Greetings, and welcome to the Guidewire Fourth Quarter and Full-Year Fiscal 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Alex Hughes, Vice President, Investor Relations. Thank you, Alex. You may begin.

Thank you, operator. Good afternoon, everyone. I'm Alex Hughes, Vice President of Investor Relations. And with me today is Mike Rosenbaum, Chief Executive Officer; and Jeff Cooper, Chief Financial Officer. A complete disclosure of our results can be found in our press release issued today as well as in our related Form 8-K furnished to the SEC, both of which are available on the Investor Relations section of our website. Today's call is being recorded, and a replay will be available following the conclusion of the call. Statements made on this call include forward-looking ones regarding our financial results, products, customer demand, operations, the impact of local, national and geopolitical events 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 of any subsequent date. Please refer to the press release and risk factors and documents we file with the SEC, including our most recent quarterly report on Form 10-Q and our prior and forthcoming annual reports on Form 10-K filed and to be filed with the SEC. For information on the risks, uncertainties and assumptions that may cause actual results to differ materially from those set forth in such statements. We also will refer to certain non-GAAP financial measures to provide additional information to investors. All commentary on margins, profitability, and expenses are on a non-GAAP basis unless stated otherwise. A reconciliation of non-GAAP to GAAP measures is provided in our press release, a reconciliation of additional data are also posted in the supplemental on our IR website. With that, I'll turn the call over to Mike.

Thank you, Alex. Good afternoon and thanks everyone for joining today. I want to start the call by expressing a sincere appreciation to everyone on the Guidewire team for all of their hard work and determination these last few years. Pivoting a software company, leading its category to a new cloud delivery model was never going to be easy, but I think that if we're being honest, sometimes it felt harder-than-expected, but the culture of this company and the determined approach to steady and daily progress all contributed to and culminated in would ended up being a fabulous result for us this fiscal year. The fourth quarter sales results were unprecedented and validate that we are very on the right track. We are steadily building a franchise that will have a lasting and positive impact on the P&C insurance industry, and will produce the durable, profitable, long-term growth that is commensurate with a vertical market leader. We closed 17 cloud deals in the quarter, bringing our total for the year to 37. We finished the year at $763 million in ARR, up 15% and just under $900 million in fully ramped ARR, up 17%. And something that I'm particularly proud of, we finished the year at a positive operating margin, significantly ahead of our plan. Underlying these results is a growing acceptance in the industry that the cloud solution we have built, the geological next generation platform capable of supporting the P&C industry's requirements, goals, and aspirations. We are uniquely positioned to be the industry's innovation platform and are now working with carriers of all sizes all over the world to help them engage with customers in new and more efficient ways to innovate and respond to market dynamics quickly with new products and distribution channels and to optimize their…

Thanks, Mike. Fourth quarter ARR ended at $761.4 million, up 15% year-over-year on a constant currency basis ahead of our expectations. As a reminder, we measure ARR on a constant currency basis throughout the year and then update ARR for year-end FX rates. Making this update modestly impacted ARR by $1.1 million, resulting in ARR of $762.5 million. This outcome was ahead of our expectation due to very strong sales activity in the quarter. As Mike noted, this Q4 saw tremendous execution and was our largest quarter ever. Fully ramped ARR, which is defined as the fully ramped annual price outlined in our customer contracts grew 17% year-over-year on a constant currency basis. This is a meaningful acceleration compared with 14% growth last year and again, is a reflection of the better-than-expected Q4 sales activity. Our sales activity in Q4 is a validation of our investment strategy as we work to modernize this industry. Total Cloud ARR, which includes ARR for all of our cloud products and for customers that have contracted to move to the cloud, grew 28% year-over-year and comprised 59% of total ARR. Total revenue for the year was $905 million, ahead of our expectations due to stronger performance across all components of revenue. Notably, cloud strength continues to be visible in subscription revenue, which was $352 million, up 36% year-over-year. It is exciting to see the progression of our subscription revenue line. In 2018, our subscription revenue was just over $30 million, primarily from acquired products. Since that point, we have delivered a five-year CAGR of 60%. Subscription and support revenue was $430 million, up 25% year-over-year. Turning to profitability for the fiscal year, which we will discuss on a non-GAAP basis, gross profit was $495 million. This was up 18% year-over-year. Overall gross margin was…

Thank you. We’ll now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question is from Dylan Becker with William Blair. Please proceed with your question.

Hey, guys. Great job here. And Mike and Jeff, it seems like the tone is really clear on the model transition. I guess starting with Jeff, obviously, the encouraging sales activity here, there's still some moving parts and appreciate the color on kind of the '25 targets. I guess can you help us kind of give a sense of what's instilling that confidence relative to the time-based outcomes of the ramped activity sounds like subscription is very healthy, maybe a little bit of an offset on the services front, but just kind of level set some of the puts and takes relative to the guide outlook for '24 and '25? Thanks.

Yes, absolutely. We're thrilled with the activity we saw in Q4. And as you know, we are cloud contracts typically contain multiple years of committed fees in the contracts. We call these ramps, right? So the shape of these ramps can be impacted by a number of factors, including our insurers rollout schedule, their implementation strategy and the business case to potentially support that investment. We noted last quarter that we were thrilled with the activity and what we're seeing in the environment and our ability to transact with some of these ramps, we're taking a little bit more time to develop. Ultimately, I really care the most about getting to an attractive fully ramped value and I was thrilled with the activity that we saw in the quarter to drive to that outcome. That also is what underpins our fully ramped ARR growth of 17%. And so as we inspected the cohort analysis and the deals that underpin kind of the activity in Q4, we did see a little bit of a slower development and that had an impact in how we -- in our outlook for how much of our ARR will come off of the backlog in FY '24. But we also see a material acceleration in FY '25, giving us really good line of sight into some of the longer-term targets that we talked about. So in general, just thrilled with the activity to set us up the foundation for as we think about FY '24 and FY '25.

Great. Okay. That's very helpful. Thanks, Jeff. Mike, maybe switching over to you to kind of from a foundational level, right, the idea of what an intelligent core and embedded analytics can look like and how that courses a shift in these underwriting models. You called out an emphasis on product innovation, but how does this shift the strategic importance of what a core system can look like versus maybe what it was in the traditional sense and how that incentivizes change from both a carrier perspective but also kind of fuels your ongoing innovation road map there as well? Thank you guys.

Thanks, Dylan. Great question. And I think it winds up very much to what we -- what I was talking about in the script in terms of carriers being aligned with our strategic vision for the platform and where we're taking Guidewire. I think if you think about just the most basic maybe boring definition of what a core platform needs to be. It needs to be a system of record database for policy claims and builds. But we see an opportunity to do so much more with that platform because really doing anything innovative with -- at an insurance company necessitates a connection to that core system of record. And so it's not just analytics, it's integration, it's the digital interfaces that they need to be able to build to connect to customers, to connect to agents, to connect to brokers, it's also workflow systems to drive better efficiency and automation. And obviously, as you say, is analytics and embedding intelligence into the system. We've worked incredibly hard to ensure that any piece of data, any business process you're running on this core platform, we're capturing every transaction. We're storing every change, every single thing that's happening on that platform in stored in our data platform, available to these companies to be able to run the operational analytics that they need to be able to run just to do business to be able to connect into the financial systems as they need to be able to use to do business and to do the complex sort of multi-period, period-over-period predictions and deep analytics that really basically allowed them to make better insurance decisions. We want all of that to be easier and easier and easier for our customers in this industry to harness and leverage. And like I said, it's like broad and more efficient, better insurance industry. We think we've done that with this platform, and we're starting to see that I don't know, attitude, that reality picked up in the demand that we see for the product and the execution that we saw in Q4 in this fiscal year. So I really do like the question, because we think that the industry is going to get smarter and get more efficient, and we're excited to be part of it.

Perfect. Thank you guys. Appreciate it and congrats again on a very solid Q4.

Thanks a lot.

Thank you. Our next question is from Kevin Kumar with Goldman Sachs. Please proceed with your question.

Thanks for taking the question. Mike, on your comment on displacing other vendors. I think that's 2 quarters in a row that you called that out. So I'm curious, is there a specific pain point or some common themes that's catalyzing these modernizations? Do you view this as a durable theme going forward?

There's -- yes, thanks for the question. It certainly depends. I would say part of it is just a bit of frustration with incumbent vendors. And it's not specifically one. It's like the -- there's multiple installed vendors where this is coming up. I'd say there's a bit of frustration associated with this. But maybe that frustration is better understood in the context to, what I'd say, alignment to our innovation vision and the track record that we have been able to establish with our platform and with the successful production implementations that are now live and running on the system. I think if I think about my four years at Guidewire, there's been an absolute change in the perspective around us painting a vision and partnering with companies to go ahead and sell it and get through the project to get it implemented and get it live and get it running. But this is now much more something that's becoming the norm something we're feeling very confident in something that the systems integrators are feeling very confident in and alignment to that vision helps sort of juxtaposed to the experience that these companies might be having with other vendors. And so it is a couple of quarters in a row that we're seeing this. We called it out because we thought it was important to sort of identify that this is a reasonable redefinition of how we think about total addressable market like in one case, you could think of Guidewire is only targeting what you might call legacy systems. But if you open that up, broaden the perspective to systems that are already kind of modernized, but not modernized to Guidewire. That's a significant positive change for us. And so every quarter that we see these examples, we're very, very excited about it. And excited to tell you, but more excited to welcome other customers to the fold and to the Guidewire ecosystem.

Great. That's really helpful. And then I wanted to ask about the migration acceleration, specialization that's being rolled out to your partners. I guess what's the implication there in terms of TCO to migrate? And in general, are you feeling more confident in terms of the pipeline of migrations?

We're definitely feeling more confident about identifying all of the things that we need to do to ensure that these projects go smoothly. And what we're excited about extending that expertise, that learning to the SI ecosystem so that we have a broader group of people, sort of more horsepower in that we can bring to bear in successfully executing these migrations. I wouldn't necessarily say that it's going to change the pipeline or the run rate of that business for us. We work hard to do that. It's more so the signal that I think you should see is we're confident enough in these programs to now start to extend it to the partners and build that specialization with these specific partners so that we can ensure -- like I said, we've got enough horsepower to meet the demand as we go forward to the next few years. Really, it's been great to see the balance in the bookings for us over the past couple of quarters between new business and new deals and then also the migration of our customer base, which is progressing very well. So yes, glad that you picked up on that program, I guess, that we've launched this quarter.

Thanks and congrats on the quarter.

Hey, thanks a lot.

Thank you. Our next question is from Parker Lane with Stifel. Please proceed with your question.

Yes. Hi guys, thanks for taking the questions. Mike and Jeff, in the context of 17 cloud deals, 13 go lives here, it looks like the outlook for 2024 fiscal is fairly conservative. Is that primarily a reflection of the pronounced acceleration of ramps in '25? Or is there something else you're baking in there? Thanks.

Yes. I think it's two things. One, like Jeff said, we have very good visibility into what internally we call the waterfall, right, like contracted ARR that will flow into the model based on agreements that we've already done. Jeff explained that the shape of the ramps that we've already completed already contracted give us pretty good visibility into what we should expect in '24, what should we expect in '25 and beyond. Then we add to that a projection based on the pipeline we see for fiscal '24, and that gets us to the guide that we provided. But what's really critical if you really want -- I think you really want to understand how powerful the business is and how great we're doing right now. If you got to look at the 17% growth in fully ramped ARR, and we looked at hey, are we still confident in the fiscal '25 targets. And based on the flow of the ARR coming in off the rents in fiscal '25, we felt comfortable that we could stick with that. And we could guide to that effectively signal that acceleration in ARR growth year-to-year. So that's what's driving it. Like it's may be a unique business that we have so much visibility into the out years of the committed contracts that we do. But it is the nature of the relationships that we sign up for. And it was a great, great year for us on bookings, and it was nice to be able to get these deals signed and to be able to add as much fully ramped ARR this year as we did.

Got it. Very helpful. And Jeff, just one for you here, a quick one. Is the solid profit outlook for next year or more a reflection of the improvements you made on subscription and support gross margins, services or a combination of both?

Yes. I mean, look, the subscription and support margins are ultimately going to drive the long-term cash generation of this business. And so the improvements we've made there have been significant, and that's the key driver. But the services organization returning back to positive margin in Q4, I think we have a very solid plan to continue to drive that margin moving forward. I almost think this year, as we look at the services business, we're pushing a lot of work to our partners. We think that that's healthy. We want to do the very strategic high-value work. And as we manage that business, we're going to manage more to gross profit dollar basis. And so if the revenue was a little bit below our expectations, but came in above our $30 million gross profit dollar that's implied into our guide. That's a good outcome for Guidewire. So but we feel confident in that the organization's ability to contribute, which is great.

Makes sense. Thanks again, guys. Congrats on the quarter. Thank you.

Thank you.

Thank you. Our next question is from Matt VanVliet with BTIG. Please proceed with your question.

Yes. Good afternoon. Thanks for taking the question. I guess following up a little bit on that last point. Looking at the overall margin profile. Obviously, with the fully ramped deals impacting more of FY '25, maybe that is sort of the underlying answer that you get more cloud is as you get more and more of those deals ramped up. But are there any specific levels or key indicators that you look to point us to at really expanding the gross margin on the cloud business, realizing those efficiencies of skidding able to truly wind down some of the support costs on the legacy business? Or is it a little too early to tell given some complexity around the mix shift as it happens from more of your customers migrating?

I'm going to take a quick pass at this and I'll let Jeff add to it. Expanding margins in my view are going to happen by selling more cloud, continuing to sell more cloud deals, continuing to ramp those deals over time into the fully ran values as you say. And executing as we have been continuously to improve the efficiency of the cloud platform. So it's both of those things. So we're increasing top line against a fixed headcount expense that we manage very carefully, and we're continuously optimizing the way that we're using these services such that the platform becomes more efficient each period, each release. So the two of those things combined are what drive the improved margins. I don't want people to think that we're dependent on these, like, I think, what did you say, retiring the sort of first phase or like, let's say, legacy versions of the cloud. We're going to work with those customers to migrate them to our Guidewire Cloud platform. But as I've said, I think in previous calls and other quarters, the -- our targets are not dependent on those transitions. We can achieve -- we're going to do right by those customers, and we're going to manage through that with them. but we're going to be able to grow into these margins and execute through these engineering projects, the efficiencies we need to hit those targets. That's the way I see it.

Yes. And I'd just add. I mean, look, I think as we manage through this transition, the outset, we started kind of more some of those early cohorts learning what the cloud requirements for -- we developed Guidewire Cloud Platform. We standardized our customers on that platform. And now we are scaling that. I think you've heard us talk for some period of time that we hired a bit in building out a cloud operations function to make sure that we had folks ready to make sure that the early cohorts were successful. And now as we're scaling the platform, we can leverage that investment. So we don't need to add incremental cloud operations head count because we've hired ahead of that demand curve and now we're seeing the scale benefits that we had planned for. In general, this is playing out kind of the way we thought it would. Now the other thing that is embedded in here is that ARR lose cash collection cycles. And so we have this dynamic that we talked about, where we're seeing a really healthy step-up in FY '25. When we look at the cohort of the deals sold in FY '23. Subscription revenue normalizes that under ASC 606. And so we are seeing very healthy and durable subscription revenue growth. And the midpoint of our guide implies kind of continued 30-plus percent subscription revenue growth, which is also obviously contributing to the margin expansion story.

Okay. Very helpful. And John Mullen has been in the head of the sales organization here for quite a while now. Anything you'd point to that has been, as you look back kind of a meaningful shift in either the process or just the flat-out execution? And then you touched on kind of the continued expansion of the SI partnerships would you credit him with much of that? Or is it really just a maturation of the industry, they've been investing in the Guidewire practice for a long time, and he's just sort of enhanced that? Anything you'd highlight that he's really kind of brought to the table that has been a sea change for Guidewire?

Yes. John has been an incredible addition to the leadership team here. I would also say that David Laker, who joined us has been an incredible addition, Michael Mahoney, he's been an incredible addition to the leadership team. We feel great about the customer components of our team. And now it also give a lot of credit to Christina Colby, who's our Chief Customer Officer, and what she's done to ensure that we've driven the follow-through around making sure that these projects are successful. I feel great about the team and the innovation and the energy that this team has brought to the company. It's for sure their contribution. It's also part for sure, driven by the maturation of the product and the general increased experience that we have as an organization and the ecosystem around what it takes to be successful with these projects. I think we've talked numbers at times about the conversations that we have with the -- with these insurance buyers certain not exactly wanting to be on the vanguard of these new programs and wanting to kind of wait until they see the success of other companies who are charting the course ahead of them. Well, that maybe is starting to kick in, right, as you're seeing numbers in the triple digits now of Guidewire Cloud customers and tens of -- maybe not 100 yet, but growing every quarter by over a dozen successful production go-lives. That experience helps us sell that experience helps gain the confidence we need to get these deals across finish line. So certainly, it's John and the rest of the team that we've added, but it's also a lot of things that contribute to that success. And I would just highlight one additional thing that I think kind of John…

Great. Thank you.

Thank you. Our next question is from Ken Wong with Oppenheimer. Please proceed with your question.

Great, thank you for taking my question. Mike, I just wanted to maybe touch on 1 of the trends you guys called out last quarter in terms of the ARR pushing a little bit to the right and some of that caused by some kind of DWP visibility across your customers. You guys didn't really mention it this quarter. Is it fair to assume that perhaps some of that has started to fade? Or in any case, any update on that front?

Sure. So we definitely are continuing to work through and deal with a very challenging environment for the insurance industry. And that still exists. We called it out in Q3. We touched on it a bit. I touched on it a tiny bit in this quarter. We did, however, see an exceptional sales result in the quarter. And what I would chalk that up to is the idea that the insurance companies can see the investment in Guidewire stretching way beyond the immediate economic conditions that they're operating through right now. And even in some cases, thinking about Bag wire as a mechanism for dealing with these challenges more effectively if they have an agile, reliable core system that is not holding them back, but instead enabling them to connect with customers in different ways to open up new channels to brokers operate their claims processes more effectively. So it is still a challenge. And I would say it does have an impact on the types of deals and the structures of the deals that we are negotiating and closing with these companies. But we were able to have, as I said, an exceptional outcome in the quarter. And so both things can be true. But -- so that reality, I suppose, in the insurance industry still exists, and we're working with our customers very carefully to help them navigate this.

Yes, the only thing I would add is last quarter, we talked about being cautiously optimistic about our ability to transact through this environment. I think coming out of Q4, we're obviously thrilled with our ability to transact. But we did see -- and we talked about this in the prepared remarks, we are seeing some of these ramps taking a little bit longer than what we had seen historically to materialize into meaningful ARR that has that impact in FY ‘25 more so than FY ‘24. So we are continuing to see that theme that we kind of introduced last quarter a bit, but obviously thrilled with our ability to transact in the quarter.

Got it. Got it. Yes. Great to see the fantastic results in this tough environment. And then, Jeff, just quickly on subscription and support gross margins, '25, again, a nice step-up from where you guys are closing out in -- I mean, sorry, '24 from where you guys are closing on fiscal '23. I guess when I look at the exit trajectory, you guys are at $58 million. Can you maybe walk us through some of the puts and takes in I guess, to -- why would it be higher building off of what was a very strong Q4 number?

Yes. Obviously '23 delivered a lot of margin expansion. And over the last 18 months, this has been a huge focus for us. I think we've executed quite well. There's a variety of things that we've kind of taken advantage of -- to kind of have that move in ‘23. As we look ahead to ‘24, we have a lot of deals that were transacted. And so we'll start to see those customers using the platform. We're seeing our existing customers start to use the platform in a bit more scale. So we're -- we have that flowing through our model, combined with the overall revenue growth. But I think as we look ahead, we're proud of the trajectory we're seeing in ‘24 and how that sets us up for kind of both our near-term and long-term targets?

Got it. Okay, fantastic, guys. Thank you so much.

Thank you.

Thank you. Our next question is from Michael Turrin with Wells Fargo. Please proceed with your question.

Hey, thanks. This is David Unger on for Michael Turrin, tonight. Just one for me. Great to see the meaningful cash on the balance sheet with a seasonally strong 4Q. Can you guys remind us the best way to think about capital allocation, pecking order at this point in the cycle? Thank you.

Yes. Look, I mean, we are -- we benefit from having a very strong balance sheet. Our customers appreciate these are long-term consequential decisions that our customers are making. So they certainly appreciate seeing a well-capitalized companies that they can partner with. When we talked about this in the past, we've talked about what do we really need as a minimum cash balance to support running the operations of the business, and we've talked about that kind of in that kind of $400 million to $500 million range. We have been doing some repurchase activity. And then we obviously think over the long-term, we are a logical acquirer in our space. So maintain some cash for strategic cash. That's how we think about it. And we're in an environment now where -- we feel very good about where we are in the cloud transition. And so it's possible that you could see us be a bit more strategic and start thinking about M&A a bit more, although we will continue to be price disciplined and cautious with respect to M&A.

Great, congrats. Thank you.

Thank you.

Thank you. Our next question is from Michael Funk with Bank of America. Please proceed with your question.

Yes, thank you for the question. And maybe a two-part, if I could. You mentioned earlier that fewer deals slipped into 1Q, and that contributed to the guidance for 1Q. Maybe also, in addition to answer the question, I think anything unique happened there. To talk about the pipeline, size of deals in the pipeline, how far along in the pipeline those deals are? And then how that contributes to the confidence in guidance for the year?

Yes, sure. Like we said, it was a very strong close for us in Q4, just relative to the percentages that you would normally expect in terms of deals closing, which validates in a lot of ways, our vision and team and execution. So this is phenomenal. Sometimes, you end up with deals slipping into the first quarter software companies. And when you have a great Q4, you have fewer deals slip into Q1. So that factors slightly into the Q1 perspective, that's like better news, right? You want to close the deals early, it's not bad news. Speaking to the pipeline, we are -- we have a lot of confidence in the visibility that we have for the fiscal year. The position that we're in now is only strengthening, as I described in my prepared remarks. We feel good about the product we're good about the customer success. We feel good about the track record feel good about the competitive position, all of those things, our point in the right direction. We've worked real hard over the past couple of years to drive a more linear business throughout the year. So pulling as much of the deals earlier in the fiscal year as we possibly can. And that also gives us just building confidence, I'd say, in our ability to project how we're going to do. But the other thing to keep in mind is like there's a percentage of what we closed that flows into this year's ARR but a significant amount we closed, like Jeff talked about, flows the ramps into fully ramped ARR over the next few years. I'm increasingly thinking about Guidewire as a multiyear business, and that is the way we transact with our customers. This is the way we think about investing. This is the way we think about running the company. These are decades long relationships that we're establishing and the durability of the relationships really speaks to that. And so that's -- it's like almost like Yes, we're talk about Q1, we're also talking about the fiscal year. And then we're also talking about fiscal year '25. And that's why -- it's just -- we feel a lot of -- we feel a very good sense of confidence in the business and how it's -- how we're executing right now and why we think it's appropriate or we think it's reasonable for us to project that acceleration in ARR in fiscal '25. So hopefully, that gives you enough of a sense of how confident we are in the business right now.

It did. Thank you very much.

Appreciate it.

Thank you. There are no further questions at this time. I would like to hand the floor back over to Mike Rosenbaum for any closing comments.

I just wanted to say thanks, everybody, for participating in the call today. We -- it was an exceptional Q4 for us an exceptional fiscal year. We're really excited about the prospects of the business going forward. And I just wanted to say, hopefully, we'll see all of you at our Connections event and Analyst Day that is coming up in November. We'll see you in Nashville looking forward to hosting everybody and not seeing everybody in person if you can make it. So thanks very much.

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