Guidewire Software Inc (GWRE) 2022 Q3 法說會逐字稿

Greetings. Welcome to the Guidewire Third Quarter 2022 Financial Results Conference Call. (Operator Instructions) Please note that this conference is being recorded. I will now turn the conference over to your host, Alex Hughes, Vice President of Investor Relations at Guidewire Software, Inc. You may begin.

Thank you, operator. Good afternoon, and welcome to Guidewire Software's earnings conference call for the third quarter of fiscal year 2022, which ended on April 30. My name is Alex Hughes, I'm Vice President of Investor Relations. And with me on the call today is Mike Rosenbaum, Chief Executive Officer; and Jeff Cooper, Chief Financial 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, both of which are available on the Investor Relations section of our website. Today's call is being recorded, and a replay will be available following the conclusion of the call.

Statements made on this call include forward-looking [ones] regarding our financial results, products, customer demand, operations, the impact of COVID-19 and geopolitical events on our business and our other matters. These statements are subject to risks, uncertainties and assumptions and are based on management's current expectations as of today and should not be relied upon as representing our views as of any subsequent date. Please refer to the press release and risk factors and documents we file with the SEC, including our most recent annual report on Form 10-K and our quarterly report on Form 10-Q to be filed with the SEC for information on risks, uncertainties and assumptions that may cause actual results to differ materially from those set forth in such statements. We also will refer to certain non-GAAP financial measures to provide additional information to investors.

A reconciliation of non-GAAP to GAAP measures is provided in our press release. Reconciliations and additional data are also posted in the supplement on our IR website. And so with that behind us, I will now turn the call over to Mike.

Thanks, Alex. Good afternoon, and thanks for joining us today. I'm excited to begin by saying that Q3 was another great quarter for us. We exceeded expectations on ARR and revenue as we continue to see strong interest and momentum in Guidewire Cloud. We continue to make progress on our cloud product offerings and see demand from existing and new insurers all over the world.

We serve customers and an industry that is remarkably resilient. And that fact, combined with our product momentum, should serve us well through this period of economic uncertainty. As most of you already know, we serve the property and casualty insurance sector, a $2.5 trillion global industry that sells a wide variety of essential products, indemnifying individuals and businesses against all sorts of risks.

Many insurance products are nondiscretionary, which contributes to industry resilience during periods of economic uncertainty. We serve this industry with mission-critical indispensable systems of record sold in a recurring revenue model. Most of our customers have been in business for decades and some for over a century.

They have demonstrated an ability to weather down markets, periods of inflation and periods of macroeconomic uncertainty. This is an important and durable industry, and I'm proud of the role of Guidewire plays in supporting it and thankful for the stability it provides our business model. In the third quarter, we continued to see strong sales momentum for Guidewire Cloud with cloud again comprising approximately 90% of our bookings.

We closed 8 cloud deals in the quarter, bringing our year-to-date total to 24. I was particularly pleased to see sustained cloud momentum with Tier 1 and Tier 2 insurers, as larger insurers gain greater confidence in Guidewire Cloud. We added 3 deals of Tier 1 insurers in the third quarter. This included Cincinnati Financial Corporation, a top 25 insurer in the United States as measured by DWP and the new Guidewire customer.

We also added National Indemnity as a new cloud customer. National Indemnity is an existing On-premise ClaimCenter customer and we are thrilled that they decided to modernize their policy and billing systems with Guidewire Cloud. The momentum we're experiencing with Tier 1 customers is reflected in the fact that we've had a total of 8 Tier 1 cloud wins so far this fiscal year. We're also pleased to see this cloud adoption remain healthy and balanced across existing and new customers. Momentum with existing customers in the third quarter was driven by 2 more cloud migrations at both Santam and San Cristóbal and 4 more cloud expansions. Santam is our first cloud customer in South Africa and San Cristóbal, our first in South America. So it's exciting to see our cloud model and strategy continue to play out internationally.

We also added 2 new cloud customers. including previously mentioned Tier 1 Cincinnati Financial and a new InsuranceNow customer. Finally, I was pleased to see 20 deals in data and analytics during the quarter, including 2 meaningful deals for [science] and another 18 for HazardHub as insurers increasingly seek better real-time data throughout their policy and claims workflows.

The HazardHub integration is going extremely well, and we are seeing strong cross-sell success with HazardHub, reflected both in the number of deals and also deal size. Also in the quarter, one of the largest reinsurers in the world adopted HazardHub. Turning to our cloud deployment activity. We continue to see healthy progress in the number of go-lives. These are large complex projects. And with each successful deployment, we deepen our learning and expertise.

In the third quarter, we added 5 customer go-lives, including 4 with InsuranceSuite and one with ClaimCenter. This brings the total number of cloud go-lives to date to 59 across InsuranceSuite and InsuranceNow. In addition to our cloud deployments, one of the largest insurers in the world went live with a significant line of business on PolicyCenter as part of their self-managed implementation.

As I said earlier, Guidewire deployments are large and complex projects, so it's important that we foster a deep and talented partner community that can be leveraged across the growing number of cloud implementations, and we continue to make great progress on this front. The number of Guidewire Cloud-certified consultants increased 169% year-over-year to nearly 4,400 as the partner community continues to align around our cloud-first strategy.

There are now 18,000 total consultants from SI Partners, up 42% year-over-year that our customers can draw from. We also continue to grow our valuable solution partner community, where we added 8 new solution partners this quarter, bringing our total to over 150.

Each new application on our marketplace enables our customers to more easily leverage innovation from across our ecosystem. In Q3, we also launched Elysian, our fifth Guidewire Cloud platform product release. It provides the flexibility and agility insurers need to deliver innovation faster to their customers.

Elysian delivers new innovation, supporting accelerated speed to market, better risk insights and embedded insurance solution and an elevated developer experience. We are all feeling great about our product momentum and our ability to establish this new release pattern with our cloud customers. In summary, we're excited about our momentum heading into Q4, which is reflected in our guidance for the year, which Jeff will share on today's call.

But I'll just add that we are pleased with the operational progress we're making and believe that we are positioning ourselves to drive profitable and durable long-term growth. We have a strong foundation and a stable customer base that is resilient to market fluctuations and a product that creates world-class customer retention. As insurers increasingly embrace cloud, the success we have demonstrated to date sets us up to drive further cloud adoption from customer migrations, expansions and new modernizations.

And with that, I'll turn it over to Jeff.

Thanks, Mike. We had another strong quarter with ARR and revenue ahead of our expectations. Third quarter ARR ended at $637 million, up 18% year-over-year or 17% on a constant currency basis. Growth was driven by both new sales activity and deal ramps. As a reminder, we report ARR on a constant currency basis during the year and then updated currency exchange rates at year-end. If we were to adjust third quarter ARR for current FX rates, then ARR would have been $624 million as we have seen the U.S. dollar strengthen since our fiscal year-end.

Total revenue was $197.4 million, ahead of our expectations due to stronger performance across all components of revenue. Cloud strength continues to be visible on subscription revenue, which was $66.4 million, up 49% year-over-year. Subscription and support revenue was $86.9 million, up 34% year-over-year.

License revenue was $53.9 million, up 6% when compared to Q3 last year. Services revenue was $56.7 million, up 18%. Services revenue has benefited from ongoing increases in the number of cloud implementation programs. Turning to profitability for the third quarter, which we will discuss on a non-GAAP basis, gross profit was $89 million.

Overall gross margin was 45% compared to 50% a year ago. The year-over-year decline resulted from revenue mix shift towards subscription and support revenue and away from higher-margin term license revenue. Subscription and support gross margins were 44% compared to 42% a year ago. And services gross margin was negative 2% compared to positive 10% a year ago.

To meet the high demand for cloud, and to drive early success, we have made some investments alongside our early cloud customers. This has also meant hiring additional services talent. And while these new hires on board and become billable, we have used more subcontractors impacting services gross margins in the interim. Additionally, we have entered into a number of fixed fee arrangements with customers, and some of these projects have extended longer than originally anticipated.

Operating loss was $24.9 million. This included a onetime charge of $3 million for a bad debt expense related to a Russian customer that had signed a multiyear term license arrangement where we are no longer invoicing. This bad debt expense impacted G&A expenses.

Adjusting for this, operating loss would have been $21.9 million. We ended the quarter with $1.1 billion in cash, cash equivalents and investments. Turning to our outlook for the full year fiscal 2022, we are increasing our outlook for ARR by $4 million to between $668 million and $674 million. This reflects our continued optimism in Guidewire Cloud's market success.

As Mike notes, we sell mission-critical software to a very resilient industry. We have continued to see healthy demand and our ARR attrition rate is less than 3% on a trailing 12-months basis. and this includes the removal of $3 million in ARR from Russian customers in Q3. The nondiscretionary nature of our platform provides strong durability in periods of economic uncertainty. For our usual approach, our ARR outlook assumes foreign currency exchange rates as of the end of our last fiscal year.

For the last couple of years, exchange rates have benefited ARR at year-end. If current exchange rates remain unchanged, there would be a negative impact of approximately $13 million to our ARR at year-end. We are also increasing our outlook for total revenue, which we now expect to be between $794 million and $800 million.

I am pleased to be able to raise this outlook even with the backdrop of a strengthening U.S. dollar, which has had a negative impact on nondollar-denominated revenues. We expect our subscription revenue to be a $3 million higher than prior guidance due to -- sorry, we expect our subscription revenue to be $3 million higher than our prior guidance to approximately $257 million and overall subscription and support closer to $340 million, representing 52% and 35% year-over-year growth, respectively.

Expectations for license revenue are largely unchanged and services revenue is now expected to be approximately $205 million. We continue to expect subscription and support gross margins to be 44%. Services gross margins are expected to be negative 1% to breakeven and total gross margins are expected to be 49%. With respect to operating income, we expect an operating loss of between $53 million and $47 million for the fiscal year, and this reflects our updated services margin expectations, and the impact of the bad debt expense that I just mentioned, which is partially offset by higher revenue expectations.

There is no change to our cash flow from operations expectations. As we look ahead to fiscal 2023, we are confident that we can continue to deliver mid-teens ARR growth next year. Total revenue growth in fiscal 2023 is expected to accelerate to 10% to 12%. We also expect that overall operating margin and cash flow from operations will grow off of the low point of this year.

We will give more insight into our expectations for fiscal 2023 on our Q4 earnings call and our Analyst Day event in early October. In summary, we are pleased with our performance in the third quarter. Our confidence is reflected in our higher revenue guidance for the fiscal year, and we are looking forward to Q4, which is always a seasonally strong quarter for us.

Operator, we can now open the call for questions.

(Operator Instructions)

Our first question is from Peter Heckmann with D.A. Davidson.

I wanted to see, it certainly sounds like it and looking at the overall cloud deals. Do you feel that your current self-managed customers are getting more confidence, and you're seeing an acceleration of the self-managed to cloud migrations or -- and do you think that will continue in '23?

Yes, for sure. I would say -- I don't know if I used the word acceleration, it's just building. The confidence is building with the successful implementations and go-lives, that's why we like to highlight those every quarter. We pay a lot of attention to that as does the customer base and as the broader market. So we're just -- we're growing in our confidence. They're growing in confidence around us. And this is -- I keep saying this quarter-over-quarter, it certainly feels like the word inevitable is more appropriate than if. When exactly these things fall in line and when the projects line up to move to cloud, is sometimes a little bit outside of our control.

But certainly, the success in the sales to date this year and especially those implementations give us a lot of confidence going into next year.

Okay. Great. And then when you talked about that preliminary commentary of maybe 10% to 12% total revenue growth preliminary for next year, does that include some sort of FX headwind, maybe 150 to 200 basis points?

Yes, I think that's fair. As we're kind of using current FX rates as we build up our forecast model, so that would include some headwind there.

Okay. Great. I'll get back in the queue.

Our next question is from Dylan Becker with William Blair.

This is (inaudible) on for Dylan. I guess from a platform perspective, just looking at the content, like how much of this platform build was getting this up to speed and the integration is ready for the different line of businesses and use cases, especially as you think about the global application?

Yes, it's a good question. And I guess I'll answer it less around specific lines of business, and it's more around our ability to prove out the upgrade that's normally associated with the migration to cloud, any kind of, I don't know, redevelopment, reconfiguration of those implementations that are necessary to get it to cloud and successfully get the use case, whatever line of business, it is rolled out and supported on the product.

The international side of this has a lot to do with our ability to run Guidewire Cloud in different regions all over the world. That's what's behind the win that we talked about in South Africa. So that flexibility of the cloud operating model certainly helps us. So it's just building up, now we're over 50 of these production go-lives. It's pretty exciting to start to see the sort of experience build, not just with us actually, but also the partners and having the ecosystem start to get these projects under their belts and start to get that experience built into the effectively sales cycles to convince new customers to make this move. It all certainly adds up and helps give us confidence. So hopefully, that answers your question.

No, that's perfect. And a quick follow-up. Apologies, you're probably getting this one a time, just about the overall macro environment. just what discussions are happening internally. And I know earlier, you touched on like what you're hearing from customers. They've been through similar situations before, just given the longevity on them. But anything new coming up, anything -- important conversations that you're having?

Nothing beyond just the durability that we wanted to call out. It was -- we've had a phenomenal year on attrition. And that's why we wanted to call it out in the prepared remarks. And I think it speaks to the use case that we support and the general durability of the customers that we serve. I think everybody is looking at what does a period of inflation look like? And how does that flow through the insurance industry? And how does that relate to -- we think about how that does relate to Guidewire.

But a lot of -- there's a lot of controls built into the system such that a -- even if it is unfortunately and hopefully not a prolonged period of inflation the industry will do well. The industry will continue to support the use case it provides and will continue to support the industry with the platform we provide. So I think the conversations I'm having are basically -- you can't ever say that this industry is immune from this.

They're certainly watching it and dealing with it and adjusting to it. But is -- it is something that they will get through and is sort of built to be resilient despite the uncertainty that we -- that you see in the broader economy.

Our next question is from Matt VanVliet with BTIG.

Maybe, Mike, curious on the Cincinnati Financial net new deal there. If you could walk through maybe some of the key drivers for why Guidewire is selected and sort of what the competitive process looked like there, either what you're displacing? Or maybe was it the normal sort of cast characters on the competitive front there? And then sort of in line with that, looking at maybe even the national indemnity choice to move to the cloud. Is there a different set of drivers there that are influencing the migration deals? Or are some of them very similar to the Cincinnati Financial deal, for example?

Thank you for question. Thanks very much. Yes. So we're incredibly excited about the opportunity to partner with and serve Cincinnati Financial. This is a phenomenal organization, big Tier 1 insurance company. This is a ClaimCenter implementation. And what we're replacing is it's effectively a 20-year-old enterprise system that's out of support and needed to be refreshed. And so they were in a process. They ran an extensive process that looked at what was available.

We participated in all the gory detail of that evaluation, and we're excited to have come out, like I said, with the opportunity to prove it in real life to make them one more successful ClaimCenter customer. And the fact that we're now at the point where these kinds of implementations are obviously going to cloud is -- I think it's something that we should all be very, very proud of -- end points. And it's a very positive signal. This was a cloud deal from the very, very beginning.

And we're excited about, like I said making sure that, that's a successful implementation for, let's say, 20 more years and maybe 40. So that was the Cincinnati Financial win. And on National Indemnity, we've talked about this in previous quarters. It's great to be able to have a positive customer relationship in the base case so that when a new component of the core system comes up for grabs, so to speak, in terms of modernization then we can compete for that successfully, and we can prove ourselves for that other component of that company's architecture.

I think that there is a lot of benefit to our product strategy around the InsuranceSuite. We think that claim center and PolicyCenter and BillingCenter logically work together and that companies that see that synergy between those products, between the functionality across those products, the single vendor, the single approach to how it's going to run in the cloud, how it's upgraded, how it's maintained, how it's configured, all of those things, I think, lend to a sort of a bit of an advantage we have in those types of opportunities. But again, I would just say like this is a real exciting customer for us, and we're excited about getting to work on the hard stuff, which is the implementation and the eventual successful go-live of that PolicyCenter and BillingCenter implementation. So thanks for the question.

Yes. No, very helpful. And then I mean, now that we've seen a number of quarters in a row now of close to 90% cloud mix. And I think you mentioned over 50% go-lives -- or 50 customers live now. Should we think -- start thinking about maybe a little bit near term of you starting to maybe shepherd some customers with a little bit more influence to the cloud? And maybe, Jeff, is there any way to think that we should see some reduction or a reallocation of resources on the customer support side that will be, to start winding down, supporting so many number of versions out there? Are we just not far enough along in that process yet, and we're still maybe a couple of years away from that being a meaningful driver to gross margins?

I guess I want -- let me take this -- first half of this. I want this to be all carrot, no stick, if that's an appropriate way to describe this. I think that we talked a lot about in the prepared remarks, how important these implementations are for our customers. And we take that very seriously. I think it's an important part of the brand. It's an important part of the brand promise and it's an important part of what customers are buying when they think about building a very often greater than a decade long relationship with Guidewire.

So I really want to recognize that we do need to recognize that these projects are super complicated and there's very often a whole bunch of things that are constraining a company's ability to take on one of these transitions. And so any attempt that we would have to sort of force this issue, I just think it's detrimental for us in the long run. So we want to create a really compelling product in the cloud. We want to create an on-ramp to the cloud by building and doing real engineering to facilitate that transition, make it smooth and make it easy and make it as cost effective as possible. But I don't really want to push in terms of sort of de-supporting versions.

I really just think that it's part of the -- implicit maybe contract that customers have with Guidewire, this expectation that we will support them and obviously not forever, but as long as they really need us to -- so anyway, I don't know, Jeff could comment about how that will show up in the financials. But just strategically, that's how I feel about it.

And I think as we evaluate how this market is playing out vis-a-vis our expectations. To date, it's been pretty aligned in terms of the momentum that we're seeing, how we're investing to support that momentum. Our product organization is constantly investing and making our platform more scalable to allow us to handle more and more of these customers. And as we do that, we can add customers without adding the same levels of headcount that we've had previously.

So -- all of this is largely playing out in line with our expectation and is certainly a little bit of a delicate balance navigating the early part of this journey because how complex and how -- just all-encompassing some of these projects are and our ability to kind of manage those, continue to add efficiencies to the platform so that we can scale that. But it's playing out in line with how we expected, which is a positive thing.

Our next question is from Rishi Jaluria with RBC Capital Markets.

This is Richard Carlin on for Rishi Jaluria. In the context of just the macro backdrop. I know you guys have gotten a lot of questions on this. But I'm just curious, on your ability and willingness to use the inflationary environment as a source of maybe pricing leverage and maybe how that's considered in some of these migration contracts and just renewals in general.

So I can comment quickly on that. We enter into very long-term relationships with our customers. And our customers view this as a decade-plus long relationship. And so our contracts tend to be negotiated for long-term surety. Now there are certainly avenues within our contracts that we can make sure that we're not falling behind in inflationary environments. But it's not something that we would expect to kind of weave through a pricing annual renewal cycle like because our customers take a very long-term approach to this. Now we generally price our software on direct written premiums, which does grow along with the industry. And so we think we are well protected in an inflationary environment, but not necessarily something that we would capitalize in a pricing increase cycle.

And so one -- another way to think about this with respect to DWP and inflation is as inflationary pressures cause claims to go up, over time, that will be reflected in premiums and DWP going up, which over time will be reflected in Guidewire pricing. So it is all tied together.

It doesn't exactly play out quarter-over-quarter, but it does play out, I think, and expect year-over-year. And so that sort of protection to inflation is, to some degree, built into the model at Guidewire.

Got it. That's super helpful. And then just one on the data and analytics products. So another strong quarter, 20 deals similar to last quarter and the strong HazardHub attached. I think last quarter, you mentioned I think it's around 6 or so of the HazardHub deals were over [$100,000] last quarter. Are you continuing to see the same size of deals on that front? And then can you just maybe give a little bit more color on what the land and expand motion tends to look like on the data and analytics product side of the business?

Sure. Great question. Yes. So we do continue to see, I would call it, very healthy deal sizes. This is something that we're very excited about with respect to HazardHub, and we did see some healthy deals in the quarter, chose not to call it out a specific count like we did last quarter, but we are still seeing those healthy deal sizes. And so in addition to this being a sort of business that's maybe a bit sort of usage and demand driven. We're also seeing with the direct sales approach and the relationship that Guidewire has with large insurance companies.

And like I called out in the remarks, a large reinsurance company, the ability to manufacture pretty big deals that we're very, very excited about. Then with respect to the use cases, I'm glad you asked this -- we -- as I said, kind of in the sort of narrative, we really see data and analytics as a core part of a business workflow and insurance. And you can think about every single step in an underwriting workflow, every single step in a claims workflow. You can predict those steps, you can use data to make -- to allow people to make better decisions. You can use data and analytics to automate steps and drive better efficiencies. And I really think the industry is just getting started unlocking the potential for better, smarter, faster insurance, but also just more efficient underwriting and claims operations using data and analytics.

And so the HazardHub that -- we called out HazardHub just because it's an acquisition that's growing in importance for us strategically, but we also have a product called Predict, which now is completely embedded with InsuranceSuite such that we can extract data out of the InsuranceSuite core products, build models using the Predict platform and then inject the results of those models back into the workflows that are running in ClaimCenter and PolicyCenter.

And that use case across the 30-some lines of business that we have in production and the sort of, let's call it, a few dozen specific analytics models and predictions that we can make. That's just a natural thing for us to be talking to customers about either around what you should be doing when you initially deployed Guidewire? Or how can you be getting more value out of your installed Guidewire instance in the investment that you've already made in Guidewire. So we're really excited about both of those products as they relate to -- as they relate to that sort of cross-sell and connection to the core business opportunity. So anyway, thanks. So hopefully, that helps -- I really appreciate the question.

Our next question is from Tyler Radke with Citi.

So you called out the strength in data and analytics. And I think one of the things we saw at Guidewire -- the conference last year was some of the product releases around autonomous claims, some of which you're working on with partners. I'm curious to what extent that was the driver in the quarter? And then just how much do you think the overall environment around labor cost issues and just companies looking to reduce cost is helping on the data analytics and autonomous side?

Yes. Great question. Autonomous is -- it's like a -- the way I think about it is -- it's a great vision. It's a great direction. It's a great goal, but it's not something that you achieve in a single step. There's no sort of magical model that we're going to deploy that's going to make everything autonomous.

Instead, what's really -- the way this is really going to play out is this is going to be a concerted effort from Guidewire, from partners, both on the application side and the implementation side and customers just working hard day after day after day to identify areas that can be automated. And building out those rules and the -- and the analytics and machine learning models that facilitate those rules, running them and testing them and getting more and more efficient over time to where eventually, I think you can see today in which things are largely autonomous.

Maybe not completely autonomous because one of the things we always talk about whenever we're discussing this with insurance executives is very often when you've had a catastrophe and your house is flooded or your roof has blown off, it's pleasant to talk to somebody in an insurance company who's going to tell you that everything is going to be okay, and they're going to walk you through the process for managing that. So there is always a human part of this. But I do -- the industry, in general, really sees that this sort of drives to operating efficiency as possible. What's driving it?

I think, yes, labor cost is certainly part of it. I also think that just technically, it's much more possible, much more feasible now. There's a whole bunch of different platforms and tools that are available these days, that probably -- they just weren't there 10 years ago. They weren't there 5 years ago. They're there now. And so the potential to do this exists. And I also think that part of this is you've got to do the hard work first, especially on the claims side.

You really have to do the hard work first of getting to a system like Guidewire, getting to a modern platform with structured data with a modern application server that has an integration framework that enables you to be able to build these systems that can be automated. And so -- now that I think the industry has put in a lot of work with Guidewire, I think we have 200 -- over 250 implementations at ClaimCenter, either self-managed or cloud. So then now that work is done and that sort of space is created to automate, it creates a lot of potential for this autonomous future. So yes, labor is driving it, potential is driving it. I think operating cost is driving it. Competition is driving it. And I don't know probably you can tell from the tone of my voice.

It's exciting to be a part of it. But I think the last -- I just want to repeat that it's not going to be a sort of a magic button that we press that makes the whole world autonomous. It's going to be a whole lot of hard work over years, that's little by little going to really improve the operating efficiency of the insurance industry. So does that help?

Yes, that's great. And glad to see the enthusiasm and excitement. Maybe one for Jeff. So you talked about a few moving pieces just on the gross margin side and operating margin side. And then you gave us some good preliminary comments for next year. I guess, as we think about those comments, do you still feel like you're tracking to kind of your midterm targets? Are these kind of one-off issues and the expense side of the equation that you think go away? Or are these kind of something that we should be thinking about in terms of headwinds to your midterm targets?

Yes. So the items we mentioned on the call were more transient, right? So we talked a little bit about lower services margin this quarter and our expectations for the year. We think that is combined to some of these investments that we're making with these early cloud customers. These are really critical investments for us to make. Our longer-term model had assumed that we would drive towards a more normalized services margin. And I don't think there's anything that gives us pause that we can't continue to see that.

The other item that we called out that was a little bit unique in the quarter was the bad debt expense related to the Russian customer that had signed a 5-year term license arrangement, but was paying us annually, and we're obviously no longer collecting that. And so that flowed through G&A expense. So those are the 2 things we highlight. Both of those, in my opinion, don't have any longer-term impacts. Those are kind of more to this fiscal year. And then -- we're doing a lot of work right now as we're thinking around next year budgeting and impacts on the LRP, and we're feeling like that work is very productive, and we'll update folks in a more material way. But as we think about the longer-term potential, it's still very consistent with how we thought about it in the past.

(Operator Instructions)

Our next question is from Michael Turrin with Wells Fargo Securities.

You referenced the resilience of the customer base. The macro backdrop is clearly changing a bit. You're talking about FX and some of those things, but still providing a prelim outlook for 10% to 12% growth for next fiscal year here in Q3, we haven't seen those growth levels from the company in a number of years. So maybe you can just expand on the visibility you have, what's assumed and what informs that initial outlook for next year here currently?

Sure. Happy to do it. And it is our typical cadence to provide an early look. We understand that our business is complicated to model. And so helping people with a little bit of an early look into next year is consistent with our typical cadence. I think there's -- the biggest and most important thing is just the continued growth and durability of the subscription revenue line. And as that grows, and becomes a more meaningful part of the overall revenue mix that will inform and help us drive to the levels that we talked about on the preliminary FY '23 outlook.

There are some other dynamics in this year, in particular, that made for difficult year-over-year comparisons on the license revenue side. License revenue will continue to decline. And our expectation is just maybe not at quite the same levels that we're experiencing this year due to some factors. And then as we look ahead to next year, we are seeing healthy demand on the implementation side and the delivery services side. And so we are expecting to see a bit of growth there, not too too much, not too much -- not more than the overall revenue growth, but maybe a little bit more than what we're seeing this year.

And so -- that's kind of how we've put it together. And then the visibility into that is we just continue to see steady and growing demand with the cloud deals. As you know, a lot of these deals have significant ramps associated with it. We've seen our overall ARR attrition rate come back to historic levels, which are best-in-class. And so all of that gives us increasing visibility into this model and how it's going to play out.

That's all very helpful. You also referenced the balance sheet with more than $1 billion in cash. Does the current market environment at all change? How you think about capital allocation? Are there areas of InsureTech that could prove [audit] data or just other levers you're thinking about just given your durable position and some of the changes we've seen in the market environment.

Yes, it's a great question. We're certainly paying close attention to it. And I think we're happy with the flexibility that the cash position affords us. We -- I've said a number of times that the more confidence that we have in our cloud product and the ability to move the customer base to the cloud product builds the potential for us to expand into new product areas.

And so we're feeling good about that. I wouldn't -- I think that overall, overall macroeconomic conditions, multiples things like that, kind of obviously has an impact on potential strategic activity but it will mostly be -- that's mostly driven by what's a logical and strategic fit for Guidewire. And so we feel good about the cash position and the flexibility that it offers in our really feeling better and better every cycle around cloud maturity and our ability to execute on that baseline component of the company.

Our next question is from Joe Goodwin with JMP Securities.

Congrats on the quarter. During the Elysian announcement, you shared that in Guidewire, you guys were managing 30 billion records and 135 terabytes of data in your data lake and that's expected to grow to 60 billion and 300 terabytes, respectively, by the end of the year. I guess that's obviously exponential growth in data there. But just what's driving that? And then kind of two, how should we think about that in relation to demand for your data analytics solutions? Is there any correlation there?

Yes. Great question. Yes. So the -- as part of the switch to Guidewire Cloud platform, one of the key components of this is this data lake that you touched on, right? And this is a significantly different approach to data and analytics for core customer use cases than it's probably traditionally deployed as part of a core system implementation. We're streaming every transaction out of the InsuranceSuite instances to this data lake, which creates a lot of records. I mean every single time something changes, we stream that information to this data lake, and that effect -- that makes it available for a company to analyze either immediately or 10 years down the line, right?

That transaction is available to them. It can be analyzed. It can be utilized to create an analytics that can be then used to operate the company more effectively. I think one way to think about it is that you don't often know the type of analysis that you want to be able to do. And so taking this approach, it sort of sets you up to be able to do whatever sort of analysis you think of on the data that's years old, right? So this is an exciting component of the cloud platform and something I think customers are interested in not just for today, but out into the future as the use cases for analytics increase.

With respect to the analytics product offerings, absolutely, they're connected. We think that the more transactional data that we make available to customers and to our Predict platform, the more benefit and positive use cases that we will be able to build and sell into the customer base. And so I wouldn't -- I don't -- I think that it's more of an opportunity that will build over time as we get more and more of these companies to the cloud, but it is an important part of the long-term product strategy. So yes, thanks for the question.

We have reached the end of the question-and-answer session. And I will now turn the call over to Mike Rosenbaum for closing remarks.

Thanks very much. I want to thank everybody for participating on the call today. We're obviously thrilled with our continued cloud momentum across new and existing customers and with Tier 1s and Tier 2 insurers. It's a great validation of the strategy and gives us increasing confidence in the long-term opportunity here at Guidewire. So look forward to catching up with many of you throughout the rest of the quarter. Otherwise, we'll see you again on the Q4 call. Thanks very much.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.