Guidewire Software Inc (GWRE) 2020 Q4 法說會逐字稿

Greetings, and welcome to today's conference call.

Welcome to Guidewire's Fourth Quarter Fiscal Year 2020 Financial Results Conference Call.

(Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Mr. Jeff Cooper, CFO.

Thank you.

You may begin.

Good afternoon, and welcome Guidewire Software's earnings conference call for the fourth quarter of fiscal year 2020 which ended on July 31.

My name is Jeff Cooper.

I am the Chief Financial Officer, and with me on the call is Mike Rosenbaum, 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, 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 statements regarding our financial results, products, customer demand, operations, the impact of COVID-19 on our business and 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 the risk factors and documents we file with the SEC, including our most recent quarterly report on Form 10-Q and our annual report on Form 10-K 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 will also 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.

Additionally, reconciliations and additional data are also posted in a supplement on our IR website.

With that, let me turn the call over to Mike.

Thanks, Jeff, and thanks, everyone, for joining us today.

It's now been a little over a year since I joined Guidewire, and this call marks the assessment of my first fiscal year as the leader of this incredible company.

People say leaders should expect the unexpected, and I can say without a doubt, we exercised that principle pretty thoroughly this year.

When I joined, we talked a lot about the cloud transformation we are embarked on.

And now a year later, when I assess the progress we have made, I can say I have absolutely no doubt that we are on the right path.

We continue to build proof points and momentum across product, services and our ecosystem and, most importantly, with our customers.

Each of those proof points builds confidence, credibility and trust and helps us continue to build cloud momentum.

Regarding COVID and our operating model, things are a little changed since last quarter.

We have opened a few of our international offices in accordance with local guidelines, but the vast majority of our employees are still working from home and not traveling.

The company continues to operate effectively, as you will see in our product and sales momentum in Q4.

One of the positives I have personally experienced is that social norms now allow me to connect with customers virtually a lot more than I might have before using airplanes and hotels.

This has given me an opportunity to do almost 50 checkpoints with insurance technologies executives across our customer base and around the world.

These conversations, even more than the objective measures of our progress in Q4, have validated to me that we are on the right path.

As we execute on our product vision for Guidewire as a cloud service, I believe it's just a matter of time before each customer makes the decision to upgrade to Guidewire Cloud.

So while I was excited when I joined a year ago, I'd say I'm feeling much more confident now that we are on the right path.

Turning to our financial results.

We ended fiscal 2020 beating our guidance for revenue and profitability, with ARR finishing the year at $514 million.

Driving this performance was very strong momentum in Guidewire Cloud products with 10 InsuranceSuite Cloud deals and 3 InsuranceNow deals closed in Q4.

Combined with sales of on-premise add-ons, expansions and new sales that exceeded our expectations, subscription revenue grew 84% to $120 million in the fiscal year, and we are positioned well for subscription growth into fiscal 2021.

We were pleased to see customers and prospects transact in a meaningful way in Q4.

Despite a degree of uncertainty due to COVID, overall, the insurance industry remains a strong market and continues to be focused on the digital transformation projects that drive our business.

We are in a great position to be the technology and cloud platform leader that powers the P&C industry's digital transformation for decades to come as we extend our leadership position and transition the industry to our cloud platform.

Last quarter, I mentioned that we are poised to release Aspen, our first cloud-optimized product release for InsuranceSuite.

In June, we did exactly that with a virtual public launch attended by more than 1,500 people.

Aspen unifies digital, analytics, AI and our core transaction system into one platform delivered as a cloud service.

Aspen introduced our cloud services architecture featuring new cloud-native services for rating and business rules and a new cloud data pipeline, which provides access to core system data in real time.

It's truly the next-generation P&C cloud platform.

We've already seen existing Guidewire Cloud customers upgrade to Aspen, with EMC completing the first stage of their upgrade to Aspen in only a week.

USAA and American Family have started their Aspen implementations.

Aspen is already contributing to our momentum with cloud upgrades and new customer adoption with 10 customers selecting InsuranceSuite Cloud in the fourth quarter.

This brings the total number of InsuranceSuite Cloud customers to 26, doubling since the end of last year.

InsuranceNow, our full suite cloud solution purpose-built for smaller U.S. insurers, also had a great year with 6 new deals, 3 of which were in the fourth quarter.

62 insurers have now purchased InsuranceSuite or InsuranceNow on Guidewire Cloud.

Our early success with Aspen is just the beginning as we look forward to introducing new releases every 6 months with our Banff release next scheduled for November, followed by Cortina early in 2021 and so on and so on.

We expect each new release will have new capabilities and cloud-native services our customers will use to improve how they engage with their policyholders and agents, innovate and grow efficiently.

As is evidenced by the early indicators from Aspen upgrades, these upgrades will be easier and easier for our customers to adopt, accelerating the value they derive from running Guidewire.

Looking at the fourth quarter in more detail.

Of the 10 InsuranceSuite Cloud deals we closed, 6 customers purchased upgrades from self-managed to our full InsuranceSuite Cloud offering.

This includes 3 Tier 2 insurers, Aviva Canada, Texas Mutual Insurance Company and Wawanesa Mutual Insurance company; and 3 Tier 3 insurers, Germania, La Capitale and Western National.

Germania's cloud upgrade included a major expansion in the DWP scope of their planned deployment.

La Capitale's upgrade included a significant expansion from BillingCenter only to the full suite in the cloud.

CSAA Insurance Group, a AAA insurer, selected Guidewire Cloud to migrate ClaimCenter.

CSAA offers automobile, homeowners and other personal lines of insurance to AAA members through AAA clubs in 23 states in the district of Columbia.

Finally, 3 customers selected InsuranceSuite Cloud for insurance lines not previously managed by a Guidewire core system.

MAPFRE North America selected PolicyCenter on Guidewire Cloud, including digital, for commercial lines.

A Tier 1 insurer chose ClaimCenter cloud for a new insurance brand to support a greenfield, digital-first renters insurance line; and another Tier 1 insurer selected all of InsuranceSuite Cloud for a new, innovative insurance brand targeting commercial auto use cases.

As I previously mentioned, we also continued our cloud momentum with all-in-one core solution InsuranceNow, with 3 deals in the fourth quarter.

An existing Tier 1 customer purchased InsuranceNow for a $100 million DWP commercial auto line.

The oldest insurer in the United States, the Philadelphia Contributionship, which, by the way, was founded by Benjamin Franklin, will be migrating their InsuranceNow deployment to Guidewire Cloud; and CURE Auto Insurance became a new InsuranceNow customer in the quarter.

InsuranceNow has proven to deliver very tangible business benefits for our customers, and we look forward to seeing the success these new customers can achieve.

I'm very pleased with the turnaround we activated at InsuranceNow over the last year.

I am confident that we have the right product, team and go-to-market motion to build on this success in fiscal '21.

In addition to cloud momentum, we continue to expand the relationships and sign new customers for on-premise products.

This new on-premise business was particularly strong internationally, reflecting our belief that customers in North America are earlier in the cloud adoption cycle.

We added 3 on-premise customers in Europe.

Vaudoise Assurances of Switzerland and Colonnade Insurance based in Luxembourg selected InsuranceSuite.

Sky Distribution, a VIG Group start-up based in Poland, selected InsuranceSuite and digital.

Additionally, Hannover Re, a Tier 1 insurer in Germany, and Guidewire are undertaking a pilot to prove out the ability of PolicyCenter to be used as an underwriter's cockpit.

Hannover Re will take inward reinsurance policies created by brokers and cedents and populate PolicyCenter in order to provide a consistent view to their underwriters.

Rounding out our new on-premise business, a Tier 5 insurer in Canada selected InsuranceSuite digital and data.

At the end of fiscal 2020, $518 billion of direct written premium was under license for at least one Guidewire core application, up 3% from last year.

This growth rate is a result of new sales activity this year being more focused on expanding our footprint at existing customers through add-on business and cloud upgrades versus previous years.

Turning to go-lives.

Our go-live event is always an exciting time for our customers, and customer adoption is how we ultimately define our success.

In the fourth quarter, I was pleased to see 14 customers go live on implementations for 27 Guidewire products, including 3 cloud product go-lives.

It's great to see our services team and our SI partners continue to drive successful go-lives in a primarily virtual delivery context.

Meanwhile, our growing partner ecosystem continues to be an important contributor to our increasing market leadership.

Our partners facilitate customer implementations and help us accelerate customer success with value-added solutions for InsuranceSuite.

We ended the year with approximately 620 consultants from 28 partner companies who have now earned the advanced certifications required for Guidewire InsuranceSuite Cloud implementations, up from approximately 475 as of the end of last quarter.

We believe that this growth is an exciting proof point for the opportunity our partners see in the future of Guidewire Cloud.

The Guidewire Marketplace has also been a valuable resource for customers to drive value and simplify integrations across the insurance life cycle.

For example, the general estimates, they will generate $1 million per year in cost savings and reduce payment cycle times by 80% as a result of automating their claim payment process by using Guidewire and our Marketplace partner, InsurPay.

In fiscal '20, our Marketplace ecosystem grew to include 91 solution partners, up from 52 a year ago, providing more than 140 apps.

We introduced a number of new partners in Q4.

One new partner, Handy, provides an app that connects claimants directly to approved contractors seamlessly after a claim is entered in ClaimCenter.

The app walks the contractor through the inspection, eliminating the need for adjuster inspections, contractor bids and significantly reducing cycle times, cost for insurers and increasing customer satisfaction.

This is just one example of the many innovations our ecosystem partners are delivering to the insurance industry through our Marketplace.

I continue to be energized by what they can accomplish by integrating into our foundational core systems.

In summary, we had a great fourth quarter that capped off an important year for our company and specifically for Guidewire Cloud.

We are starting fiscal 2021 with growing optimism for the business.

As excited as we are about our cloud success, it's also important to realize that Guidewire Cloud is still in the early days of penetrating a large market opportunity.

The vast majority of our customers and the broader industry have yet to take the first step in their core cloud journeys.

The strides we have made towards advancing our cloud platform and demonstrating customer success are important reference points for the industry.

We look forward to leading and supporting new and existing customers as they evolve to core -- cloud-based core systems and look forward to serving them as effectively as we possibly can.

Now I will turn the call over to Jeff.

Thanks, Mike.

As Mike noted, we had a very strong Q4, highlighted by 10 new InsuranceSuite Cloud deals.

ARR ended the fiscal year at $514 million, up 12% from a year ago.

We measure ARR on a constant currency basis during the fiscal year and revalue ARR at year-end for current FX rates.

Rate changes between July 2019 and July 2020 resulted in a $5 million benefit to ARR.

As a result, ARR grew 11% on a constant currency basis.

A little more than half of new ARR added in the fiscal year came from new deals sold to new and existing customers, and a little less than half came from ARR step-ups from ramp deals sold in prior years.

Fully ramped ARR, which is defined as the annualized recurring value of all active term licenses, subscription and maintenance agreements at the fully ramped annual price outlined in the customer contract, ended the year at over $600 million, representing 13% year-over-year growth and 12% growth on a constant currency basis.

We will continue to discuss fully ramped ARR on an annual basis as we work through this cloud transition.

Turning to the income statement.

I wanted to remind you all that we have adjusted our income statement presentation and we will address this new presentation on the call today.

Between our press release and the financial supplement, which can be found on our IR website, you should have all the details to reconcile to our prior presentation.

Total revenue in fiscal 2020 was $742.3 million, ahead of the expectations we discussed last quarter.

Subscription revenue for the year was $119.7 million, up 84% year-over-year due to ongoing InsuranceSuite Cloud activity.

Subscription new sales ended the year at just under 70% of total new sales.

Subscription and support revenue ended the year at $203.5 million, up 35% over last year.

License revenue in fiscal 2020, which no longer include subscriptions, was $301.6 million.

To compare with our prior presentation, license and subscription revenue was $451.2 million, well above our prior expectations.

The fourth quarter benefited from $17.6 million in incremental revenue from deals with duration longer than our standard 2-year initial terms followed by annual renewals.

Going into the fourth quarter, we had about $2 million of deal duration impact embedded into our outlook.

Even when normalizing for deal duration, license revenue was ahead of our expectations due to higher term license bookings.

For the year, license revenue benefited from $33.5 million in incremental revenue from longer duration deals.

Services revenue ended the year at $207.3 million, down $41.4 million from last year but ahead of our expectations as our services organization effectively managed ongoing projects while working from home.

The year-over-year decrease is primarily driven by the completion of large Guidewire InsuranceSuite implementations since the end of last fiscal year, increased involvement by SIs and cloud implementations, and reduced billable travel associated with COVID-19.

Turning to profitability.

We will discuss these metrics on a non-GAAP basis.

Gross profit was $452.7 million for the year compared to $442.6 million a year ago.

Overall gross margin was 61% and ahead of our expectations because of higher-than-expected term license revenue.

Subscription and support margin for the year was 55% compared to 66% a year ago.

The decline was a result of significant investments in our cloud operations function to support our growing InsuranceSuite Cloud customer base.

Operating income was $104.8 million, exceeding our guidance range due to higher-than-expected revenue.

We ended the year with $1.4 billion in cash, cash equivalents and investments.

Operating cash flow benefited from strong collections and ended the year at $113.1 million, free cash flow finished at $98.5 million, excluding $11 million in final expenditures associated with our new headquarters.

Turning to our outlook for the first fiscal -- for the first quarter and the fiscal year 2021.

We are energized by the momentum we see in our cloud business, and at the same time, we recognize the unique macroeconomic environment we and our customers are currently facing.

In the first quarter, we expect ARR to be between $509 million and $512 million.

A large contract consolidation and the sunsetting of support for acquired on-premise ISCS customers are unique events expected in Q1 that contribute to the sequential decline.

The contract consolidation occurred with one of our largest customers who had 12 active licenses, including licenses for noncore products that were not in active production and a core product license for a small insurance line that they were -- they are exiting.

We have worked with this customer to consolidate the contractual framework and put in place one enterprise license agreement with a 5-year, 4-month commitment.

This customer is still an active Guidewire supporter and in our top 5 as measured by ARR.

For the year, we expect ARR to grow between 9% and 11%, which implies fiscal 2021 ending ARR of $560 million to $571 million.

Continued adoption of our cloud products by new and existing customers is a key driver of ARR growth.

We expect the industry shift to cloud-based core systems will allow us to accelerate ARR growth over time.

However, we are still in the early days of this transition and we recognize that insurers tend to be cautious in their decision-making when replatforming core systems.

Over the longer term, this conservative nature plays into our strength as the proven market leader who has demonstrated that we can tackle the most complex core system modernizations.

In prior quarters, we have discussed the impact to our income statement from the business model shift to subscription revenue and the new revenue pattern for term licenses because of our adoption of ASC 606.

We expect the impact of the business model shift to be apparent in fiscal 2021.

ARR can help investors normalize varying revenue recognition patterns to provide a better measure of our overall software sales growth.

Total revenue for Q1 is expected to be between $162 million and $166 million.

This includes $14 million of term license revenue from contract duration that deviates from our standard primarily due to the large contract consolidation that I just referenced.

Subscription revenue is expected to be approximately $35 million in Q1.

Total revenue for the year is expected to be between $723 million and $733 million.

We expect that our subscription revenue will be approximately $165 million, representing 34% growth, and support revenue is expected to decline by about $2 million year-over-year.

Services revenue is expected to be approximately $190 million, a decline of 8%.

License revenue is expected to decline due to our shift to subscription sales as well as the impact of multiyear license revenue recognized last year that will not recur this year.

We have not modeled any positive impact of multiyear term license revenue above the $14 million we have visibility into in Q1.

We expect total gross margins for the year to be approximately 55%, but this gross margin will ultimately depend on our final revenue mix.

Services margin is expected to be similar to what we experienced in fiscal 2020.

The business model shift in revenue complexity are also visible in the divergence between our expectations for operating income and cash flow from operations.

With respect to operating income, we are expecting an operating loss in Q1 of between $10 million and $6 million.

For the year, we expect an operating loss of $5 million to positive operating income of $5 million.

Our operating income is significantly impacted by the revenue recognition patterns reported on our income statement, which may vary depending on whether we sell a multiyear term license or a subscription agreement.

Thankfully, our customers continue to pay us in the same way, which is primarily annually upfront.

As a result, just as we believe ARR is the best proxy for momentum, we believe that cash flow from operations is a better measure of our profitability than operating income.

Our cash flow from operations expectations in fiscal 2021 are between $60 million and $70 million.

We expect a decline in cash flow from operations as we continue to build out our cloud operations function and invest in cloud capabilities.

This is a once-in-a-generation platform shift for the industry that significantly expands our TAM, and we are investing today to capitalize on this opportunity for decades to come.

Additionally, we expect approximately $15 million less in interest income in fiscal '21.

We expect to spend approximately $40 million in capital expenditures, including $25 million in build-out expenses, as we are moving to new offices in Dublin, Ireland, our European headquarters, and Toronto, Canada.

Project dates may be delayed due to the pandemic and may stretch into the next fiscal year.

Additionally, our planning for these and other locations takes into account a new approach to offices as we consider more flexible work arrangements that may require less office space in the future.

In summary, we are proud of what the team was able to accomplish in Q4, a tremendous result.

We look forward to providing more detail at our Analyst Day, which will be a virtual event on October 13.

Operator, you can now open the call for questions.

(Operator Instructions) The first question comes from the line of Ken Wong with Guggenheim Securities.

Maybe first off for you, Mike.

Would love to get a sense of what you're hearing from customers in regard to Aspen, obviously very strong quarter from a cloud deal perspective, but just wondering how they're thinking about adopting Aspen with all the new features potentially dragging out sales cycles.

Or has that shortened the sales cycles?

Yes.

Thanks for the question.

I wouldn't say at all that it's dragging on sales cycles.

I think the biggest thing customers are excited about with respect to Aspen is just this philosophy of making the upgrades easier and easier and easier for them to take, right, and the proof points that I talked about, which are early.

We've had a couple of customers begin the process, but those proof points are positive.

And I think what I'm hearing from people is just real, real excitement about the shift in the strategy, the product strategy that we've taken from a 2-year cycle to a 6-month cycle, and the shift in the design approach to the idea that we expect these to be just easier and easier and easier to adopt.

You add on top of that sort of the idea that you can take these cloud-native services, and you can use them to add to the approach that they're taking to building out new lines of business on a Guidewire core platform, and it just offers them more flexibility in terms of how they use the system to attack business problems.

And so I wouldn't say it slows it down at all.

It's been really, really positive, the feedback that I've gotten from customers in terms of our strategic project direction.

Got it.

Fantastic.

And then I guess this could be either for you or Jeff.

But as we look at ARR growth, you guys in the past have obviously thrown out a number of 20% longer term.

Just wondering as we look at this trajectory, is it fair to assume that fiscal '21 is the trough?

And any color you can provide there.

Yes.

I think that -- I'll let Jeff chime in.

And I think we intend to provide a little bit more longer-term visibility on the Analyst Day presentation that we'll provide.

Certainly, we see the potential for that when you look at the installed base and the potential that we see.

But the guidance we provided this year is just based on what we see in the pipeline and what we feel very confident in our ability to go execute on this year.

Jeff, anything to add?

Yes.

And I think that's -- you hit it, Mike.

The only thing that we've talked about in the past, Ken, is just the pace of this migration activity is a big driver of growth.

And we're trying to be thoughtful about how we approach that.

And this industry moves at its own pace.

So as Mike said, we have, I'd say, better visibility into our guide for this year than we did in prior years.

And we want to be conservative as we think through the next year.

Our next question comes from the line of Chris Merwin with Goldman Sachs.

I wanted to ask about ARR.

I think in fiscal '19, ARR grew 11% and your fully ramped was over 20%.

And this year, if I got the numbers right, ARR was 12% but fully ramped was 13%.

So it looks like the gap between those 2 metrics has come in quite a bit.

And I just was curious, like what in particular is driving that?

Is there anything changing with the way that you're pricing these deals?

And anything you can say about what fully ramped ARR might look like next year relative to your guidance.

Yes.

It's a good question.

I think there are a couple of things driving it.

One is we exited FY '19, the year-over-year growth in what we would call an ARR backlog number was -- actually was like over 300% because that was a relatively -- we'd always sold ramps, but the way we engage with customers in a cloud context and especially in a migration context, really accelerated the slope of these ramps.

And so that drove the very significant year-over-year growth there.

Now coming out of fiscal '21 -- or fiscal '19, we had a fairly significant amount of customers that we signed in Q4 that were larger customers with steeper ramps, and so that created a more difficult compare year-over-year.

We set an expectation last quarter that we expected fully ramped ARR to come in roughly in line with ARR growth this year, but we're pleased with some of the cloud activity to see that come in just a little bit higher than ARR growth.

Got it.

And then maybe just a follow-up on on-premise demand.

I know last quarter, I think there was a headwind there from a slowdown in on-premise demand not just -- I guess it wasn't in isolation in the sense that it seemed like where customers were thinking about a cloud migration.

This quarter, it sounded like you saw a pickup in activity in on-prem.

I think you called out a few deals there.

So maybe, Mike, can you just talk a bit about the state of demand for on-premise?

And I mean in particular for customers that are considering either going to on-premise or cloud, I mean what is their mindset today?

And what have you factored into the outlook for next year as it relates to the health of the on-prem and cloud business?

Well, so the first thing I'd say is that we are in a particularly good position technically to be able to support both customer choices, right?

The fact that we're starting from a core application, that's really market-leading, and its feature and functionally complete as anything in the market puts us in a great position to be able to provide customers the sort of operating model of choice.

As we discussed previously, I think North America is ahead of the curve relative to Europe and Asia in how they're thinking about cloud deployments and cloud implementations.

I expect in the long run that everybody will make this switch to the cloud just because the characteristics of the upgrades and the functionality that we can provide in a cloud modality are just significantly better.

But that said, different customers have different approaches and different mindsets about when that's going to make sense.

Like I said, I've had a lot of conversations with customers, and some of them start off by saying we've already made the decision strategically to start moving assets to the cloud and we're already underway.

Others are just saying we're going to wait maybe until the next cycle, maybe even 5 years, that they're just not ready.

And that's sort of customer by customer by customer.

And so projecting that and making an estimate for how much demand we'll see quarter-to-quarter, it's -- we work with them and we try to predict it.

But my sense is that as we're able to show more and more functional value and more and more agility that customers that make the decision to go with our cloud approach, we're going to see that shift.

But like I said, we're in a great position to be able to offer both.

And that's why it's exciting to be able to call those out, call out those wins because when -- for those customers who are trying to drive a digital transformation and -- but they haven't made the decision to go with a cloud strategy in their IT shop, it's great to be able to support and serve those customers as well.

Our next question comes from the line of Bhavan Suri with William Blair.

I guess I wanted to touch a little bit on the competitive environment.

You've obviously seen one of your competitors go public, and that's one I'd love to hear if you're seeing more or less of.

But the other one, Mike, obviously, Salesforce bought Vlocity, and they've got an insurance offering and they sort of, if you read the marketing materials, talk like they have a pricing engine, a policy engine, everything else.

But I like to understand sort of as you think about the space and the insurtech space getting quite a bit of investment, how you view the competitive environment.

Have there been any changes?

Yes.

So I think the headline answer to your question is we haven't seen any changes in the competitive dynamic.

We obviously have seen a lot of activity in our market and a lot of success in our market.

That, I think, is not unexpected.

We're not the only company in the world to recognize the very significant opportunity that, call it, the digital transformation or the digitization of insurance presents to the world.

We like our position very much, coming at this from a position of strength with hundreds and hundreds of customers across all tiers.

I really feel good about our competitive position.

And we haven't seen a change in the dynamic of the competition.

But like I've said on previous calls, we compete for these deals.

We have our strengths and we lead with our strengths, and we aspire to win every deal, but we don't win every deal.

It's a competitive market.

I really do appreciate the sort of -- I don't know, the part of your question related to insurtech investment.

It's one of the reasons I'm so excited about our Marketplace and our approach to having an open API and the sort of the philosophy that we can plug these innovative start-up technologies into our core systems.

I can't tell you the number of times I hear customers sort of saying we're so thankful that we executed on the Guidewire core program a few years ago because now we're in a position to -- with a modern system with the ability to open the system up and connect in these insurtechs and really start to innovate in terms of how they're able to engage with their customers.

And so that part of it is really, really exciting.

Insurance is -- it's a unique market.

It's a really, really unique technical challenge that requires a really deep expertise in core systems.

And it's kind of one of the things that's been hard for me but also pretty validating.

It's just learning how deep -- how incredibly deep the investment that Guidewire has made in that core system across claims and policy and billing.

It's somewhat -- one of my sort of internal comments is that it's sort of misstating it to call it one market, right, because you really have to think about this market in terms of all the lines of business in all the states and all the countries that we've really invested in over the years to be able to give these -- our customers a head start in terms of how they approach bringing a modern insurance product to market.

So we -- getting to your Vlocity question, I really think that this is going to strengthen the partnership with Salesforce.

I think that Salesforce is, by this -- by their acquisition, is very serious about the vertical strategy and very serious about the insurance industry.

And I really think that adding the Vlocity team and the Vlocity IP is really just going to strengthen our partnership and make it just more feasible for every insurer in the world to be able to have a first-class CRM platform and a first-class core system for claims and policy and billing.

Yes.

That was very helpful.

And then one quick one for Jeff.

Obviously, historically, Q4 has been sort of seasonally the strongest quarter.

And I know you just commented about how difficult deals are in terms of -- how hard it is, sorry, to predict sort of the deal timing.

As we think about next year, should we expect the same seasonality on a quarterly basis?

Or is there some sense of the demand partially pent up and also interest around Aspen sort of help support growth earlier throughout the year than maybe we originally expected?

Any deals may be pushed out through the current environment, might close early in fiscal '21, anything like that, that would change seasonality in the coming year.

Yes.

I don't think anything significant changing seasonality in the coming year.

We did have a very strong Q4.

Steve handed the reins over to Frank as the new sales leader, and I mean he did a good job of running the table on the deals that he had in his pipeline.

So that was embedded in our guidance for Q1 a bit that we're not expecting a lot of new sales activity in Q1 and the pipeline will build.

We are thinking about ways to increase the linearity, and we have a couple of initiatives in place that we think we can do that better.

And then as we get into more of the 6-month release cadence and the cloud demand becomes more pervasive rather than where we are today still with the early adopters, I think we can lessen some of this back-end-weighted-ness.

But I don't expect to see that in this fiscal year.

Our next question comes from the line of Sterling Auty with JPMorgan.

This is Jackson Ader on for Sterling tonight.

Our question actually is a clarification just on the mechanics.

I mean when we think about closing 10 InsuranceSuite deals and 3 InsuranceNow deals in the fourth quarter, when should we actually expect that to hit ARR?

And is that different from when we would expect those deals to actually hit subscription revenue?

Yes, it's a good question.

So as soon as the deals are executed, we -- they will hit ARR.

Now a lot of the migration activity we've noted in the past can tend to have a relatively muted year 1 ARR impact as that customers are already paying a full-term license fee.

And then we expect to see the incremental ARR ramp over a 5-year period.

So that is one of the dynamics that exists for a migration agreement.

The other thing, revenue occurs on the subscription side once we've delivered the software, and we can usually do that within 30 days in most instances.

So the revenue wouldn't hit until Q1.

On a migration deal, because the customer continues to need to use their on-premise software through a migration period, we do have to allocate some of that revenue for that cloud deal towards the term license component of the deal.

And as a result, migration revenues can actually contribute to term -- migration deals can actually contribute to term license revenue in the quarter, and we did see that a bit in Q4.

Okay.

That's helpful and interesting.

The -- our follow-up question on the direct written premiums, the $518 billion for the quarter.

But do you have any sense for maybe what kind of DWP you have under the hood for noncore products that maybe aren't linked to the core platform?

It's a good question.

The DWP that we report is always tied to the core.

And we think about our core systems will manage that DWP.

And then the ancillary products are typically tied to a core -- obviously, things like Cyence can be purchased independently, but that's not a metric that we've broken out in the past.

Our next question comes from the line of Mayank Tandon with Needham & Co.

I just wanted to piggyback off of Bhavan's question on the competitive landscape.

Could you share maybe some qualitative data around win rates across the various tiers of the market?

And then sort of tied to that would be any noticeable shift within the tiers that you're competing in today.

Yes.

Let me comment on it.

And I think we'll provide a little bit more detail at Analyst Day.

But I just want to repeat what I said is that we have not seen a change in the competitive dynamic in the market.

That's based on tier, based on deal type, whatever.

It just basically looks pretty stable to us relative to what we've seen over the past couple of years.

I would say we -- the turnaround in the InsuranceNow business has been a real, real positive for us.

It was one of the things that when I joined the company a year ago, when Marcus and I were talking about what's important to really focus on and help ensure that we're getting traction sort of month after month after month, that was one of the major, major objectives so that we are really able to compete in all the tiers.

And so seeing the turnaround in that part of the business is a real positive for me.

And like I said in sort of the prepared remarks, I think that the momentum that we've established there should do well to help carry us forward into next fiscal year and beyond.

I'm really excited about this company being able to put the best foot forward in terms of core systems for every tier in this market.

So hopefully, that makes sense.

Yes.

That's helpful.

And then, Mike, you mentioned the international expansion.

Just wanted to get a sense, given how localized the insurance industry is and how regulated it is by region, are you thinking more on the lines of M&A as an expansion driver?

Or do you think you can go about it organically and still be competitive with some of your peers out there that are maybe more European-centric?

I don't want to comment on acquisitions but I will say this.

Our philosophy is we have a common core platform that provides all the mechanisms that are necessary worldwide.

And then we have a very significant investment in providing the specific integrations and the specific functionality on top of that core platform for each region where we want to compete.

I believe very, very strongly that when you think about a long-term cloud platform that's going to exist for, let's hope, 100 years, that is exactly the type of architecture that you want to bring to bear in solving a problem like this.

So when you sort of piece together different technologies that are suited to a particular market, you don't end up with the economies of scale and you don't end up with being able to deliver as much value to each and every customer regardless of where they're located.

With the Guidewire model, we're able to make an enhancement to the cloud data platform that works in Japan, and it works in Germany, and it works in Luxembourg, and it works in every single state in the United States.

When we make an enhancement to our API, that becomes true.

That's the philosophy of this company.

I think that's why this company has been so successful for 18 years.

Now we're bringing that to the cloud.

And I think it's going to -- I think it's really going to help us win in the long run.

Now it's -- you've got to have a very determined, steady approach to taking that sort of strategy.

But I think it served us really, really well to this point.

And I am excited about our ability to sort of continue that investment internationally and continue to make progress internationally because I think that's what allows us to serve this industry most effectively.

Our next question comes from the line of Tom Roderick with Stifel.

I'll echo the earlier sentiment here.

Getting 10 cloud deals across the goal line when everyone's working remotely is quite significant.

So congratulations on that.

Mike, first question for you.

Just we've heard this concept of data gravity as something that's a real driver of cloud adoption for years now.

And I'd love to hear how your customers are thinking about the role of predictive analytics, AI, machine learning, broader insights that that's having on catalyzing their desire to move to the cloud.

Perhaps if you could talk a little bit more about Cyence with some success there more recently and how that is linking up with the cloud strategy, that would be great.

Yes.

Thanks for the question.

There's no doubt that analytics and basically taking advantage of the data asset that is produced by running a core system in a modern way is one of the key drivers behind a lot of these projects.

And that's what's behind the strategy we've taken in Aspen around more completely integrating the predictive analytics assets as well as the Cyence asset into our core system because we really think that what you think of maybe previously as an insurance core system will change, that the necessity to have easy access to the data, easy access to the insights that you are deriving from that data and then pushing that information back to the -- each individual user so that they're intelligent in the moment that they're using the system, right, that's the real key, I think, to transforming this industry, and that's what some of the more forward-thinking customers are doing already with Guidewire and other innovative insurance assets.

Making all of that easier and easier and easier every single release as we make progress on our cloud platform is what's going to drive the incremental value and the incremental differentiation that our customers are after.

I really, really just love the question because Cyence and predictive analytics and our cloud data platform all sort of coming together on a cloud platform that makes it easier for insurers to be able to deliver these innovative use cases, it's very, very exciting.

Now I think we all sort of sometimes tend to get bogged down in how difficult and hard work it is to do one of these modern transformations and migrate off that legacy mainframe platform and instantiate Guidewire across a set of lines of business.

But once it's done and once you start to see that value, you start to see the customers' eyes light up with the exciting things that they're able to do now.

All these ideas people have about how you can use machine learning and AI to provide that insight to the agents and the adjusters and the underwriters, it's really exciting.

And so anyway, I really appreciate the question and I think it's sort of central to the product strategy that we have here at Guidewire.

And I'm glad you brought up the context of Aspen in that answer, Mike, because that's sort of where I wanted to go next.

As you've already started to move and migrate some of your customers -- I think you mentioned USAA and AmFam earlier on the call.

As you started those migrations, I'd love to hear you talk a little bit about some of the challenges and some of the sort of inputs from a capacity standpoint, whether that's services heads, implementation heads.

Just talk about the challenges and how you're managing through those challenges getting those customers in the beginnings of their migration to Aspen because that seems important to have some early successful use cases there.

Thanks again for a great question, right, and -- because it points to what I think is a very philosophical, very fundamental change in Guidewire's position as it relates to our customers' technology strategies.

And that is to stay current, okay?

Instead of thinking about Guidewire as this thing that does this thing and we're going to use it, we're going to install it and then we're going to test it, we're going to roll it out and it's going to be live and we're going to forget about it for 5 years; instead, we are partnering with each and every one of these cloud customers to change their approach to thinking about every time we provide an upgrade, to slot that upgrade into the cycle, to slot that upgrade into the testing cycle, to slot that upgrade into the development cycle.

This is what is sort of behind the scenes going on when I say the word transformation.

It's that we need to teach our teams how to execute on that change effectively.

We need to work with our customers very directly to trust us and to work with us in lockstep as we evolve the product and to make plans about their implementations that enable them to dovetail those upgrades into their plans.

That's what's really exciting about the partnership that we have established with USAA because they are committed and we are committed to doing this in this sort of completely in-sync, lockstep approach that enables them to be completely in line with all the innovation that we're providing in each release.

And to be just perfectly direct, this is not the norm in the insurance industry.

We intend, I intend -- this whole company, we intend to change that, but it's going to take a while, right?

It's going to take a couple of releases.

It's going to take maybe a couple of years.

It's going to take us being committed to working with each and every single one of our customers about establishing that new approach.

But I've seen firsthand, based on my previous experience, the difference in the amount of value that a software company can provide to its customer base once you're following an approach like that.

And so that's why I'm so excited about it.

Like I keep saying the path we're on because when I talk to these customers and we go through this and we talk about it, we both recognize that it's lot of change but it's very clear that there's a significant amount of value, incremental value that we can provide to them.

So thanks for the question.

Our next question comes from the line of Matt VanVliet with BTIG.

I guess thinking about the number you talked about, you have over 600 consultants now on the more advanced cloud implementation certification here.

But as we think about what the demand looks like when you get a partner involved, especially one of the big global SIs, are you seeing them also pushing harder on cloud projects as part of maybe bigger digital transformations that they're engaged with at these customers?

Are they skewing the mix even maybe more towards the cloud?

Or is it pretty consistent around a lot of those partnerships right now?

Yes.

I wouldn't differentiate one versus the other, but I would say we're getting very, very good alignment with them.

And that number is just the most objective way for us to assess that.

It's that we're asking those partners to really step up and get trained and certified on a whole bunch of new technology and a whole bunch of new approaches that are better aligned to delivering value, and they're stepping up.

So we're very thankful that they are stepping into that because it's a significant investment on their part.

I think it aligns to the value that they see in being able to drive those implementations.

But I think they also recognize that this is just a better model.

It's a better approach.

I think it's hard to find a technology, an IT executive in the world these days who doesn't admit that the cloud model logically is a better approach, that having a vendor responsible for upgrading the service and keeping the service up-to-date is a better approach because the R&D investment that you're making centrally can be more easily sort of spread out and enjoyed by the customer base.

The question is sort of what's the timing?

When does it make sense for that particular customer in terms of the other projects that they have?

And so kind of just like I said before, we're in a very, very good position in being able to deliver an on-prem core platform and in a cloud core platform.

And depending on the time line a particular customer has for their overall IT landscape, that's going to more drive what the SIs and what Guidewire suggests.

But make no mistake, they're pushing it and we're pushing it because over time, we're just -- it's just going to be more and more valuable.

And the flexibility and the agility that they're going to be able to enjoy from running projects on a cloud platform from Guidewire is just going to be greater.

And so I would say that's kind of my summary of the situation.

It's -- just like us, we're basically making sure that the customers are educated about what we think the future is.

But we're open to working with the customers based on the time lines that make sense for their business.

And then maybe following up a little bit on Tom's question before but also some of the earlier comments around the expansion of the Marketplace and some of these newer kind of digital and data-driven functionality.

How much -- or when do you think about sort of exclusively providing that type of add-on feature to cloud-only customers?

I know in the past, you've talked about supporting the self-managed customers for as long as -- for the foreseeable future, I suppose.

But at what point do you feel like you start developing some that can only leverage the deployment model offered by the cloud and use that as more of a pull tactic to get customers to not only migrate but then buy new in the cloud?

Yes.

The way I've been phrasing this is that I want these decisions to be carrot-driven, not stick-driven.

I want to create such a compelling value proposition for the cloud that customers willingly and excitingly make that decision.

We will -- that decision ultimately ends up being very technical and ends up being very, very much based on how expensive is it, how much investment does it take for us to be able to take some capability or feature and make it available to -- in the on-prem modality to -- sometimes, it's really straightforward and easy.

I mean to the extent that we deliver a cloud-native service for ratings, that's just a cloud-native service, right?

It doesn't really even make sense for us to even contemplate the concept of that being run on-prem.

But other times, there's going to be a debate and we're going to talk to our customers, and we're going to assess and we're going to make that decision, but I really am trying -- the concept of the service is a big part of the culture here.

And I think it's a big part of the reason that this company has been so successful.

That we really -- our customers are maybe the primary stakeholder of Guidewire.

And I think it makes sense for us to do all we can to enable those customers to make this decision, make this upgrade decision on their time line and how it makes sense for their business.

These projects are incredibly complicated.

Like it's -- sometimes it's hard to imagine when you're on a phone call talking about it in the abstract, how complicated and how detailed and how much of a commitment is necessary for an insurer to take on one of these projects.

And in just -- that's been a big part of the learning curve for me this year.

It's really fully understanding that and being able to empathize with the decision-makers at these insurers.

And so that's why I just feel like we owe them our best effort to continue to provide that service and make -- just make the cloud better and better and better, such that when it makes sense, they're going to make that move.

So hopefully, that helps you understand how I'm thinking about it.

That's very helpful.

Great job on the quarter.

Okay.

Thanks a lot.

Our next question comes from the line of Michael Turrin with Wells Fargo Securities.

Just one for me.

On the margin outlook, you commented on the impacts from rev rec, and I think it certainly makes sense to point to cash flow as a better metric during the transition.

But given you have services coming down here and an increasing involvement on the partner side seems like you should also see some offsets.

So I was just hoping to revisit the impacts driving that expected compression.

Is it primarily a function of cloud?

And are your expectations for cloud margins still holding given what you've observed with these initial cohorts of customers thus far?

Yes.

It's -- the big investments we're making right now are on the cloud operation side and then the product development side.

As we invest in our product to make it more efficient, our cloud operations functions should get -- also get more efficient over time.

These are big investments that we're making, and we're in the early days of this replatforming.

So that's the driver.

There are some other kind of smaller drivers on the fringes.

We did have a very strong collections year this year, including working on some past due payments that flowed into this year that won't recur, but the primary driver of the year-over-year decline in cash flow from operations are those investments.

Our next question comes from the line of Joe Vruwink with Baird.

I'll keep it to one as well, but I wanted to go back to the conversation on just the feedback related to Aspen since the release event.

And I'm curious if there were any use cases for segments of the broader customer audience that, I don't know, maybe surprised you now that there's finally a cloud-optimized InsuranceSuite release in market.

And a few things, Mike, you brought up like the digital-first greenfield efforts that's not new to Guidewire, of course, or even this new crop of all-digital insurers targeting homeowners or renters lines.

Are there things about the product itself where there's suddenly a broader set of new opportunities, which maybe inject a new element for Guidewire as opposed to what might have been the case before the Aspen release was out there?

Yes.

Thanks for the question.

So yes, for sure, sort of two-part answer.

One, we're -- one part of Aspen is something we're calling an advanced product designer, and it's designed to enable insurers to be able to design and release new lines of business much more efficiently and effectively just really much more quickly than they could before.

And we -- I was talking to one of our Tier 1 customers who said, "Look, we're basically managing many lines of business with Guidewire." And some of those lines of business are driving the majority of our DWP and the majority of our revenue, and those get the most attention from our IT organization and the projects that are running Guidewire.

And the smaller lines of business, they get neglected somewhat.

And so the pace of change and the priorities there sort of frustrate those businesses.

But with APD and with Aspen, they're able to sort of balance that a little more effectively, such that the business line users of those smaller lines of business can have something much more flexible much more real time.

And it was surprising to hear that, right?

Because we weren't necessarily thinking about that sort of value proposition and -- but it reminds you again of the complexity of the implementations that we are driving here.

And it also -- it just speaks to the business benefits, the business impact of adding agility to an IT organization, especially one that's digitally driven.

And so just in terms of answering the second kind of part of your question, what was exciting to me about Q4 was that there was just a variety of compelling events driving those deals, that you didn't just see one situation causing the deal to transpire, that there's upgrades driving some of them and there's digital transformations and digital interfaces driving others, and that there's new lines of business being launched.

And when we were in the middle of Q3 and we were questioning what's going on in the macroeconomic environment and how that's going to impact the insurance industry and how that's going to impact Guidewire, I would be lying to say that I wasn't a little bit nervous about what the future was going to look like.

But Q4, it just reminded us that this is a very solid industry.

There is a whole bunch of really interesting dynamics driving this industry.

And if we do what we're supposed to do, we deliver this platform, we're going to be able to continue to really grow this company and serve customers more effectively.

And that was one of the parts of Q4 that was really motivating for me.

And hopefully, that helps answer your question.

It does.

Okay.

Thanks a lot.

Our next question comes from the line of Rishi Jaluria with D.A. Davidson.

This is Rishi Jaluria.

Just one that I want to squeeze in, and thank you for squeezing me in.

But on the cloud gross margin side, if I do kind of the quick math between the new presentation and the old presentation, you're sitting around 35%, give or take, non-GAAP subscription gross margins, which I think feels a little lower than I would have expected at this point.

Maybe can you walk us through, A, is that even directionally correct?

Or is my math entirely off?

And B, is that a function of just the ramps and all the investments that you're making right now and there's going to be natural leverage coming up from here to get towards that 65% cloud gross margin target in FY '24?

Or is there a lot of kind of more multi-tenancy on services and things that need to happen to get from here to there?

Yes, Rishi.

So there is a lot of investment going on in the product to build more multi-tenancy into our platform that we expect to realize over time.

And those investments will take time to kind of work their way through our product and then into our customers and how we support and maintain those customers, making big investments in building out our cloud operations team.

And I think we've commented on this in the past that to some extent, these are really critical initial implementations, and we have to get these right and we need to make sure that we invest the time and resources to bring every customer along that chooses to go on this path with us and make them successful.

And so there may be a little bit of overinvestment in terms of making sure we get this right, and then we can leverage those investments over time as we continue to migrate our customer base over.

There's one other small dynamic that we'll get into a bit more on the accounting and how cloud migrations, in particular, we end up allocating a pretty significant part of the overall contract value to term license revenue, which depresses the subscription value over the initial contract duration even though we're fully investing in building out cloud operations to support those customers.

So that is a small dynamic.

I think that my team estimated that, that is a 3 percentage point to 4 percentage point impact in this fiscal year, and we expect that to grow a little bit into the future, and we can talk about that a little bit more on Analyst Day.

Our next question comes from the line of Pat Walravens with JMP Securities.

This is Joe on for Pat.

Just a quick one.

On the Aspen, the actual product architecture, can you just talk about how -- if and how that architecture is differentiated from some of the other cloud offerings in the space of your competitors?

Sure.

That's a tough one to answer quickly.

But I would say this is what's important to understand about Guidewire's approach, okay?

It's we have 18 years invested in developing the world's leading claims policy and billing systems in InsuranceSuite, very, very complete offerings.

What we've done with Aspen is we've invested in a cloud player that enables us to run those instances of ClaimCenter, PolicyCenter, BillingCenter efficiently across many, many instances and across all of the non-production instances necessary to manage a complex implementation of a core system like Guidewire.

What you want to picture in your head is maybe one of the most complex IT environments in the world at some of our Tier 1 insurers with many, many instances of Guidewire that support development and testing and performance testing and then UAT testing and finally, production.

And so we've invested a very significant amount of time and effort into building a layer on top of AWS that facilitates our ability to run what will ultimately be tens of thousands of these Guidewire instances.

Additionally, we have developed what we're calling cloud-native services to support and augment the functionality in those core systems.

Ratings is a very, very good, simple example.

We have a rating engine inside a PolicyCenter.

Each customer that runs PolicyCenter can use that rating engine.

We've added now a cloud-native service for rating that can be used alongside the PolicyCenter implementation.

That's a very flexible approach to doing it.

We don't replace it.

We don't force a customer to move to that cloud-native rating engine.

But they can, over time, start to leverage that cloud-native rating engine.

And then what that does is it enables a customer to have more flexibility in terms of how they architect and how they manage the system.

Like I said in the call, we expect more and more of these cloud-native services to be built and delivered on top of Aspen, Banff, our cloud platform.

And those services, whether they be rating-related or rules-related or claims-related or data-related, those will support the overall ecosystem of the Guidewire implementations.

So hopefully, that helps.

It does.

Okay.

Thanks a lot.

Our next question comes from the line of Brad Sills with Bank of America.

Just wanted to ask one on the term license customers that you had a good quarter here on customers adding more term.

I guess for those customers, are they thinking about kind of a hybrid deployment here, were going to add more term but think about migrating over to the cloud over time?

Is it in the road map?

Any commentary on just customers that are kind of adding more term license in kind of their road map.

Yes.

It's a good question because it's one that Jeff and I ask every single time we talk to our customers or our sales organization about these deals.

These customers are perfectly aware of our long-term road map.

And I would say for the most part, they all have a plan in the forefront of their minds or the back of their minds about when it makes sense for them to go to the cloud.

It's one of the nice things about our approach, like I said.

It's that they're able to -- if cloud doesn't make sense for their organization, they can purchase on-prem, they can deploy on-prem with the intention of moving to the cloud in the future.

And so it's something that we discuss with each and every one of our customers.

And each one will have a plan that makes sense for them and for their overall corporate strategy.

Ladies and gentlemen, we have reached the end of the question-and-answer session.

I would like to turn the call back to Mr. Mike Rosenbaum for closing remarks.

Okay.

Thanks, everybody, for participating in the call today.

Just wanted to say this was a really phenomenal quarter at a really critical time for the world really and for -- and especially for Guidewire.

We're excited about the continued demand we see in our -- for our platform and the advancement of the cloud strategy.

And we're as optimistic as ever about the long-term vision and opportunity for all of our stakeholders.

So I really appreciate everybody joining today, and thanks very much.

Thank you for joining us today.

This concludes today's conference.

You may disconnect your lines at this time.

Thank you for your participation.

Have a great day.