrate its scale, the final payment in a five-year transaction can be on average more than double the initial payment, with the most significant increase occurring on average in the third year of the contract.

We believe their prevalence in future periods is difficult to predict, and will be most affected by the mix of large projects.

We do not typically accept these payment terms for transactions, which have more compact deployment profiles.

Turning to services revenues, services revenues were $151.3 million in FY15, down 3% from FY14, as we continued to successfully transition the task of deploying our software to our system integrator partners.

As a result, service revenues declined from 45% of total revenue in FY14 to 40% of revenue in FY15.

We anticipate that a percentage decline of similar size will occur in 2016.

Geographically, the US represented 59% and 55% of revenue for the fourth quarter and the full year.

In FY15, 66% of revenue was subject to contracts denominated in US dollars.

Compared to a year ago, our international revenue mix increased by 3 percentage points in FY15, reflecting our commitment to expand our geographic footprint.

Turning to our profitability metrics, we will discuss these on a non-GAAP basis, and we have provided reconciliation to GAAP 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 $91 million, an increase of 9% on a year-over-year basis, and representing 72.3% non-GAAP gross margin, compared to 70.4% in the year-ago quarter.

Breaking that down, in the fourth quarter, non-GAAP gross margin for license was 99%, maintenance was 84.9%, and services was 18.4%.

Services gross margins were impacted by lower utilization levels, as we hired ahead of anticipated starts of several new projects.

Nevertheless, with services representing only 31% of the revenue in the fourth quarter, non-GAAP gross margins were higher than they've ever been.

Total non-GAAP operating expenses were $53.7 million in the fourth quarter, an increase of 18%, compared to a year ago.

This resulted in non-GAAP operating income of $37.4 million, and a non-GAAP operating margin of 29.7%.

Above our expectations, and despite increased R&D investments, due to revenue that was above our guidance range, and more modest growth of new employee hires in Q4.

Non-GAAP net income was $25.7 million, or $0.35 per diluted share, and was also above expectations.

Looking at profitability for the year, non-GAAP gross margin was 66% in FY15, up from 61.6% in 2014.

As I've mentioned, this record performance reflects our shift in the mix of our revenues, and has helped fund our increased R&D investments.

Non-GAAP operating income was $69.3 million, up 11% from a year ago, resulting in a non-GAAP operating margin of 18.2%, reflecting our better than anticipated fourth-quarter performance.

During the year, we added 158 employees, of which 78 were in research and development, 19 in sales and marketing, and 32 were associated with our professional services organization.

Turning now to our balance sheet, we ended the year with $677.8 million in cash, cash equivalents and investments, up from $643.8 million at the end of the third quarter, primarily due to cash flow generated during the fourth quarter.

Operating cash flow was $33 million in the fourth quarter, and $63.7 million for FY15.

During the fourth quarter, we changed the way most employees satisfied their tax liability on the vesting of their restricted share units.

We transitioned from a net share settlement method, in which we paid the tax liability and retained the necessary shares to cover those amounts, to a sell to cover method, in which shares are sold to employees, by employees, to generate the cash to meet their tax liability.

We anticipate this change will be reflected in approximately $20 million of additional retained cash in FY16, and approximately 500,000 additional shares outstanding by the end of the period.

Our total deferred revenue was $52.6 million at the end of the fourth quarter, compared to $63.8 million at the end of the third quarter.

As a reminder, our deferred revenue balance can vary widely from quarter-to-quarter, and is not 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, long-term deferred revenue does not reflect our multi-year contracts, which are typically five years in length.

We believe that the combination of this contracted business and our best-in-class renewal rates provides us with a high level of visibility towards FY16 revenue.

Turning to our outlook, our expectations for FY16 are consistent with the initial view that we provided on our third-quarter call, including our goal to grow term license revenue 20%, improve gross margins by growing higher-margin license revenues, and invest potential gross margin improvements into R&D, which we expect to increase slightly as a percentage of revenue on a full-year basis, as we enhance and develop new software products, and to broaden our market opportunity.

For FY16, we anticipate revenue to be in the range of $405 million to $415 million, representing an increase of 8% over FY15 at the midpoint.

Within revenue, we anticipate that license revenue will be in the range of $202 million to $212 million, an increase of 13% to 18% from FY15.

As I've mentioned, we expect perpetual license to continue to decline on an absolute basis, and represent a decreasing percentage of license revenue.

We expect maintenance revenue to be in the range of $56 million to $58 million, an increase of 14% at the midpoint, reflecting overall license growth in FY15, offset in part by an approximate 200 basis points to 300 basis point impact, caused by the delayed effects of negative foreign currency trends on FY15 maintenance renewals that we will recognize in 2016.

We expect services revenue to be in the range of $144 million to $148 million, down approximately 4% from FY15, and representing approximately 36% of total revenue.

This reduction is in line with our strategy of transitioning implementation services to our system integrator partners.

While in any particular quarter, the percentage of services revenue may fluctuate depending on the timing of project completions and project starts, the trend of the lower percentage of services revenues will persist over the year.

Non-GAAP operating margins are expected to range from 15% to 17%, with A midpoint of 16%, consistent with the guidance we provided in our last call, resulting in full year non-GAAP operating income in the range of $60 million to $70 million.

We anticipate that the full cost of hiring during FY15 and the continued hiring in research and development in FY16 will more than offset gross margin improvements.

We anticipate non-GAAP net income in the range of $39.6 million to $46.2 million or $0.54 to $0.63 per share, based on an estimated diluted average basic share count of 73.0 million shares.

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

On a GAAP basis, which includes an estimated $60 million of stock-based compensation expense, and $1.4 million of amortization of intangible assets, we anticipate FY16 operating income to be between a loss of $1.6 million and income of $8.4 million.

We anticipate a net loss of $0.5 million to a net income of $2.8 million, or an EPS loss of $0.01 to a gain of $0.04, based on an estimated weighted average basic share count of 71.3 million and a weighted average diluted share count of 73.0 million shares.

We anticipate an effective GAAP tax rate of approximately 67% for the full year.

From a seasonality perspective, we expect 2016 to follow normal patterns, with the fourth quarter representing the period of most significant license revenue based on the timing of annual customer invoicing activity.

Looking at the first quarter of FY15, we anticipate total revenue to be in the range of $78.5 million to $82.5 million.

Recall that in the first quarter of 2015, we recognized approximately $4 million from deferred revenue from a historical contract, as well as early payment from a contract that had not been expected until later in the year, creating a challenging year-over-year compare.

Within revenue, we expect license revenue to be in the range of $30 million to $32 million, maintenance revenue of $13 million to $14 million, and services revenue of $35 million to $37 million.

For the first quarter, we anticipate non-GAAP operating income to be between $1 million to $5 million, and non-GAAP net income to be between $0.7 million and $3.3 million, or $0.01 to $0.05 per share, based on an estimated weighted average diluted share count of 73.1 million shares.

Our non-GAAP operating income and net income expectations for the first quarter exclude approximately $14 million in stock-based compensation expense, and $0.36 million in amortization of intangible assets in the first fiscal quarter.

Including these non-cash expenses we anticipate a GAAP operating loss between $13.3 million and $9.3 million.

We anticipate a GAAP net loss of between $4.4 million to $3.1 million or an EPS loss of $0.06 to $0.04 per share, based on an estimated weighted average basic share count of 71.3 million shares.

We anticipate an effective non-GAAP tax rate of approximately 34%, and a GAAP tax rate of approximately 67% in the first quarter.

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

In summary, our strategy of landing and expanding into the market, while investing and capturing a growing share of the opportunity is working.

We have expanded our base of recurring term license and maintenance revenue, while building on our technology leadership, and our newer product offerings have begun to contribute measurably to new bookings.

We plan to expand on this strategy in FY16, and are optimistic we can again deliver strong performance that will contribute to building long-term shareholder value.

Operator, can you now open the call for questions?

(Operator Instructions)

Our first question is from Walter Pritchard from Citigroup.

Please go ahead.

It's actually Ken Wong in for Walter.

I guess first off, on the Tier 1 customers, five signings, that's pretty impressive since you were expecting three.

How should we think about -- you talked about the deals here ramping up and getting bigger.

Is that something that we should expect to be pretty linear over the course of the next few years?

And then are there situations where it could possibly be lumpy in terms of from quarter to quarter, we see some of the license activity pop up?

Maybe first that, and then I've got a follow-up.

Thanks, Ken.

The way to think about those ramp transactions, again, reminding you that they really apply only a portion of the time, and only to the very largest transactions, typically with the largest customers that we have, is to -- you need to think of them linearly.

They typically would involve an increase, monetarily upwards year after year, getting to an exit rate, which would then be the basis for future renewals into the next contract period.

So they're not lumpy and certainly not quarter to quarter, because all of our term license agreements are structured on -- typically on a single payment per year basis.

Got you.

And those contracts, would they still be subject to a percent of the direct written premium that's under license, or is there some pre-arranged uptick in terms of the current starting point?

Best to think of them as being a prenegotiated amount that would increase over that period of time for a defined scope of initial license.

It's entirely possible that a customer could choose to license additionally, other lines of business that were not originally in that first contract scope, in which case you'd have a layering effect potentially of multiple contracts onto each other.

We've had plenty of examples of that, with other customers in the past.

But with respect to an individual contract, they would be largely dialed in for the contract period, typically five years.

Got you.

Got you.

And then Richard, as we think about the spending next year, and it looks like -- first, what are your gross margin expectations heading into next year?

Should those continue to trend up, or is there going to be a drag, for example, in Q4, we did see a bit of a drag from services.

But overall, how should we think about it for 2016?

I think that you should model a growth in gross margin, commensurate with the mix shift in services and license revenue.

And I think that right now what we are projecting is gross margins of up 2 points to about 68%.

Got you.

So then, I guess that would put OpEx at roughly high teens growth, by my math.

Is it fair to assume that most of that is going to R&D, since that sounded to be the core focus of what you were discussing earlier, Marcus?

Yes, I think R&D will continue to be an area of focus for us for investments in 2016.

Would you expect that would be the outsized uptick from the growth in OpEx here?

Yes, I think if you think of R&D investments as a percentage of revenue on a curve, I think 2016 will be the height of that curve.

I think you're going to see, as a percentage of revenue, R&D will start declining again after 2016.

Okay.

Perfect.

Thanks a lot, Richard.

I'll pass the baton.

And we'll move on to Justin Furby from William Blair & Company.

Please go ahead, sir.

Thanks, and congratulations.

A few questions.

First, wanted to -- it seems like you have enough, plenty of cross-sell opportunity to feed the beast for a while, but Marcus, I just wanted to touch on Tier 1 pipeline entering FY16.

You obviously just closed five of them, including the largest one here in the US market.

I'm just wondering how you feel about pipeline going forward within these new Tier 1s, and just remind us how many are out there globally?

How many Tier 1s, and what's your penetration today?

What do you think it could be longer term?

Sorry, multi-part question.

I'll take the latter parts of our question first, Justin.

Globally, we count about 50 to 60 Tier 1 customers.

There's a little bit of variance in the number, because the definition of the boundaries of a carrier can be a little tricky, when you have these multinational carrier groups.

But think of it as 50 to 60 in the universe.

Of those, naturally, we're most penetrated here in the US, where we have roughly half of half of that number.

And then a couple of significant ones in other countries like Sompo, Japan now, Tokyo Marine, and a few others in the UK and Australia.

So, these conversations all take a long time to evolve into a final consummated contract, and there was a clustering of an unusually large number of them in Q4 of the year, but many of these other dialogues continue onward, and we think that we have validated our relevance and our fitness to serve to the largest insurors anywhere in the world, so we feel optimistic about a lot of other ones still to come.

Equally important of course, is that we deliver and evolve the relationships that we have, as you've noted.

Right.

On those five deals from the quarter, Richard, I appreciate the commentary on how they ramp, but is there any way to actually quantify Q4 impact, if you normalize for that?

I'm wondering if you look at your guidance for FY16, presumably, you get some degree of step-up in your second year invoice.

Does that give you, in theory, more visibility into your outlook this year as you get that, or what's the right way to think about it?

There are a couple of things to note.

One is, amplifying on Marcus' description, if you look broadly at the ramped transactions this year, what you would note is that there's a linear dynamic, except in year three, where you actually have a relatively significant bump, and I think part of that is the recognition that some of these longer deployment cycles have some milestones associated with year two.

Now, all of these are different.

There's no real consistent methodology.

They're all very deal-specific, but if you look at them in aggregate, you would see that kind of dynamic.

Two, it's very difficult to try to understand what the ultimate impact was on term license this year.

If you look at it out five years, for example, and you look at the delta between what we can recognize this year and what we can recognize at the end state, then the delta is approximately $10 million to $12 million.

Now, that would assume that you could license those contracts linearly at the initial outset at the same -- the end state as we can with most of our other contracts, and that's an assumption I'm happy to make, but it's still an assumption.

That's the delta between the beginning and the end of these contracts, on an annual basis.

The other thing you asked, I'm sorry, Justin, I think you asked three questions there.

There was another one embedded in there.

Oh, in terms of guidance for next year, is that was you were asking?

Yes, visibility.

Yes.

So I think the visibility is actually -- we get a little bit of a tailwind, but it's relatively modest, because this is a very small percentage of the size of the annual base that comes in every year.

So I wouldn't count on that increased visibility too much, on top of the great visibility we already have.

Simply because, in light of our model, you have to always consider that the beginning of the year, we already have visibility as to 75% to 80% of the license stream that's coming in to the end of the year.

Okay.

Great.

And then just one, last one if I may, on the data side of things.

We're now a couple years post Millbrook, and it sounds like you're double-digit percentage of bookings is dated in some of the newer initiatives.

Marcus, I'm just curious to get your longer term view of the TAM in that segment, and I've heard you talk about $1 billion-plus of license revenue longer term, and I'm wondering what you think data could be as part of that mix, over time?

Data is not one product.

It's a whole frontier of possibilities that range from basic things like providing better operational visibility into core data, and obviously better visualization of that, too much deeper statistical mining for predictive insights, to really sort of next-generation concepts that we're trying to pioneer with Guidewire Live, where you have syndication across enterprises, and with other external data sources to yield a completely different category of insights than you could get just from your own enterprise data.

These are all possibilities.

Some of them are easier to define and more like pre-existing software categories.

Others are more adventurous or speculative out there, and it's -- so guessing exactly the size of the market would be, for all of them in aggregate, is necessarily a little bit speculative.

I can tell you that as you'd expect, every insurer of every size has a fundamental need for greater operational data visibility, and that the data industry insurors care passionately about getting higher quality data and using it for insights at every stage of the process.

So we see pretty much an unending frontier of product possibilities, both for the products we've already designated, as well as completely new categories, which is why we have designated a separate team, quite distinct from the core system team, that's now just exploring multiple of these opportunities.

And we see it as a really significant growth vector for the Company.

Got it.

Thanks.

Congratulations on a nice quarter.

And we'll move on to Nandan Amladi from Deutsche Bank.

So Marcus, last year, I think at the Analyst Day, you were showing a chart on your land and expand theme, and if I recall right, roughly with the same customers that you had, if you didn't add any new customers, you still had about a 2.5 times potential to sell, so you were roughly 40%-ish penetrated.

First of all, is that number right?

And what is it at the end of this year?

That's correct.

I apologize.

I understand your question.

I apologize for not having the exactly that down to the digit updated version of that figure, though we'll certainly provide that at our Analyst Day, but it will be directionally similar to what we had last year.

In fact, precisely because of the larger deals that we signed that are in aggregate a relatively modest portion, actually quite a small portion of the total licensable opportunity there, that figure should actually decrease, IE, the percentage of our total licensed opportunity within our customer base should actually decrease year-over-year.

I just couldn't give you the exact number right now.

That's fair.

And then on the hiring targets for the year, looks like you added about half of the new headcount in professional services.

So is the next wave of hiring exclusively focused on R&D, because that's the plan at the beginning of FY15, as well?

Nandan, I just want to make sure that it's clear that we hired significantly more R&D folks this year than we hired professional services consultants.

We anticipate that the mix of hiring will actually weigh even more heavily towards R&D next year.

Okay.

And then one last question, actually refers to an earlier question on this call.

Richard, I think you said the R&D as a percentage of revenue will likely peak in FY16, and that as a percentage, maybe downtick a bit.

I'm assuming that still means that on a dollar basis, you'll continue to add R&D staff?

Oh, yes.

Absolutely.

I think, right now, our plan is to add approximately, just round numbers, 100 technical people into the organization.

I will say that as we bring up Dublin, and we think about other offshore development centers, you will see us equalizing our hiring outside of the US and in the US, so that it will bring the percentages which are currently about two-thirds in the -- three-quarters in the US, in and a quarter abroad, a little bit more in line with a two-thirds/one-third split, which will actually decrease some of the R&D costs in the model, but having said that, you should consider R&D coming and reaching approximately 25% of total revenue next year.

Okay.

Thank you.

And we'll take Brent Thill from UBS.

Please go ahead, sir.

Good afternoon.

Marcus, this year, you corralled all five Tier 1s in Q4.

I'm curious when you look at the new Tier 1s in your pipeline, do you expect 2016 to be that back-end loaded again, or do you think that this year's a little more linear, when you look at the new customer signings?

It's hard to call, Brent.

If you were to look at my prediction at the beginning of 12 months ago, about where I thought the year would fall, it definitely ended up substantially more back-end loaded in the customer signings than I either would have expected or liked, so I'm hesitant to be specific about the year ahead.

I can tell you that we have many dialogues that have been underway for a long time that are still underway, that as far as our customer base is concerned, they don't really care whether it's Q1 or Q4, they're doing their evaluation cycle.

It was somewhat coincidental that a number clustered in the quarter, which is why we felt obliged to give a little bit more visibility about that count in last earnings call than we normally would.

I think we'll have a better sense of that, as always, as the year progresses, but I can tell you the important point is that we are -- we think we're very relevant and very engaged with the biggest insurers in the world on their most strategic issues, and the fact that we were able to get some household names into our customer community, I think, is the best validation of that.

Just on the five wins in Q4, there seems to be some varying levels of discussion among your investors about what actually closed, and I think you -- I just want to clarify that you said the average penetration is less than 5% on those wins.

Is that -- was that what you were commenting on, just those five, or could you maybe provide a little more color about what was involved in this tranche?

Let me elaborate on that assertion.

I'm saying that if you look at those five customers as enterprises, and you imagine the total pie chart to be them licensing all of InsuranceSuite, as well as Data Management and our portal products at historical pricing, that would be 100% of the full pie, and of that pie, 5% was represented by the current agreements that we have.

And then on top of that you have to -- it was our commentary about some of the time, there's a ramped license structure that results in a few years elapsing before we reach the end state run rate recurring term license amount that is due to us, just for those contracts already executed.

I hope that's all clear.

Yes, that is.

One quick follow-up for Richard.

18%, roughly, operating margins over the last four years.

You're guiding operating margins below that range, and we understand you've had a good hit on over-achieving your guide.

But when you think about this year, it sounds like it's another big R&D hiring year.

I was surprised that only 12% of your headcounts were in sales and marketing.

It sounds like you're going to continue to see R&D heavy.

When you leave, and I know you're not give guidance for the year out.

We're not asking for that, but when you start to think about leverage in this model, it certainly feels like you've been at a ceiling of 18%, your view long-term still is a belief that this is a way more profitable business than an 18% ceiling?

Absolutely.

Absolutely.

I mean, there is absolutely no reason why we cannot accommodate a margin structure that is typical for mature vertical companies, and in those structures R&D is much more muted than where it is today, and where it's going in FY16.

But at the end of the day, right now, we are sensing a great deal of demand for new innovation from our target market, and I think we're in a position that we can manage to deliver that kind of innovation, and I think it's something that we should do.

So these investments are purposeful, I think they're well thought out, and they are reflective of customer demand.

Thanks for the help.

We'll move on to Sterling Auty from JPMorgan.

Marcus, you've often commented about the hyper competitiveness that's in the market, but I can't help notice that within the Tier 1 wins includes Policy wins at customers that I would think would have been anchor tenants of some of your biggest competitors.

Can you highlight how these wins came about, and what it suggests about the competitive landscape?

I appreciate the question, Sterling.

That is the case, that in each of these very large customers, you're going to find an incredibly complex enterprise IT landscape where they have relationships with every technology company under the sun, and in many cases every software company that serves the P&C industry, and all of them, of course, are competing for the opportunity.

Some more credibly than others.

You're familiar with our roster of competitors.

You can be sure that those that are active in the US were in heavy pursuit of each of these deals, as well.

Qualitatively, I'll say that we do best the larger the customer is, and the larger the insurer, the more they care about extremely highly-engineered software that can perform at very, very large production volumes, and those are areas where we have particularly strong credentials to demonstrate, and they also care a great deal about what their peer group is doing.

And so momentum within this segment is a pretty important factor for each of them to consider, when they go through their own selection process.

So all of that's been into the positive.

That said, we still face a very competitive landscape, and as you get to the Tier 3 and tier 4 insurors, and as you move you away from the English-speaking world, you find that we compete with a whole host of small, often smaller, often regional-only competitors, that can be very challenging to compete with, because they have local knowledge and sometimes much greater contractual flexibility than we do, and the like.

So if you were to take a total pie chart of all the core system decisions being made in the global industry, you would see us winning a majority of them, and you would also see lots of other little wedges of companies that you may not be familiar with, that are specific to different segments, where they were able to score one or two, some small single digit number of wins against us.

And that's pretty much been the competitive landscape for the last few years, and it will probably be the case next year, as well.

When you look at the comments you made about signing master license agreements, I'm just curious within these large wins, are they contractually obligated to continue to roll out, or how much is dependent on success of each stage?

And if you are successful, does it automatically lock you into winning the next round?

In other words, what's the visibility on driving that 5% penetration to a much higher level in the coming years?

Right.

There's has been a bit of variance from contract to contract, but some of them work exactly as you described, where unless there was something that would be -- something would go egregiously wrong with a project in a way that had never happened in a Guidewire project before, there would be the expectation in some cases, the commercial commitment to expand the relationship.

A you can imagine, these are all very negotiated contracts, and there's tradeoffs that we face between volume discounts and upfront commitments versus more delayed commitments, and the like.

We juggle all of those factors to ensure that we're really preserving the value of the customer relationship, while acknowledging their need to see proof and validation in their enterprise over time.

We're very protective of the value of our software, and as well as the precedents that we set, and we are very confident in our ability, both to make the project successful, and to expand the relationship.

If you were to look across the entire universe of our customers, you would see not only have we delivered to all of them, and kept those relationships intact and renewed to the tune of 100%, but that those relationships tend to expand over time through additional products and additional use of the products they license.

And we very much bet on that and expect that in these new relationships, as well.

Last quick housekeeping question.

Richard, in the big deals that were signed, are all of these annual payments, or is any percentage of them actually more quarterly type of payment contract structures?

If you look at our base overall, as you may likely know, Sterling, we have 80% of our deals are annual payment deals and about 20% are quarterly payment deals, broad numbers.

In each particular case, in the deals we're talking about, all of them are annual deals.

Great.

Thank you.

We'll move on to Tom Roderick from Stifel.

Go ahead.

Good afternoon.

Marcus, I wanted to see if you could provide a little bit more detail.

I know you've been getting questions for a long time on a handful of these big customers.

You have announced State Farm and Chubb, which are two of the biggest here in the US.

Of course, State Farm is way up there.

Can you provide me more detail with respect to -- I'm sorry if I missed it -- with respect to what it is that they're committing to today in terms of products, or interest level?

And I have a follow-up behind that.

But I'd love to hear anything you else you could add about those two carriers, particularly.

Both of those relationships were for PolicyCenter.

PolicyCenter, and a couple of the ancillary modules that go along with PolicyCenter, rating and some cases reinsurance or client Data Management, but not for the other two big applications in InsuranceSuite, namely ClaimCenter and BillingCenter.

In both cases, actually in all of the cases, on all five of those relationships, we did not structure a full enterprise license commitment across all lines of business.

That's important to understand.

That's also what you would expect from the 5% figure that we've been discussing already on the call.

So we're talking about one or more lines of business for PolicyCenter is within the scope.

But also as mentioned in the commentary, every one of them, I believe, did an evaluation of the full platform, and more or less all the products that we have, very much with the mind of making an enterprise-level decision for us as their platform going forward.

And how that ultimately translated into a commercial contract, and then what portion of that was visible in the quarter, in the period's revenue was variable across each of the five of them, but that was the spirit in which all of those relationships, indeed all of the customer relationships we signed for the year were undertaken.

Wonderful.

That's great.

That's great detail.

So maybe just a little follow-on behind the selection process.

I think Sterling asked you about the competitive landscape.

I presume that all of these Tier 1s have had a long sales cycle, but also some level of proof of concept that has gone on for a while.

If you could speak to some of these larger US carriers, and the two I just asked about, Farmers is another good example, how long were those in proof of concepts?

I gather they're probably looking at multiple lines in those proof of concepts, but within the environment that they were testing and transitioning into, how long have those been going on, and what does that proof of concept pipeline look like as you head into 2016 here with other Tier 1s?

Sure.

So the proof of concept pipeline is actually not that materially different for a big insurer versus a smaller one.

Typical proof of concept, the structure will last between three to maybe eight weeks on the outside of work, because even for a large insurer, you can generally validate what you're trying to prove.

The complexity with a larger insurer is that you may have to do multiple proofs of concepts for different segments of their business, personal versus commercial versus specialty versus international, and so forth, where they will feel that their requirements are diverse enough and the business constituents are disparate enough that they will want to do those separately, at the moment they're ready to make a decision.

That's fairly typical.

So and even a medium-size insuror will also care very passionately about derisking the project, and will often want to do a proof of concept of some form.

So that's not really a fundamental difference, but as you guessed, all of them did involve very, very thorough evaluations, and they typically take a bit longer in order to coalesce, institutional decision to act, because they have to be sure that they are not fragmenting their technology decisions.

Maybe 10 or 15 years ago they were more sanguine about potentially adopting lots of different technology for different subsidiaries.

These days there's much more of a desire to rationalize, standardize and simplify their core system decisions, which, if we do our job right, is a trend that we should be a beneficiary of.

To the other part of your question, Tom, about level of activity, I think we're going to be characteristically coy, and say we're in a lot of conversations, we're in a lot of POCs that are underway right now that are the basis, as always, of making a as a result judgment about the year.

The challenge for us, and this is one that played out this year in the fourth quarter, is translating what could feel like a great deal of progress on a deal, even a high degree of confidence, a very high degree of confidence in a selection and a contract, into the actual reported financial outcome, based on the shape of the final deal, and how much of that's recognizable in the first period.

That's always been the challenge and what you'll see Richard and I do, is take a portfolio approach that balances weighted probabilities to try to come up with a cautious guidance that we feel very confident of delivering on.

That's great.

Very helpful detail.

I appreciate it.

And we'll move on to Brendan Barnicle from Pacific Crest Securities.

Please go ahead.

Thanks so much.

Marcus, the services business was down about 3% last year, guidance implies about 3% this year.

Is that the right trajectory to think of how that business fades as you outsource more of it?

And is there a baseline below which you don't think you can go, where you always have to have a certain amount of your own people involved, means that the business stays at sort of a certain level?

Yes.

So there is a bit of quarterly variance, and so I don't want to put too much stock on any quarter to quarter movements, because of course, the utilization of our people is highly contingent on which projects are starting, which ones are rolling off, any other the timing effects and the like.

Absolutely as a trend, as a percentage of revenue, services we expect to decline.

There is a floor, because as I said in my prepared comments, it's absolutely vital, and we're quite insistent on this, in the sales process that we play a strong advisory or even lead role on the implementation for customers of any size.

That's important for everyone's interest, I think for pretty obvious reasons.

And that leads us to believe that something like, when you marry that with our aspirations for growth and new customer acquisition and new project initiations and the like, to something like a 30% floor of revenue, coming from professional services.

We could be a few points above or below that, but directionally, that's how it models out, and we have a lot of confidence in our partners, and we expect to sign on more and have them do basically every project with us side-by-side, but we're going to be very insistent on participating at some minimal level for everyone's interest.

Most of the call, we talked about some of the domestic wins.

Obviously you've had some big international ones in prior quarters.

As we think about that next year, should we expect more of an international focus, and how do you feel in terms of staffing and go-to-market for your international expansion?

International is obviously vital to our business.

The majority of the global premium sits outside of North America, and indeed outside of the English-speaking world.

So it's very important that we can succeed, not just in English-speaking countries and certainly not just in the US.

It is always going to be more difficult for us as a US-based insuror to sell internationally, and in many of these countries, even substantial ones like a France or Italy, or even a Germany, while they're very large markets, none of them are as big as the US, or the US and Canada combined.

So making investments at a product and go-to-market level always involves certain tradeoffs and compromises that we don't face in our biggest market.

So for all those reasons, it's a harder slog.

We have lower sales productivity.

The competition is tougher, but we're just as determined to succeed there.

And I think what you saw in this last quarter, and indeed in the year overall, was some very significant international wins with non-English speaking carriers, Sompo Japan is a completely domestic Japanese insuror, 99% of whose policyholders are Japanese nationals I believe, and that's a guess, not a certainty.

Zurich Germany is a large domestic insurer that writes basically every line of business.

To have their commitment on the Guidewire platform is a very, very useful market signal, that the product is prime time in those key geographies.

Great.

Thanks a lot.

We'll move on to Peter Lowry from JMP Securities.

Thanks for taking my question.

It's actually JMP Securities.

Are there any changes to, or tweaks to your sales or service structure required, as you manage and penetrate Tier 1 customers versus landing new business, especially given the ramp of Tier 1 customers in Q4?

That's an excellent question.

And indeed, we, as a Company are evolving into more and more of a -- into an acknowledgement of the need for an ongoing account relationship, or an account management structure where we are present and relevant at a principal to principal level, in a way that transcends any given project, or even any given program.

We may have multiple different streams underway with a very large insurer that are only tangentially related to each other, but we need to have some program-level relationship that can talk about them in concert, and keep a coherent relationship going.

So that's very important, and we have -- are thinking about that in our territory assignments and in our staffing models for both services and for sales, to ensure that we don't become too transactional in our posture with our customers.

And there's some markets where we've been doing that for a really long time already, like in Japan, and then there are others, including here in the US, where we're really building that into our staffing expectation.

Okay.

Thanks.

And congratulations again on a great quarter.

This does conclude our question-and-answer session.

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

No additional comments.

Thank you all for participating on our call today.

Good-bye.

Ladies and gentlemen, that does conclude today's presentation, and we appreciate everyone's participation.