Good day, and welcome to the Guidewire third quarter fiscal 2014 financial results conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Karen Blasing, Chief Financial Officer. Please go ahead, ma'am.

Thank you. Good afternoon, and welcome to the Guidewire Software's earnings conference call for the third quarter of fiscal 2014, which ended on April 30. This is Karen Blasing, Chief Financial Officer of Guidewire, and with me on the call is Marcus Ryu, Guidewire's Chief Executive Officer. A complete disclosure of our results can be found in our press release issued today, as well as in our related Form 8-K furnished to the SEC. To access the press release and the financial details, please see the Investor Relations section of our website at www.guidewire.com. As a reminder, today's call is being recorded and a replay will be available following the conclusion of the call. During today's call, we will make statements related to our business that may be considered forward-looking under federal securities laws. These statements reflect our views only as of today and should not be reflected upon as representing our views as of any subsequent date. We disclaim any obligation to update any forward-looking statements or outlook. These statements are subject to a variety of risks and uncertainties that could cause actual results to differ materially from expectations. These risks are summarized in the press release that we issued today. For a further discussion of the material risks and other important factors that could affect our actual results, please refer to our Annual Report on Form 10-K for the period ended July 31, 2013, and our quarterly report on Form 10-Q for the period ended January 31, 2014, both of which are on file with the SEC. Also, during the course of today's call, we will refer to certain non-GAAP financial measures. A reconciliation schedule showing GAAP versus non-GAAP results has been provided in our press release issued after the close of market today. Additionally, we are providing detailed reconciliation data as well as recurring revenue calculations, in a supplement posted on our IR website at ir.guidewire.com. Finally, at times in our prepared comments or responses to your questions, we may offer incremental metrics to provide greater insight into the dynamics of our business or our quarterly results. Please be advised that this additional detail may be one-time in nature and we may or may not provide an update in the future. With that, let me turn the call over to Marcus for his prepared remarks, and then I will provide details regarding our third quarter financial results and our outlook for the rest of fiscal 2014.

Thanks, Karen. We are pleased that our third quarter results exceeded expectations for both revenue and profitability. Total revenue of $82 million grew 20% from a year ago, reflecting continued demand for our modern, flexible core system software serving the global P&C insurance industry. Our recurring revenue from term license and maintenance fees on a rolling four quarter basis grew to $165.3 million, an increase of 26% compared to a year ago. We also outperformed relative to our profitability expectations, expanding both gross and operating margins. Based on these results and our view toward the fourth quarter, we are slightly increasing the midpoint of our full-year revenue guidance that Karen will detail later. Our mission is to build software products that transform the global P&C industry, while ensuring that every customer succeeds in the journey. Strategic competency has served us well over the last 13 years since our founding and we remain singularly focused on the opportunity to serve a huge global industry modernizing its obsolescent core technology. We believe that we are still less than 10% penetrated in this opportunity and we are positioning ourselves to lead the industry through this transformation for many years to come. Over the last two or three years, we have invested heavily in three areas, sales and marketing, professional services and technology. I would like to take a deeper look at each of these including some examples of third quarter success and describe how our progress will guide our investment strategy with an eye towards fiscal 2015. Regarding sales and marketing, we have often underscored that our products address highly complex problems, that our sales cycles are very long and demanding and that consequently it takes time to ramp selling teams into effectiveness. Notwithstanding those challenges, we have made considerable investments since going…

Thank you, Marcus. We are pleased to report solid results for the third quarter that exceeded our revenue and earnings expectations. Total revenue was $82 million for the third quarter of fiscal 2014, a 20% increase from a year ago. Within revenue, license revenue was $31.9 million, a 39% increase from third quarter fiscal 2013. Term license revenue increased 58% year-over-year to $28.2 million while perpetual license revenue remained quite small at $3.7 million, compared with $5 million in the third quarter fiscal 2013. As a reminder, in the second quarter of fiscal 2013, we saw $4.5 million in early payments of our software invoices from our current customers which were expected in the third quarter of fiscal 2013, and in the second quarter of 2014 we saw $1 million in early payments which were expected in the third quarter. There were no significant early payments in the third quarter of 2014. Including these early payments in the respective third quarter results, license revenue growth would have been 20% year-over-year. Maintenance revenue, which is recognized ratably through the year, was $10.4 million for the third quarter, up 15% from a year ago, reflecting overall license growth trends. Services revenue was $39.7 million, up 10% from a year ago as we continue our strategy to increasingly leverage our SI partners for customer implementations. Geographically, the U.S. represented 59% of revenue in the third quarter, with 41% of revenue coming from outside the U.S. Turning to expenses. We will discuss our profitability measures on both a GAAP and non-GAAP basis and we have provided a reconciliation of these measures in our earnings release issued today, which is also posted on our website, with the primary difference being stock-based compensation expenses. Non-GAAP gross profit in the third quarter of $49.3 million represented a…

(Operator Instructions). We will go first to Brent Thill with UBS.

Good afternoon. Marcus, you mentioned a number of pretty high profile wins outside the U.S. I am curious if you could just talk a little bit about the pace of those wins. Any changes you are seeing? I know Karen noted that some of the sales cycles continue to be pretty long there. But anything notable from your perspective as you look at the international sales volume?

I wish I could report an acceleration. Brent, every one of these cycles are really arduous and they come sometimes in clusters, just with no specific pattern when we finally take a long conversation and get it converted. We are pretty pleased with what we are seeing internationally, in that there is a consistency of demand. We have a lot of confidence in our platform being generalized enough to serve the needs of a very diverse and global industry and we think that we have the only platform that's proven, that it can serve that totality of the market. Any P&C insurer of any size writing business in any language and that's a pretty unique market position to have. I don't think any of our competitors do. That has been pretty compelling. And over time, that's allowed us to penetrate some very difficult places, including a lot of organizations, like one of the names I mentioned, Basler Insurance in Switzerland that is really unaccustomed to buying packaged applications because they never believed that one would be able to meet their needs. So those kinds of confirmations are very encouraging to us. But the cycles remain very, very difficult and I think that's just the nature of the business we have and will always have.

Okay, and just a quick follow-up. You mentioned in R&D, you are going to open up your investments a little bit faster than you have. And given that it sounds like you have some proof points in the new products. Can you give us a little more granularity in terms of where you have been pleasantly surprised on the R&D side that now gives you confidence to step back on the investments area?

Yes. So as a refresher, we really have three additional vectors of new product development beyond the core suite, which of course is still the bulk of our business and is essential to our strategic plan. We have to win the core system battle and new product offerings really leverage the value proposition of that core system once it's been implemented. But those three vectors build on top of it and they are data management, which is an operational data store and conventional data warehousing technology, but very specific for P&C insurers and integrated to our suite, mobile and portal technology that extends our platform to external constituents and then analytics where the primary asset that we have today is Guidewire Live, but we have other aspirations as well. In each of those areas, over the last 18 months, we brought new offerings to market and the goal, as with any new software offerings is, can you get those early customers excited, can you get them engaged and prove that you have something interesting to them, get them to actually pay you and prove value that then is the basis for the next wave of customers and eventually, hopefully not to long from then really bringing it to the mass market. And we feel really good about all three of those efforts, all three of those dimensions. We have got a lot of great customer engagement and excitement about them. And now we have more product to build to fulfill the opportunity in each of those areas. It is very satisfying to get license from existing customers in each of those who now recognize we can do more beyond just that core suite.

Okay. Thank you.

And next we will move to Nandan Amladi with Deutsche Bank.

Hi. Good afternoon. Thanks for taking my question. So, Marcus, first question for you on the system integration partnerships. Clearly they are moving in a direction that you had stated a couple of years ago. But services mix has always been a bit of a leading indicator for large contracts that you might have signed. As this mix shifts in the stated direction, how should investors look at or what should they look at as other leading indicators for new business might have brought in?

Right. Service engagements are still an indicator in the sense that we have heavier services involvement on the newer frontiers of our business so that would be newer products and newer geographies. Of course, that's all blended in with the total services book in our total portfolio of customers. So I appreciate the question of what else can you look to, to have a sense of how license sales might be going in and what could be anticipated for the future? I think other very useful indicators are progress in countries, right. Because one of the biggest gating factors for a non-U.S. customer to buy our software is to feel comfortable that we meet their specific needs in Germany, in the U.K., in France, et cetera and the single best thing that we can do to win more customers in the geography is to win some customers in the geography. So that's a very useful indicator. I think the same applies to newer products and next quarter we will be giving a more detailed profile of the new wins that we have had over the year for our newer products. And obviously the more traction we have there, the same logic applies and we go up the adoption curve and I think just generally the kind of confidence in the nature of the guidance that we deliver in every one of these calls is the other quantitative measure. I think in aggregate they should give a pretty declarative picture of how we feel about the future.

Thank you. Then perhaps a follow-up on the previous question. Your increased investments in sales and marketing, how are you targeting them in terms of certain geographies, certain product areas?

Right. So consistent with the answer I just gave to your prior question, we are directing the investments towards those other frontiers of our business that we see more work to be done. One of those is geographic expansion, primarily in Europe, where we have made a lot of progress. We have some really great wins this year. But we need a little bit of heavier coverage than we have right now. So if you were to look at the territories of our average European rep, compared to our average North American rep, you would see that they are really spread out over many more relationships that are aspiring relationship and so we need a bit more coverage. And then as we bring new products there, there are more conversations to be had, more constituents at our prospect that we have to persuade. And so that takes more focus and in some cases, especially with something like data management, and we anticipate more and more with analytics, we want to bring some domain expertise, very specific to those areas to bear as well. So that's where our investments in sales and marketing you will see directed.

Thank you.

Our next question comes from Walter Pritchard with Citi.

I have two questions. One, Marcus, on your end, with SIs doing more of the go live, or I guess more of the [inaudible] you are still involved in a lot of those deals, can you talk about whether the go lives, they happen faster or slower than when you had primary involvement in that? And how you are tracking that, getting track of that?

Right. I appreciate the question. First an important clarification is that we really demand to be involved in all of our projects, not just some of them. In some cases, at a very modest level, at least by headcount but it's very important and it's precisely to ensure that all of the promises and expectations of the customer are being fulfilled. I would not report any difference in project duration or in success rate or anything of the sort between us and our SI partners. That's a very important part of the pledge that we make to customers that we stand behind our estimates jointly with our partners, arm-in-arm and that it will make them successful together and own it equally. We are not passing off any responsibility or accountability, but we are just bringing more resource to bear and in some cases, more cost efficiently than we could do on our own.

Got it, and then Karen, just on seasonality here, we understand you have been giving us guidance here for this year for quite a while. So we understand, I guess you have quite a bit of confidence in that. Could you just help us understand though, as we look forward at seasonality, your business does attribute to getting more seasonal, especially weighted towards the fourth quarter and I am wondering like it was 30% a year in terms of license revenue in 2012 and then 40% a year in 2013 and this year it is looking like it is going to be above that a little of 40%. What's driving that? And should we expect that trend to continue in terms of back end loading of the years?

Thanks, Walter. That's absolutely right. Our sales team has signed more contracts in the back half of the year than in any other time. So the customer base of those annual invoice payments which triggers the license revenue for us, this preponderance of them in the fourth quarter for the existing customers, and you can see that in the pattern that you have described. And then historically, new business has come in much heavier in that back half of the year with it as well, particularly in the fourth quarter. So it continues to just be a higher mountain range in each of the four periods. But a good portion of that, of the revenue that's recognized in that fourth quarter is already booked on existing contracts.

So we should expect that to become even more the case in 2015?

If history repeats itself, yes, that will be the case.

Okay. Thank you very much.

And Tom Roderick with Stifel has our next question.

Hi, guys. Good afternoon. Marcus, my first question is for you. You talked a little bit about the adoption of non-modules beyond the core suite. I am interested in learning a little bit more about product demand or customer demand out there some of the Millbrook assets you picked up a while back and how customers are embracing and adopting data integration and analytics that you have built up around that acquisition?

Right. So Millbrook was a contributing asset to our data management offering and it was a great accelerant to our own efforts in that space. I think, if you would ask any one on the team here, we were really enthusiastic about the way that that's gone. As a matter of integrating the organization in to Guidewire, that wasn't that challenging. It was quite a small acquisitions. There were less than 25 employees, but it really was a definitive, an important step for the company to expand its footprint into a very well established and high IT spend domain for an insurer which is aggregating their data into an operational store, often across many systems and using that as an integration point to a lot of downstream systems, which is just a universal problem. It is not one that we invented or brought any particularly novel approach to, but we think we can bring a lot of efficiency for those customers that have implemented our suite. So in terms of demand, there is actually more than we can meet right now. It would be the most forthright way to describe it. There are a lot of customers who, or pretty much any customer who has implemented the suite has a set of needs there and we want to be very judicious, as we always been in our history, not to take on more than we can successfully implement and fulfill every promise to and that's one of the motivations for us to step up investment in data management, because we see such evidence of demand and have been reasonably well validated pricing now, even though it's an early product.

Great. Thanks. Second question. You have talked a lot about the Tier 1 pipeline for a while. You have been overly enthusiastic about what that pipeline holds and named a number of Tier 1 international wins this quarter or expansions with Tier 1 customers. But as you look back in that pipeline, particularly in some the proof of concepts that might be getting closer to going live and becoming something more formal, how do you think about what that pipeline looks like and should we expect to see some acceleration in these big deals in 2015?

That could happen. But one nuance that we have always taken pains to underscore is that even if a Tier 1 company chooses to license Guidewire, they may do it with only a fraction of their business. In fact, that's the more likely mode that it will be some fraction of their business that they will commit to us to begin with, and that may be as a matter of just of implementation bandwidth, what they feel they can take on, our capital investment bandwidth or it may be because they want to really validate that this is a platform worthy of serving their enterprise, and that's a decision that a very large conservative organization like to take in steps as opposed to in one big leap, no matter how well validated our technology is from references and a lengthy evaluation cycle. So I think we feel great about the number of those Tier 1 dialogues we are in and I think we have more proof points than ever to validate that we are the right platform for them. But just as a matter of buying preference, we still expect that the majority, not necessarily the totality, but the majority of them will still choose to buy one application for one portion of their business or a suite for a small portion of their business. And as it impacts our bookings and our revenue, that may be comparable to a bigger, more enterprise decision by a smaller, say a Tier 2 company. And that's an important nuance to understand.

Great, and Karen, one last quick one for you. I want to make sure I understand the thinking on the gross margin discussion for next year. You talked about that, you expect it to go up modestly. Is that strictly a revenue mix shift issue? In other words, as term license outpaces services, that will drive the entirety of the gross margin increase? Or is there room for greater efficiencies even within each of the lines?

It's mostly mix shift. As you noticed, the gross margin that the services margin that we achieved this third quarter was pretty good, in excess of 20%. So there is not a lot more to squeeze out of those gross margins in services. The big benefit to total gross margin will come from the higher mix of license and maintenance.

Great, perfect. Thank you, guys. Nice job.

Our next question comes from Sterling Auty with JPMorgan.

Hi, thanks. Two questions, guys. First one, just to make sure I understand it, if you look at services revenue in the quarter, how would you say they came in relative to your expectations? It came in a little bit better than we would have thought. I am just wondering if there is anything in particular that drove that strength in services revenue.

It did come in a little better than we thought. We start out every quarter with an estimate of how much project work is going to be completed, particularly at some of the larger engagements that we have and sometimes the pace of work actually outpaces what our expectation was. So thus we ended up with higher service revenue in the third quarter.

Yes. It was a little bit of a utilization uptick, I would say, relative to expectations. And then, it's also the case that sometimes our services are billable in a sales engagement and sometimes they are not, depending on the dynamics of the sales cycle and how much -- there is a lot of factors that can go into whether it's billable or not, and that's another element that's a little bit less predictable than the conventional services utilization, but it counts towards services revenue too. So those are other factors.

(inaudible). Most of our services revenues is related to kind of materials billing. There is a small proportion of things that sometimes are more billed build based on milestone rather than this direct number of hours or billable days in that. And that can have some influence over the amount of billings in there for revenue and anyone in the periods. So there is small fluctuations, really, between the quarters for that.

Right.

Okay. And a separate question, maintenance revenue, I still think there's some confusion out there from people, in terms of how much of that maintenance revenue comes from perpetual license? What, if any, comes from term or the subscription contract? And how should we think about that trend going forward?

So both perpetual licenses and term license carry maintenance or post contract support maintenance contract with them as well. And both of them are roughly 20% of the license value but as the perpetual revenue has continued to come down over time, the amount of nominal maintenance revenue, most of the components of the maintenance revenue today is from term licenses with very little leftover from the old residual perpetual licenses of years gone by. So the pace of maintenance revenue has definitely slowed and a part of it is the transition from perpetual to term as well.

And one clarification, Sterling, it's not that the maintenance revenue from existing perpetual relationship has gone away. It's just that that has declined as a percentage of total maintenance that we get because most of the maintenance now comes from term licenses as opposed to from perpetual.

That's correct.

And it's 20%, just like it is for perpetual. There's no other difference. So we should see this hit a baseline and then grow in correlation to term license?

Absolutely.

All right. Perfect. Thank you, guys.

That does conclude today's question-and-answer session. Mr. Marcus Ryu, I would like to turn the call back to you for any additional or closing remarks.

No other remarks. Thank you all for participating on our call and good bye.

Once again, that does conclude today's conference. We appreciate your participation.