Good day, everyone and welcome to the Guidewire’s Fourth Quarter Fiscal Year 2017 Financial Results Conference Call. Today’s call is being recorded. At this time, I would like to turn the call over to Richard Hart, Chief Financial Officer. Please go ahead.

Good afternoon, and welcome to Guidewire Software’s earnings conference call for the fourth quarter and fiscal year 2017, which ended on July 31, 2017. My name is Richard Hart. I am the Chief Financial Officer of Guidewire, and with me on the call is Marcus Ryu, Guidewire’s Chief Executive Officer. A complete disclosure of our results can be found in our press release issued today, as well as in our related Form 8-K furnished to the SEC, both of which are available on the Investor Relations section of our website at ir.guidewire.com. As a reminder, today’s call is being recorded and a replay will be available following the conclusion of the call. During the call, we will make forward-looking statements pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 regarding trends, strategies, and anticipated performance of the business, including developments in connection with our recent acquisition activity. These forward-looking statements are based on management’s current views and expectations as of today and should not be relied upon as representing our views as of any subsequent date. We disclaim any obligation to update any forward-looking statements or outlook. Actual results may differ materially. Please refer to the Risk Factors in our most recent Form 10-K and 10-Qs filed with the SEC. 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. Reconciliations and additional data are also posted in a supplement on our IR site. And during the call, we may offer incremental metrics to provide greater insight into the dynamics of our business. These details may be one-time in nature, and we may or may not provide updates in the future. With that, let me turn the call over to Marcus for his prepared remarks. And then I will provide details on our fourth quarter and fiscal year '17 financial results and our outlook for Q1 and the rest of fiscal '18.

Thank you, Richard. I start by sympathizing with the terrible difficulties being experienced by the people of Texas and Louisiana, as well as Puerto Rico and Florida. And noting the essential role displayed by property and casualty insurers in coping with Hurricane Harvey and Irma. These include multiple Guidewire customers, such as regional carriers, Texas Farm Bureau and Texas Windstorm and national carriers, such as Citizens, C&A, Farmers, Nationwide, State Farm and Zurich, whose claims personnel are on the front lines of recovery. As it always does during the times of natural disaster, the industry we serve shows its indispensability. I will summarize our Q4 and fiscal 2017 results and then turn to 2018 and the increased investments we intend to make to support and capitalize upon the growing opportunities in our market. Our revenue and profitability were above the high end of our outlook for the fourth quarter and for the 2017 fiscal year. Revenue in the fourth quarter was $181.1 million and non-GAAP net income was $44.8 million. License revenue was $109.7 million, the term license revenue of $102.9 million up 25% from a year ago. For fiscal 2017, we generated total revenue of $514.3 million and non-GAAP net income of $78.8 million. License revenue was $271.5 million representing year-over-year growth of 24%. I note however, that this license revenue growth for the quarter and the year benefited from early payments by customers of approximately $6.1 million in term license revenue that were expected to be recognized in Q1 of fiscal 2018. Term license and maintenance revenue for the trailing 12 months, totaled $327 million an increase of 22% from a year ago. Business activity in the quarter was healthy across the two-product families that comprised Guidewire insurance platform, core operations, digital engagement and data management and analytics.…

Thank you, Marcus. As Marcus indicated, we exceeded our revenue and earnings guidance for both the fourth quarter and the fiscal year and we have again delivered on our goal of going annual recurring license and maintenance revenue by 20%. Before I inaugurate our financial results for fiscal 2017 and offer commentary on our forward-looking guidance each of which we publish today, I’d like to review two of our few themes that inform these topics, the effects of early payments and then anticipated increase in subscription sales. As a remainder, the vast majority of our software today is licensed under our term license model for which we recognize term license revenue on the earlier of an invoice due date or when the payment is received, at times we are paid weeks ahead of invoice due date and the associated revenues can be recognized in an earlier fiscal year or even fiscal quarter. We call out these early payments when they are significant, because we want investors to understand what portion of our growth is related to sales in the period. At those times, we also remind investors that early payments can inflate period results, while reduction the notional growth rate in future estimates. This year in our fourth quarter as Marcus mentioned, we recognized $6.1 million due to early payments, for comparison last year we disclosed that early payments of $2.7 million were recognized in the fourth quarter of that year. I will note here that the $6.1 million early payment will reduce our anticipated license revenue growth in fiscal year 2018 by approximately four percentage points. Early payments also impact our profitability since the revenues carry no associated cost. In fiscal 2017 our non-GAAP operating margins were higher by 1%, as a result of early payments. The same effect…

Certainly. [Operator Instructions] We will take the first question from Jesse Hulsing with Goldman Sachs.

Yeah. Thank you. I had a couple that are related. First Marcus, based on your commentary and also Richard’s about the first quarter, it sounds like the cloud pipeline is building nicely. I was wondering if you could drill into that and if you can, and then I understand it’s early, give us an idea of what percentage of your transactions of your licenses next year you expect to be subscription?

Yeah. I’ll turn the quantitative part of that question over to Richard, but just qualitatively speaking, as Richard mentioned in his comments, we are seeing heightened demand for both the products that we offer only in the cloud-based form and then for the core systems, which we include InsuranceNow, also only delivered cloud-based form, but then also cloud-based deployments, and full insurance suite cloud version of our main product, InsuranceSuite. So, there is no question it’s heightened demand. As you know, we deal with a finite number of transactions in any given period, so we try not to extrapolate too vigorously in any given quarter or even year. But we do seem to have a clustering of additional transactions of that type, in the first half of the year. And have factored that into our estimation of how the whole year will come out, which we think will be a little bit more normalized relative to the first half. I think that this underlying secular trend is undeniable, which is why we underscored and did it in our remarks today and I think that we are well situated to benefit from the desire of customers to transfer more responsibility to our shoulders. But by no means, is that an overnight phenomenon or a comprehensive one and we fully expect that many customers who want a license InsuranceSuite, as they have traditionally as well. It’s our job to calibrate the exact mix and estimate that as best we can and as Richard said, we are committing to not only to a specific forecast of that breakdown, but also to then truing that up at the end of the year.

Jesse, as we mentioned we currently anticipate that subscription sales will make up 20% to 30% of total sales over the year up from about 6% last year and that includes all of our subscription-based products. It is a good question you asked because the first quarter is being seasonally our lightest quarter, can be the one most impacted by kind of a concentration of different kinds of deals, and in this particular quarter, we had a concentration of subscription sales. We do not expect that in the next three quarters we’ll kind of mirror Q1, which for better or for worse, has come in with a substantial majority of subscription sales in the quarter.

Got you. And Richard is there any way to for the first quarter, because of the headwind to revenue from increased subscription sales, which in the long run is a good thing. Do you plan on disclosing any kind of true-up metric or I guess a license equivalent metric or something like that, so we can get a sense of what underlying new business looks like?

We are not planning on suggesting what our quarterly distribution of sales is in any particular quarter. What we -- because it’s just too volatile, and it’s very hard for us to predict these things. But what we can suggest is over a year, we will -- we have a sense as to how fast that migration can happen. We may be wrong, it can happen faster, it can happen slower, but we have a pretty good guess as to where we think the year is going to come out looking both at our pipeline as well as the seasonal nature of our sales and we will definitely at the end of the year update our investors on how much of our sales for that year were subscription-based.

Got you. Thank you.

We’ll take our next question from Nandan Amladi with Deutsche Bank.

Hi. Good afternoon. Thanks for taking my question. So, a little bit on the previous question. If you think about other software companies who have gone through a revenue transition, there’s sort of a point where the revenue model pivots right. So, if your new sales you expect to go from 6% to 20% or so in this fiscal year, ex-ISCS, how many of the traditional customers who would have otherwise bought the full suite for an on-premise deployment, how many of those customers might be part of this new, so is this is a pivot point and if it is then are we able to size that?

If I understand the gist of your question Nandan, I think we expect right now, maybe one out of four or possibly one out of five, Suite customers on the larger end, maybe Tier 3, Tier 2 and Tier 1 customers may turn out to be InsuranceSuite cloud customers as opposed to traditional term license customers of InsuranceSuite. Obviously, anything that we sell InsuranceNow for, any customers who licenses InsuranceNow is licensing on a subscription model or subscribing to the software. That’s our best guess right now. It’s a newer phenomenon, not only for Guidewire, but kind of for the industry, certainly for larger insurers to transition full post production responsibility to a partner of any sort is I think a trend that’s undeniable and that they are strong secular motivators for. But it’s still nonetheless a new phenomenon and therefore subject to, if it’s errors in forecasting, but that’s our best guess right now. So maybe one out of three to one out of five, Tier 1 to Tier 3 InsuranceSuite customers will come now in a subscription insurance cloud form.

All right. Thanks. And for the follow-up for Richard. We’ve talked about the new 606 accounting standard and obviously in your traditional license once a year rev rec model that would not have been that much of a change. Now as we move to a bigger share of subscription revenue, do you expect that you have to revisit that?

No. I think that, even as we transition to more of a subscription model, the impact on our P&L will be modest in the beginning periods because it competes with already an established annuity stream of term licenses and so those still represent a substantial majority of our recognized revenues. And that is -- those are the revenues that are most impacted by the change to 606, so we still need to remediate those. We are in the process of doing so. We’re ahead of plan and we’re going to continue to do that during the rest of this fiscal year.

Thank you. That’s all from me.

Okay. Thank you.

We’ll take our next question from Sterling Auty with JPMorgan.

Yeah. Thanks. Hi, guys. You started off the call with the unfortunate situation with Hurricane Harvey, Hurricane Irma. It’s been some time since we’ve had real catastrophic events and P&C carriers have been flushed with reserves. Can you just -- now that we’re going through this, remind us what kind of impact either to the negative or the positive that situations like this had on the industry and demand for your solutions?

I think it’s -- I appreciate the question, Sterling. I think it’s a little early to say, the industry hasn’t tabulated the outcome for Harvey yet and of course Irma is still an event unfolding. So, it’s too early to guess. But you are right that the last few years have been relatively benign in terms of natural disasters for the industry, which industry doesn’t get, never takes, gets too excited about because of course over time those probabilities add up and eventually there is a – there is a natural catastrophe and a very expensive one. So, as you pointed out, the industry saved against that in its reserves in the anticipation of an inevitable event like a Harvey. As I think the industry is well-reserved against that you may have heard some of Warren Buffett’s commentary on that, which expressed a lot of confidence about the insurance industry’s ability to absorb this and similar size loses, but it’s too early to say. I think the overall magnitude has been more or less scoped and I think it’s considered well within the bounds as we expected, not necessarily this year versus next year but that’s the way insurance modeling works.

All right, makes sense. And then as a follow-up. Am I right, in whipping at if I take the $6 million and change that came in early that would have been revenue, that would have been in fiscal 2018. Your guidance on the revenue range is still in line or better than what most of us were expecting and it sounds like you’re expecting more ratable revenue in fiscal '18 than what was originally contemplated when a lot these estimates were put together, it would suggest that actually underlying business is doing even better than what most of us anticipating when we’re putting our models together for next year. How much of that is just related to the services revenue that you’re taking for InsuranceNow and InsuranceSuite in the cloud, this is other upticks that you’re seeing just overall in demand?

I think we feel good about demand across the whole product portfolio, as we talked both about the core, which is still the heart of our business and our strategy and is the strategic high ground, as well as the new data and digital products that we have today, as well as potential new data and digital products that we’re at work on, plus further up-sell cross-sell of the acquisitions that we made last year. So, I think on all those accounts, we feel pretty positive about where we fit. The increased demand for InsuranceSuite cloud implementation while they are a bit daunting operationally, because there’s a lot of work to be done, I think is overall an exciting phenomenon for us, because it allows us to play an even deeper role in the success of the major customer projects. And in financial terms we participate further in the overall level of capital expense that -- the capital investments that our customers make in these programs. So, I think all of that is -- all of it’s too good on the whole. You are right that there are – some of its whole, the aggregate revenues for the company and our outlook are positively impacted with more services than whether we would have guessed say, a couple of quarters ago and that’s directly related to the cloud operations and some of these larger programs where our presence is expected to be much more substantial at least in the first phase than the typical Guidewire implementation.

It makes sense. Thank you, guys.

Thanks Sterling.

We’ll go next to Justin Furby with William Blair.

Hey guys, thanks and congrats on the quarter and apologies if I missed any of these. I think my brain is unfortunately operating at a much slower level than you guys at least today. Maybe just for Richard on the Q1 guidance, I understand that you pulled forward $6 million out of Q1 into Q4 and you expect more subscription revenue or subscription deals, but I guess, if you look at last year, maybe this is over simplistic, but I think it is $34.5 million of term. So, when all but the $6 million that moved into Q4 in theory recurrent Q1, so I guess, what I’m trying to get is, is there effectively no new term license baked into the guide for Q1 or what’s the right way to think about that? And then I guess, maybe Marcus, you kind of hinted on this, but what’s the risk that Q2, Q3 that you continue to see this dynamic or I guess, maybe more context around why you feel comfortable that it will move more towards the term deal, as we move towards the year would be helpful? Thanks.

Yeah, on the last part of your question Justin, we have -- as we do our overall forecasting, we look at the complexion of individual deal and it tends to get dialed in relatively early in the sales cycle whether or not with the disappointment approach and whether or not it will be an InsuranceSuite cloud opportunity. This is a new phenomenon for us in general, we have not been broadly promoting it across every prospects and so the vast majority of our sales organization is selling software as they have been in the previous number of years. So that kind of defines the character of every individual opportunity in the pipeline. Now of course there is room for change, but unlike the exact scope of the projects which we talked about in the past can be variable kind of up until over the last even month or two of a sales cycle whether or not the customer expects us to be taking a full post-production responsibility doing it themselves, that’s a more fundamental question that gets addressed and analyzed earlier in the sales process. So that’s just a long-winded way of saying that we have a general sense of the character of the bookings that we expect to make during the year and that is the input to making that 20% guess that Richard alluded to earlier.

And Justin to your question, I think it’s fair to assume that the amount of term license revenue that we will be recognizing in Q1 is very modest and really drive…

In terms of new term license.

In terms of new term license. As I suggested, a substantial majority of new sales in Q1 will be subscription based and those revenues you won’t see in Q1.

Okay. And then maybe just a follow-up, the 20% to 30% number, Richard, is that just ACV you expect from new bookings to come from cloud versus the balance from term, and if that’s right, is there a way to kind of back into what that implies for license growth sort of apples to apples when you sort of normalize for that? Thanks.

Yeah. We try to do some sensitivity analysis and I think there are two big vectors of influence on revenue, one is the number or the percentage of sales in the year which are subscription based as opposed to term and the timing of those sales. And, so obviously later in the year and the more subscription sales we had the lower reported revenue. And, just as a very, very highly level indication of what that sensitivity will provide is that, if you shift the timing the average timing of the deals by about 90 days you release about a point to point-half in growth and for every additional 10% of subscription revenue you lose about 2% in growth. That’s kind of, because most of the effect is already baked into the timing of those transactions, which we suspect will happen towards the later end of the year, in line with kind of the seasonal nature of our bookings. Does that make sense.

Sort of -- I’m trying to reconcile that with the commentary that, you expect more sub-deals to come in Q1 versus throughout the balance of the year?

Well, but don’t forget right, the Q1 historically is about 10% to 15% of our total bookings for the year, and Q4 is about 50% to 55% of our bookings for the year historically. So, if I were suggesting that a substantial majority of my deals were subscription based in Q4, then that would have a very, very big impact, but that’s not what I’m saying. Even with the activity in Q1, I think we’re going to be backend unloaded with subscription deals and we’re going to get it to a 20% of 30%, that is our guess right now. But, as Marcus mentioned, we don’t have any historical antecedent to try to understand how fast that transition can happen. I think this is a very good guess, but it’s still an estimate.

Right, that’s very clear. Thanks, Richard, I appreciated it.

We’ll go next to Rishi Jaluria with JMP Securities.

Hey, guys. Thanks for taking my questions. I wanted to follow-up on the idea of services and insurance cloud implementation. Can you give us a sense for what the services attach rate for the cloud implementations look like versus on premise and what can be done over time look like versus on-premise and what can be done over time to reduce the amount of customization necessary for those implementations? And then I’ve one follow-up.

Thanks, Rishi. Yeah, I think we’re still in the very early stages of analyzing that and I think that there could be a material change over time and in fact, we – one of the objectives of this transition is to ensure that we get as efficient as possible in implementing customers in this mode. And one of the benefits of cloud-based delivery is that you have a more intimate relationship with your customers usage of your products, and that in principle allows you to – could have tuned the implementations more closely and efficiently to in anticipation of the next customer. Now, we have a very small end of programs to look at, but so far, the largest program that we’ve done which we talked about a lot in previous calls the MetLife project was, I would say between five and eight times the size of services attach rate that we would have on – that we would have had, let us say on a more traditional implementation. I think that was anomalously high, but as to be expected for the first time we did this scale for a very strategic program that had some very innovative and new elements in what they were trying to achieve functionally, and better tax rate will surely lower over time. Nonetheless, it is still materially higher, until we have these integrators are working with us in this mode than that we have traditionally had. And so, in calculating the services demand that were attached to the bookings expectation for the year, we came out with a significantly higher number and that’s what you see reflected in the services revenue guide.

Got it. That’s very helpful. And then just thinking about the subscription mix and growth rate for next year, is this generally net new sales or is some of that conversion from existing term licenses?

It can be both -- it could be -- it can be both. As I mentioned earlier, every opportunity at least as we are thinking about it today has a character of whether or not it will be a traditional term license or may come in subscription form. And that gets dialed in pretty early in the sales conversation. So, whether or not you consider it a conversion, I think is the counterfactual question about what would have happened if we – if we were not presenting our offering this way. And that’s a guess. I think overall the level of demand, the number of projects that we expect to compete for and expect to win is on the same trajectory as it’s been for the last number of years. It’s just that we expect more to come in this form and both we and the customer and our prospects are – in select cases are very motivated to make this new model work.

So, Rishi, I will say that demand for InsuranceSuite cloud may come from existing customers that want to migrate to a cloud implementation on an upgrade, right. We don’t know whether or not that’s going to happen quickly, slowly, a lot or a little, right. Our 20% to 30% does not necessarily drive into that level of detail of how the opportunities will come. It really takes more of a look at a pipeline, a set of discussions that are happening right now and where those discussions can come into play. If we do have a significant uptick over the next two years or three years of customers that want to migrate to the cloud, obviously that will increase our subscription-based licenses or arrangements that much more quickly.

Got it. It’s very helpful. Thank you, guys.

We’ll go next to Monika Garg with KeyBanc.

Hi, thanks for taking my question. Just trying to understand the impact on the subscription. Now you just gave us that 20% to 30% of license into fiscal 2018 could be subscription, if the number was similar to last year let’s say 6% what would have been the growth of license for fiscal 2018?

I don’t have the answer to that off my fingertip. I didn’t think, to normalize that 6% subscription growth and assume that those were term licenses and then try to do an apples-to-apples comparison to fiscal year 2015. But I will suggest that the benefit we received in the year of those subscription sales was obviously modest, because those subscription sales happened over the course of the year. Whether it improved revenue growth by 1% or 2% I couldn’t tell you.

Okay. So, what I’m trying to understand is that headwind to fiscal 2018 license growth, because of higher subscription revenue than compared to term license?

So, let me make a simple statement and I think this is maybe lesson typically and you’re looking for. But if we indeed were to judge our business based only on the term license revenue model then we would have grown next year in some way in the same way we grew this year. That’s kind of a little bit above 21% a little bit above 20%.

Got it. Thank you. And then one question on the cash flow. I think, cash flow last year came much higher than your guidance about $130 million-ish. You are guiding to $94 million to $106 million for this year. Maybe walk us through the reasons why the cash flow would be down? Thank you so much.

So, I mentioned it in my call there were several reasons for the cash flow to have it increased significantly above our guidance and our outlook. One is revenues came up much higher than our outlook and that obviously helped cash flow since we are generally paid in the period. In fact, collections improved significantly and that also added a big chunk to that outperformance and that is something that we can’t control, we can’t necessarily forecast in any easy way. And then, finally our expenses were lower in the quarter than we anticipated and that also helped.

But it’s like almost $30 million down year-over-year which is almost 25%?

Right. I mean, I would urge you to look at the statement of cash flows and you will see that a significant help was from collections, and then we had about $10 million that helped just because of revenue growth. And again, the expenses were not quite what we envisioned for the quarter.

Got it. Thank you so much.

We’ll go next to Tom Roderick with Stifel.

Hi, gentlemen. Thanks for taking my questions. So, I just wanted to follow up on the services angle. Richard, I think you mentioned a number of professional services, it has about 157 at the end of the year. So maybe you could talk about the numbers of hedge you’re looking to add, and the types of investments you’re looking to make there? And then follow-up to that relative to maybe non-InsuranceNow related type of services, can you just talk about the overall impact that rising your services headcount might add with your existing relationships with some of your systems integrator partners, will this just keep those in place as they were given that it’s kind of an emerging newer market opportunity for you or does this sort of put a little friction into place in those types of relationships? Thanks.

I’ll take the last part, Tom and then I think Richard will look at the head count question with respect to services. There is no intend to change in strategy or relationship with our systems integrator partners. They are still absolutely vital to our business model and they have very long-standing relationships with a lot of existing customers, which as you know are an important source of our TAM, part of our TAM and we seek to expand relationships with existing customers. And while perhaps some of them, over a long enough horizon may look to an insurance cloud -- InsuranceSuite cloud model we fully expect that the large majority of them are just going to be traditionally expanding in the traditional way with very a significant system integrator involvement. And indeed, we have quite a few customer projects now that are now in their second, third or fourth phases, where the Guidewire presence on those implementations is very minimal or could even be zero for certain phases. So, it’s a very mature project and that all the work is being done by systems integrators. So that certainly should continue. And then even in cases, even in InsuranceSuite cloud projects, which will come in subscription form, even there our goal is that systems integrators will play a part of the initial implementation even if we take on longer-term both revenue and profitability. So, I think this is very well taken in stride by all our partners with whom we’ve worked for many year now. Our destinies are linked and I think that it’s just really to the good that we are seeing a transfer of responsibility from internal IT organization in general to us and to them as partners.

And just to come on your question.

…tough question to get?

I'm sorry. So, if you actually net out the additions of FirstBest and ISCS to our services organization, services headcount actually grew very, very modestly this year. In fact, I would say, it was less than 20 people on a net basis. In next year, I think, we’re looking to add slightly more than that, maybe 100 to 120 people really depending on our view of demand as the year runs. But we are adding a little bit ahead of anticipated demand simply because the market is becoming a little bit less or more difficult to gage in terms of each transition to a subscription-based model and we are preparing to have a few people ready to jump in, should that model transition more quickly than we anticipate. And the only reason we need that to prepare that way is because the Guidewire presence on a cloud implementation is significantly higher right now until we develop as market suggested a set of processes to help us take it from implementation to ongoing production services. And that’s the handoff that we need to get good at. And so, in the first two or three or even four in turns [indiscernible] the cloud implementations – those implementations will be controlled by Guidewire. And over time, RSI partners will become more involved. Our future goal is to have the same kind of dynamic with RSI in this particular part of our business as we do in our traditional on-premises license business.

That’s great. Thanks for the detail. I appreciate you, guys.

We’ll go next Brad Sills with Bank of America Merrill Lynch.

Hey, guys. Thanks for taking my question. Just one on the cloud adoption. The 20% to 30% of revenue this year ratable, would you say that’s higher than expected if you were to have made that estimate this time last year for fiscal 2018 or is it more in line? If it is higher, I guess, where would you explain potentially higher adoption of the cloud?

Yeah. I don’t know Brad, if we would have had, it’s definitely higher, no question. I don’t know what our guess would have been otherwise, I mean, it wasn’t even a question we would have put to ourselves. At the beginning of last year, of course, we undertook the MetLife program not as a one-off, but as an important emblematic project of a trend that we thought had legs more broadly across the industry, but assigning a percentage of our bookings and revenue that were going to come in subscription form would not have been a question that really would have occurred to us at the beginning of the year and that we only really engage seriously with, in the last month or two to be truthful, because it was thought through the territory assignments, quota assignments and of course guidance. I think the phenomenon is happening a bit faster, I would characterize it as accelerating, but not at a – it’s not a raging Tsunami of the demand coming in this form is, it is I think a steady pressure and secular trend towards a transfer of responsibility out of the internal IT organization toward external partners. And I think there is a very clear logic that having the provider of the strategic platform take on that responsibility as now Guidewire is increasingly willing to do is a good thing that it simplifies the equation and it leads to greater standardization which is now a positive in the minds of most of our customers. But that’s not terribly quantitative, I would just say it’s happening a bit faster than what was otherwise expected.

Sure. Great. Thanks, Marcus. And then…

I think it’s also important to understand that only a few deals can impact that percentage, because you typically engaged in larger transactions and our cloud-based transactions are even larger than our on-prem transactions. And therefore, the speed with which this transition happened, which we believe will be gradual, but sustained. Even small shifts in that transition can have an impact on our sales.

Sure.

Richard, it makes a good point because if any – if we were for example to win significant Tier 1 mandate for a substantial scope, and they were to come in InsuranceSuite cloud form, that could have a material impact on -- on our financials to the good for sure, but larger than what we talked about.

Great. Thanks guys. And then one more if I may. I think, Marcus, you’ve mentioned some more competition from some of the private vendors. I think, in the past you said that that’s primarily limited to Europe. Are you seeing more of that in the U.S. as well?

Definitely in the U.S. I would say across the board, the insurance sector has attracted capital in every flavor, every one of the players within insurance, so the primary insurers that we focus on the brokers, reinsurers, every segment I think, has attracted a lot of capital and non-traditional player in each of these segments are as well as technology providers to each of these segments have all attracted capital. So, after our first decade-and-a-half of quite a sleepy technology space, it’s suddenly become a very exciting one at least with respect to early stage capital. Our view is I think, we’ve expressed in other forms is that a lot of those expectations are going to be disappointed because things don’t happen as quickly, sometimes for very good reasons in the industry, but there are a lot of ideas being tried right now both direct competitors to our customers and then direct competitors to us. And that makes it quite dynamic period for us that we have to be sure we’re responsive to and highly competitive with.

Great. Thanks, Marcus.

We’ll go next to Alex Zukin with Piper Jaffray.

Yeah. Hey, guys. This is Scott Wilson on for Alex. Thanks for taking my question. Marcus or Richard, just had a curiosity, with the growing portfolio of products as well as offerings for different sizes of insurers now. Going into this new fiscal year, are you planning to make any changes in sales organization with respect to how you’re going to market given the increased and re-complex product portfolio you have. And then just related to that, given your expectations for increasing subscription deals, are you doing anything with your sales force to incent these types of deals over traditional license or term license?

Yeah. Thank you, Scott. That’s a very thoughtful question. So, with respect to the first part, small versus larger prospects. It’s very important part of our strategy that that our products are as broad as possible in their applicability. And that we’re not building lots of different sub-products that apply to different sub-segments of the market. Now, we have made a very important institution that we talked about on previous calls to have two cores, InsuranceSuite and InsuranceNow I think, and they are quite different from each other and satisfied different segments of the market. But fundamentally have the same underlying value proposition. And it’s important that all of our surrounding products, the data and digital products work with both without having different versions of each of them. And now – where that translates into the go-to-market strategy is that we still have a direct sales model with individual account ownership. We do have kind of focused overlay team that has been assembled for InsuranceNow sales. But that the data and digital products are still a broadly distributed and represented by one universal team. Now, the second part of your question was we undertaking anything at a sales incentive level to focus on insurance, the cloud customers, the answer is, no. We have -- these are more complex sales because there is a larger scope of work and larger evaluative footprint that the customers will go through before making a decision so they’re intrinsically more complex sales, their larger ticket and that’s despite nature and it’s newness means that it’s they’re more focused and more let’s call an executive discussion today. Over time I think they’ll become more sort of matter of course, but right now it’s pretty small segment of our prospect base that we are focusing these conversations on and correspondingly a smaller subset of the customer facing organization and the executive team that’s focused on them.

Perfect. Thanks guys. Congrats on a great quarter.

We’ll go next to Ken Wong with Citi.

Hey, Mark. Earlier you mentioned that you guys have about 21 customers that are already on the cloud through your partners. How should we think about what happened to those relationships, do they kind of migrate over to your supervision or do they stay with Europe?

Our expectation is that they will stay with partners. We certainly not in any way pursuing and motivating different trajectory for those. They are still a pretty modest portion of our total customer base and there are generally a set of specific conditions that have aligned for those would be the right answer. But as you can tell 21 is not zero, there are a meaningful minority of our customer who saw value in that and will continue to work that way. The InsuranceSuite cloud prospects that we’ll talking to are generally in the kind of Tier 2 or possibly even Tier 1 segment that also generally larger more complex insurers doing sometimes as in the case of MetLife undertaking quite a significant business model transformation or go-to-market transformation, it’s -- is more of those kinds of situations, which are not exactly unique in that which we see more of these opportunities arising, but each case has, there’s a lot of specificity that that requires a more complex go-to-market and customer engagement model. So, in a way they’re addressed with different segments of the market, even if the underlying proposition of transferring responsibility outside of the organization for the application is the same.

Yeah, got it. And then is it, you guys talked about InsuranceSuite cloud, but should we assume that they have to kind of go all in with InsuranceSuite as a whole or are there going to be elements similar to a traditional InsuranceSuite where they can build ClaimCenter cloud and PolicyCenter cloud that are…

Yeah, absolutely Ken it’s -- first to be clear, it is the same code base. So, InsuranceSuite cloud is not a different code base or a different product. It’s a different delivery and deployment and ongoing application management model. And as with InsuranceSuite there will be plenty of cases where customers will license only one of the core applications, just claims, or just claims and billing or policy or any combination thereof as suits their business.

Got it. All right. Great. Thanks a lot guys.

We’ll go next to Justin Furby with William Blair.

Hey, thanks, guys and sorry for dragging this on. I just wanted to go to the profitability side of the cloud model, the 20% to 30% subscription expectations. What does it view profitability this year, Richard given you expect a lot of that to be kind of at the end of the year? What’s the impact? Thanks.

No, we haven’t studied what profitability would be, if we were only on term license revenues this year. So, the comparison is not one that I can provide you with any degree of science or accuracy, but what I will say is generally. As we invest in this cloud transformation, margins will, at the offset, decline because we are investing ahead of market demand and then as we add more customers to the platform and we can amortize those initial set up costs and those initial team building investments in Guidewire production services and cloud ops more broadly over a greater number of customers. Those margins will then pick up again and how that will happen. How does that decline and the increase happens is not something that right now, we’re prepared to talk to because frankly we don’t know which specificity how fast this transition happens, but generally speaking in the initial transition of the model, margins will compress a little bit and then they will come back. Indeed, you’ve already seen some compression this year in the cost of license margin and that obviously impacts the whole P&L. And you’re going to see a little bit more of that next year which is why we brought down our gross margin guidance to 62% to 64% as an impact of these investments that then will be able to – to carry growth in the InsuranceSuite cloud and InsuranceNow implementations.

Got it. Thanks so much.

And with no further questions in the queue, I would like to turn the call over to Marcus Ryu for any additional or closing remarks.

No additional comments. Thank you for joining our call today.

This does conclude today’s conference, we thank you for your participation. You may now disconnect.