Greetings, and welcome to the Guidewire Fourth Quarter and Fiscal 2021 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Alex Hughes, Vice President, Investor Relations. Please go ahead.

Thank you, operator. Good afternoon, and welcome to Guidewire Software’s earnings conference call for the fourth quarter fiscal year 2021, which ended on July 31st. My name is Alex Hughes, I’m Vice President of Investor Relations. With me on the call today is Mike Rosenbaum, Guidewire’s Chief Executive Officer; and Jeff Cooper, Guidewire’s Chief Financial Officer. A complete disclosure of our results can be found in our press release issued today as well as in our related Form 8-K furnished to the SEC, both of which are available on the Investor Relations section of our website. Today’s call is being recorded, and a replay will be available following the conclusion of the call. Statements made on this call include forward-looking ones regarding our financial results, products, customer demand, operations, the impact of COVID-19 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 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 also will refer to non-GAAP financial measures to provide additional information to investors. A reconciliation of non-GAAP to GAAP measures is provided in our press release. Reconciliations and additional data are also posted in the supplement on our IR website. And with that, I’ll now turn the call over to Mike.

Thank you, Alex. Good afternoon, everyone, and thanks very much for joining us today. I’m very excited to have the opportunity to report on the results of what was truly a remarkable year. I’m proud of everyone on our Guidewire team for staying focused throughout the year and remaining determined to just steadily continue to execute on our mission to help power P&C insurance innovation. We had a particularly strong finish to the fiscal year, which was the result of a lot of hard work in the quarter but also a lot of hard work for months and years prior to this. With the team’s execution, I continue to feel more and more confident in the path that we’re on and the approach we’re taking to reinvent Guidewire and our InsuranceSuite customer base to a modern cloud platform and operating model. Our cloud momentum in the quarter and fiscal year positions us well to continue to accelerate and help drive continued innovation in the P&C insurance industry. Q4 cloud activity was phenomenal with 17 core cloud transactions, bringing our total cloud customer count across InsuranceSuite and InsuranceNow to 92. We closed twice as many cloud deals in fiscal ‘21 than in fiscal ‘20 and closed more deals in Q4 than in all of fiscal ‘20. This momentum gives us more confidence that we will continue to move customers to our cloud platform and continue to attract new customers to Guidewire Cloud. Every new customer helps fuel the Guidewire ecosystem that is so important to amplifying innovation and delivering value to our customers. In August, we also took another important step in enhancing our data and analytics platform by welcoming HazardHub to the Guidewire team. Through its API-based risk modeling approach, HazardHub adds a best-in-class property risk and hazard data service…

Thanks, Mike. We finished the year with great momentum, which is visible in our financial results. Our strong execution in fiscal 2021 sets us up well to achieve our long-term financial targets. ARR ended the fiscal year at $582 million, up 13% from a year ago. On a constant currency basis, ARR increased 12%, finishing the year at $575 million and above our guidance range. As a reminder, we measure ARR on a constant currency basis during the fiscal year and then revalue ARR at year-end for current FX rates. ARR overperformance was driven by strong new ARR conversion from 17 core cloud deals sold in the quarter. We also saw healthy conversion of ramped activity in the quarter and the fiscal year. Finally, we did better than our expectations on gross ARR attrition and core attrition finished the year at under 3%. Total cloud ARR, which we define as the ARR for all of our cloud products and for customers that have contracted to move to the cloud, even if they are not fully transitioned yet, finished the year at $234 million, up 51% year-over-year. Cloud ARR ended the year at 40% of total ARR, which is the upper end of the 35% to 40% range that we discussed at our Analyst Day last year. We expect to continue to break this out on an annual basis. Fully ramped ARR, which is defined as the fully ramped annual price outlined in the customer contract, ended the year at $694 million, representing 14% year-over-year growth and 12% growth on a constant currency basis. In other words, we expect to add $112 million of expansion ARR as we execute to the ramping fee schedules outlined in customer contracts. Total revenue in fiscal 2021 was $743.3 million, ahead of the guidance we…

Thank you. [Operator Instructions] Your first question comes from the line of Matt VanVliet with BTIG.

Yes. Thanks for taking my question, guys. And good job on the quarter. I guess, as you look to continue the cloud migration momentum, how much are you hearing from existing customers that are very fixated on reference customers going live, seeing your success and efficiency of those migrations and getting more of those existing customers sort of deeper in the pipeline on their own cloud migration?

Yes. I’ll take it first, so thanks for the feedback. I would say that we’re seeing, number one, the engagement from the existing customers improve steadily. Like I said -- I think I talked about this a little bit on our last quarterly call. The degree to which one of our existing customers is able to spend time with us and really evaluate and really evaluate our operation in the cloud platform, how it works, how it will impact them, the benefits, the more time we can spend with them, the better. And it’s a very positive sign when they start to spend more time with us on that because it indicates just a change in a sort of -- an intent really to do a serious evaluation that we hope will eventually end in a positive outcome in a migration. Certainly, the whole set of implementations, especially at our Tier 1 customers is on people’s minds and they consistently ask us about it. We maintain that those programs operating successfully and going live on time and successfully is critically important. And so, those questions definitely come up. But I would say probably the most important signal, I’d say, is just the deeper engagement that we’re seeing with our customer base on cloud.

Great. And then, as you look towards some of the international markets, great to see that you had a new cloud deal in both EMEA and APAC. Are those regions starting to be a little more receptive to the cloud? How should we think about the overall mix maybe over the next year or two of deals in the pipeline? Is it still pretty U.S.-centric, or are you seeing a more holistic demand across the globe? Thank you.

Well, yes, sure. I think that the ARR base, customer base of Guidewire certainly is when you look at it, U.S. Ameri-centric, and then we have a particularly strong presence in Canada as well. And that weight, so to speak, does -- you definitely see that in our pipeline and business activity just because so much of our incremental ARR will come from our customer base in those cloud migrations. But, we are seeing more and more confidence and more and more orientation, I would say, to cloud internationally, and it was great to see those two deals. We also have clear pipeline internationally across EMEA and across APAC this fiscal year that we’re excited about. And so, I don’t think we’re going to see a shift to 100% cloud next year, but definitely, that is the trend and that’s true internationally.

Your next question comes from the line of Jackson Ader with JP Morgan.

First one is on the ARR outlook. Jeff, if we adjust for the HazardHub, $4 million, $5 million or so, the guidance looks pretty similar to the preliminary guidance you provided on the third quarter call. And just given that the activity, particularly in the cloud, really strong in the fourth quarter, I guess, I’m just curious why the increase in activity didn’t lead to a larger increase in the ARR guidance.

Yes. That’s a good question. I mean, first of all, it is similar on a growth rate basis but on a bigger base, right? We did do a little -- end up doing better than our expectations in Q4. So, rolling through the bigger base on an absolute dollar basis, it is a bit better than what we outlined for folks next year. Actually, some of the performance in Q4 can create a little bit more difficult compares on a growth basis. So, we felt good that we were able to maintain, on an organic basis, the same growth rate that we outlined for investors last year and are excited about kind of how we see that playing out as we move through the year.

Yes. That’s fair. And then any -- any kind of tiering information maybe you can provide on either the cloud wins in FY21 or new customers, renewal customers? Any tier striation you can provide would be great.

Yes. I mean, we saw a lot of -- I’d say, our progress in overall cloud deal activity was pretty broad-based. We did note on the call today, we had one what we would classify as very large Tier 2 on the precipice of being a Tier 1 decide to migrate to the cloud, but still have not seen any Tier 1s move in a material way this year. So, a lot of that work is still out for us to capture in the years to come.

Your next question comes from the line of Ken Wong with Guggenheim Securities.

Mike, I just -- I couldn’t help but notice, when you talk about the 17 cloud deals that I think a lot of the commentary was you had guys that were going to go an upgrade, there was a U-turn, you saw higher product attach. I guess, is it your sense that there’s probably a lot less selling and education on Guidewire’s part now, and now it’s more just a matter of kind of customers being ready and maybe you guys are following along their time lines now in terms of cloud adoption, or perhaps is there just something that you would highlight that has kind of caused a bit of a reversal from what we had been seeing in the past where it sounds like it was sort of a much harder sell for Guidewire?

I definitely wouldn’t say that there’s less selling involved. And I really think our teams here did a phenomenal job in the year and especially the fourth quarter. I mean, every single one of these customers that makes this decision really does a thorough evaluation of the product and of their plan and of the project and what’s involved. And that’s just -- that is just the type of investment that we have to be willing to make in order to serve this industry effectively. I think, the thing that is improving is our operational readiness and the confidence around which we can predict how things are going to work for our customers on our cloud service. And that’s just confidence that comes with the experience of doing these implementations and doing the updates and doing the upgrades and all of that sort of organizational knowledge, not just even in Guidewire but also our partner ecosystem. Just having great, great partners in our ecosystem that have had the experience with a couple of other projects that can just provide a little bit more of that confidence that you need in order to convince, I guess, a customer that now is the time that it makes sense to make that decision. So, I still expect the selling activity or sort of the sales expense to still be pretty significant. And I think that that’s just what we’re ready to do. But, I think more and more, as we continue to do these releases and we continue to gain experience and we continue to have go-lives that the confidence will just build and build. And that’s what I think we’re seeing.

Got it. Thank you for the insights. They’re very useful. And then Jeff, just one on margins. As we look out to next year, you’ve got an operating loss there, which I think makes sense, given the scale of the investment in the pipeline that you guys are closing here. Is it fair to assume that we’re at a trough from a profitability perspective as we kind of march towards that 16 -- 14% to 16% range in the medium term and 26%, 29% in the later stages?

Yes, Ken. I mean, I think there’s a lot going on in our income statement and some of the revenue, timing of revenue and complexity around how that gets recognized in the income statement can cause some of those challenges that we’re seeing. I mean, some of the things that we focus on is the ARR growth. And then, if you look at how that compares to revenue growth, you can see kind of some of the stuff that’s more income statement-driven versus real business factors that are driving some of that. With respect to operating income, we do expect next year to be the bottoming-out point with respect to operating margin. We’re going to continue to align people more on cash flow margin and just how the cash flow dynamics work in the business. There’s some unusual items that we walked through on the call for cash flow from operations in fiscal ‘22. We were obviously really excited about the cash flow achievement we did in fiscal ‘21. So, you’ll hear us continue to focus on that metric a bit more as we go through the transition.

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

Hey guys. It’s Dylan on for Bhavan. I guess I maybe wanted to double-click on one of those last questions around kind of the partner ecosystem. And you guys continue to see steady momentum there with that cloud-certified number. So, maybe wanted to dig in to more like what are the requirements necessary for partners to kind of establish this? And then, what are you hearing as well from both, the partners and the customers as kind of drivers of demand, right? So, I assume it’s a combination here for carriers looking for more capacity towards their digital initiatives but then also kind of partners positioning to capitalize on these broader industry trends. So, I’d love to get a sense of how you guys are thinking about that.

Sure thing. So, in terms of partner certification demand, the requirements is one of the things we’re trying to do is make sure that the implementations of InsuranceSuite that end up being deployed in production on Guidewire Cloud are done in such a way that we can update them seamlessly, release, release, release. Guidewire is a very configurable platform. There’s a lot of degrees of freedom associated with what you can do with it. And we believe very strongly, if you do things right, we’re going to be able to update those customers every six months sort of forever. But it’s really important that the people doing those implementations, they know how we expect the system to be configured for different lines of business and different types of integrations, and that they’re up-to-date on those latest and greatest capabilities that are built into the platform, so that when they do that implementation, it’s done well, it’s done right, okay? And there was a -- this is a major change for Guidewire in the -- over 10,000 people out there in the world that participate in these implementations. And so, the certification program is designed to ensure that they are trained, educated and ready to do those implementations and do them really well. Now, they’re incented to do that in order to be able to be positioned as a partner in these deals. They are, in many cases, selling right alongside us, helping us convince the customers that this is the right step to take. And the more certified partners they can bring to bear on a program, the more -- the likelihood is better that they’re going to get that business, and they’re going to be able to be selected as the implementation partner for a program. I think -- the reason I’m so excited about that number and that number continuing to grow is really that it indicates that the consulting ecosystem recognizes that this switch is an eventual outcome that they need to be prepared for. They’re not sort of sitting on the sidelines waiting for it to happen. They’re participating with us and engaging with us and getting these people certified, so they’re helping provide the thrust necessary to move the customer base over. And, I honestly think it’s in all of our best interest to do that. I think that the demand, so to speak, for innovation in the P&C insurance industry is only going to increase. And I think that when we get our customer base and more customers added to the Guidewire Cloud platform, we’re going to really be able to significantly innovate in the broader P&C insurance industry. And I think the partner ecosystem will be a big driver of that. Hopefully, that helps answer your question.

Yes. I appreciate the color on that one. I guess, maybe one more as well. So, as we think about kind of the dynamics shaking out over the next 12 months, you have a large portion of that installed base kind of facing end-of-life support. I guess, first, maybe any update relative, again, to the pace of migration conversations you’re having here? And then, as a follow-on for Jeff, could you help us walk through the dynamics as it relates kind of to that model impact as the migrations kind of tended to have more of an impact to -- with kind of the revenue recognition dynamics?

Sure. I’ll speak to the sort of view of the fiscal and what we’re -- how we’re thinking about this going forward. Look, I’ve said a couple of times that these decisions, these projects are very, very consequential for our customers and very often need to be sequenced with in sort of line with other business objectives. And so, in terms of end-of-life and the various other sort of version-related constraints or levers I guess in the system, we want to be a first-class partner to our customers primarily. That’s the most important thing for us is to be a partner that they can trust to provide this service to them, almost no matter what. We want to make the cloud product as good as we possibly can. We want to make it as easy as we possibly can make it for them to move. And we want to reduce all of those risks as close to zero as we possibly can. But even if we do that, there’s going to be a time line that makes sense for each customer, given the other business objectives they have. And we’ve got to be prepared for that. Now, when you think about how does that translate into a business that we’re going to do in this fiscal year? Certainly, the success that we had in Q4 and last year gives us more confidence that we’ll be able to sort of incrementally tick up the pace of the cloud migration and the cloud sales, and we feel confident with the guidance that we’ve given. It’s all trending positive for us. But, at the end of the day, these still are very, very consequential complicated decisions. And we’re going to move -- we’re going to get this industry and our customer base to move as fast as we possibly can, but we’re not in complete control of that. And so, we’re going to do everything we possibly can that we can do, and I think things are going very well. But, we feel pretty good about the guidance that we’ve given and how that relates to the cloud demand.

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

You closed 15 InsuranceSuite deals here. Do you feel like you’re getting back to more of a normalized seasonal trend? And if so, can you just talk more about how that informs the visibility you have into the ARR and updated outlook for the upcoming fiscal year?

Yes. So, we did 16 InsuranceSuite deals, InsuranceSuite Cloud deals, which is very, very positive. Certainly, one of the things we always talk about is one of the things I think maybe all people bang their head up against the wall is how do we get the business to be more linear. Obviously, we had a great, great Q4. We’d love to see the business be a little bit more linear. I don’t know whether or not you can describe what we’ll see for the next year as being more normal. But certainly, I think I would sort of pivot back to the confidence that we feel in the cloud product and our operational ability to deliver it as being something that can drive a little bit more consistent demand quarter-over-quarter. And we work real hard with the teams here at Guidewire and with our customers to try to linearize that demand. But the most important thing regardless of any other factor is our readiness and the maturity of the products.

The other thing I would add is as we highlighted some new customer wins and even in some expansions and migration, some kind of new system modernizations that are taking place. So, it’s exciting to start to see that play out. As you all know, there was a period of time when the cloud platforms were still unknown to insurers and we saw a bit of a slowdown in overall for modernization activities. So, we’re starting to see that return, which is a very positive sign. I would say from how we’ve modeled it, we haven’t necessarily modeled it back to historical levels pre-cloud when people were looking at on-prem modernization projects, but we are starting to see that soften a bit, which is good.

That’s helpful. And then, I guess, just going back to the comment on the subscription gross margin line. I appreciate the mix dynamics, but I think you said those because you think the subscription gross margins can trend in the low-30s over the course of the year. I just wanted to revisit that. Is that mostly just better scale as we get through the year, or is there anything else just to be mindful of that can drive just structural improvement on the gross margins there?

Yes. So, on the subscription side of things, we’ve made heavy investments in cloud operations over the last two years. You will continue to see the full year effect of that as we move into next year. But as subscription revenue scales up and we see an acceleration in the subscription revenue line, that will help us drive expansion next year and then clearly into the future as we move towards our longer-term targets that we set out at Analyst Day.

Your next question comes from the line of Joe Vruwink with Robert W. Baird.

My question on the existing customer migrations. Are the deal sizes getting larger, Mike? The examples you shared, it sounded like these were all full core deals. I think there’s been a tendency in the past for maybe starting with an individual module or greenfield, so smaller in scope. Has there been a noticeable change in this regard with what some of the existing customers are deciding to do?

First, I guess, it’s great when we see these migrations that also include expansions. And so, those are very, very positive deals for us. And the thing I would highlight there is that customers are thinking about, what’s their overall cloud strategy? Who’s their overall cloud partner? And what are the -- and the benefits they see in Guidewire is that you get this full suite implementation, you get a consistent approach to the whole core system across claims, policy and billing. And that is a very positive thing for us. And so, when we get those deals, we’re really happy to see it. I wouldn’t -- I don’t know whether or not I would connect the dots and say that we see a trend there. But certainly, whenever you’re going to kick off one of these kinds of projects with a customer, we’re looking at the whole enterprise architecture, their whole existing landscape, and we’re working with them to assess what’s the best and most efficient way to sort of get them completely modernized. So, I think it’s probably too soon for me to say that that indicates some sort of trend, but it’s certainly a very positive signal that we saw in the quarter.

Okay. That’s good color. And then, just on the cash flow outlook for the year. So, would you maybe -- just in trying to normalize things and think about developments here, it sounds like subtracting out the $12 million and $5 million in this year’s number, adding that back to next year’s number and then the additional $18 million in onetime vacation accruals, I just want to confirm. So, I think operating cash, maybe normalized, would be closer to $70 million this year. And if that all sounds right, is that kind of in line with how you would expect things to progress?

Yes. I think that’s fair. That’s the right way to think about it. There’s been lots of puts and takes in the number this year, but that’s the fair way to think about it.

[Operator Instructions] Your next question comes from the line of Brad Sills with Bank of America.

I wanted to ask a similar question to Joe’s question, which is when you get a customer migrating to the cloud, are you finding that with some of the cohort of customers that have been on the cloud for a longer period of time that your ability to upsell them into the broader suite or even just data and analytics is more seamless? In other words, those customers, because they’re on your servers, you have a better ability to upsell these customers.

I want -- I guess, there’s -- embedded in your question is maybe the sense that they’re already running on our cloud system and we are upselling them versus they are working with us to upgrade to the cloud, at which point we work with them to assess what are the other core applications that they’re currently using and what should they be using going forward, right? So, the pattern that we saw in the quarter, which is very positive, is that we’ve got an existing customer running one of our core solutions, say, ClaimCenter. And that ClaimCenter implementation makes sense for them to move to the cloud. At the same time, they say, okay. Well, what are we doing with our policy administration system, and what are we doing with our billing system? Well, those need to be modernized. Well, okay, let’s look at the full suite from Guidewire because we’re going to get that sort of consistent cloud platform, consistent partner we trust, consistent experience across the enterprise and the system’s all designed to work together. And that leads to going from sort of one pillar of the Guidewire footprint to a full suite implementation in the cloud. And that’s a very, very good outcome. I think, over time, as we get more and more customers live on cloud as we’re able to, as I was sort of alluding to in the remarks, as we have more visibility into how they’re using the system, what they’re adopting and what the business challenges are, there’s going to be more opportunity for them -- for us to upsell them data and analytics solutions going forward. I think, that’s the kind of thing that you should expect to play out over years at Guidewire as we get the customer base move to cloud. Right now, a lot of this -- I guess, think of it as upsell is happening as part of an evaluation of a cloud migration, so that we’re working with that customer to make a picture of what does their enterprise architecture look like? What does their core systems look like in the cloud provided by Guidewire and partnering with them to find a collection of products across data and analytics and our core systems that make sense for them.

Great. Thanks so much, Mike. And then, one for you, Jeff, if I may, on just the subscription margin guide for flat or up a percentage. If you could remind us kind of where we are, as you look towards that 66% to 68% midterm target that you outlined there, what are some of the drivers that could get us there in the coming years? Thanks so much.

Yes, sure. So, I think what we said was subscription margins are going to be up in the low-30% range off of what was 23% last year. And then, subscription and support would likely be kind of roughly flat to up a percentage. And that dynamic is a result of the mix shift as support, which is usually around 82% margin declines as the overall mix that has an impact on the overall margin. And then, from where we are, where we are is we’re seeing a lot of uptick, a lot of demand and transacting on demand for our cloud products. The accounting can be complicated, especially in a migration arrangement, but we are seeing accelerating subscription revenue growth. And we feel really good about the investments we’ve made over the last two years on cloud operations so that we can start to leverage those investments. And that should drive margin expansion as we look forward. Very much on track with what we were expecting as we set out those targets last year, and we feel good about the targets we talked about at Analyst Day.

Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back to Mr. Mike Rosenbaum for closing remarks.

Thanks very much. So thanks, everybody, for participating in the call today. It was a really big quarter during an exciting time for Guidewire and the P&C industry. We’re incredibly excited about the continued demand we see for our platform and for the advancement of our cloud strategy. We remain as optimistic as ever about our long-term vision and the opportunity for all of our stakeholders. So, we look forward to talking again later this month at Analyst Day, which as Jeff said, that’ll be September 30th as a virtual event. So, thanks very much and have a good evening.

This concludes today’s conference. You may disconnect your lines at this time. Thank you all for your participation.