GWRE 2025Q1

Greetings, and welcome to the Guidewire First Quarter of Fiscal 2025 Financial Results Conference Call. As a reminder, this call is being recorded and will be posted on our Investor Relations page later today. I would now like to turn the call over to Alex Hughes, Vice President of Investor Relations. Thank you, Alex. You may begin.

Thank you, Grace. Hello, everyone. With me today is Mike Rosenbaum, Chief Executive Officer; Jeff Cooper, Chief Financial Officer; and John Mullen, President and Chief Revenue Officer, who will be with us for Q&A today on the call. 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 its conclusion. Statements today 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 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 risk factors and documents we file with the SEC, including our most recent Annual Report on Form 10-K, and our prior and forthcoming Quarterly Reports on Form 10-Q filed and to be filed with the SEC for more 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 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. Reconciliations and additional data are also posted in a supplement on our IR website. Finally, this quarter, Investor Relations decided to enter the current decade and conduct our earnings call on Zoom rather than a telebridge. This means we will manage the Q&A portion of today's call internally with the help of Grace moderating, you just heard from and me managing Q&A. Since it's our first go, please be patient with us if we encounter any short pauses in the handoffs during Q&A. So with that, I will hand it off to Mike.

Thank you, Alex. Good afternoon, and thanks everyone for joining us today. Q1 was a very strong start to the year for us, following a record quarter in Q4. I'm excited about the ongoing momentum in our business. In November, we had the chance to connect with thousands of our customers and partners at our industry conference, Connections, where we also launched Las Leñas, our 12th cloud release. Connections allowed us to showcase our company and product vision, receiving universally positive feedback. It was rewarding to see the results of our team's hard work come together. I want to highlight four key themes that emerged from the event, which I believe are driving our company right now. First, there is strong demand for our cloud-based solutions, especially at the high end of the market. Second, this demand is fueled by the increased maturity of our cloud platform, particularly its ease of updates, which enhances referenceability among our cloud customers. Third, the improved agility and flexibility of our platform resonates with the industry's growing need for speed in delivering analytics and AI-driven innovation. Finally, our partner ecosystem, inclusive of consulting partners and marketplace solutions, continues to support our cloud platform, extending and enhancing our reach and impact. Unrelated to Connections, but worth mentioning, we are also achieving greater efficiency in our operating model while managing the Guidewire Cloud Platform. I'll briefly touch on each of these points before Jeff discusses the financials. Cloud demand remained strong with nine deals in Q1, particularly at the high end of the market; five of the seven InsuranceSuite Cloud deals were with Tier 1 insurers. This includes two deals with Zurich Insurance Group, one of the top three global commercial insurers. During the quarter, we signed a global framework agreement with Zurich that simplifies the decision-making process for its local entities to adopt Guidewire Cloud. As a result, Guidewire Cloud was adopted by two Zurich entities—one for the full suite for large corporate and commercial lines, and another for ClaimCenter in Australia. This agreement and these wins underline our scale and capability to serve the largest insurers worldwide. We're also set to close another three InsuranceSuite deals with Tier 1 insurers. Arch Insurance, servicing the middle market, chose InsuranceSuite on Guidewire Cloud. Additionally, one of the largest Australian insurance firms opted for InsuranceSuite to replace a legacy system for its commercial lines, while a European mobility insurance arm of a global Tier 1 insurer chose InsuranceSuite for a multi-country rollout across Europe. These relationships take time to develop and are expected to endure for decades. We are thrilled about the momentum in this segment and the chance to serve remarkable new customers. Our ongoing success with Tier 1 insurers is encouraging, and the international growth aligns with our previously outlined strategic focus. In Europe, we added three cloud customers, including those I mentioned earlier. I was especially pleased that a long-time self-managed customer opted to migrate to Guidewire Cloud while expanding to the full suite for its European entities. In the Asia Pacific region, we saw strong results in Australia and New Zealand, highlighted by the two Tier 1 deals. I'm delighted to see our investments in this area paying off. Additionally, InsuranceNow had another successful quarter with one new win and further expansion. Our robust demand is primarily driven by the increasing maturity and referenceability of the Guidewire Cloud Platform and its solutions. This was a significant takeaway from Connections. Our customers are achieving success with Guidewire, specifically Guidewire Cloud. With more customers transitioning to the cloud, those who have been waiting to see success are becoming more serious about modernization plans. The CTO of Travelers shared her migration experience to PolicyCenter on Guidewire Cloud, encouraging others to take action, stating that earlier adoption leads to growth and innovation. The COO of IAG, Australia's largest insurer, discussed the efficiency and innovation benefits gained from consolidating onto a single claims platform with intelligent automation. Their process to report a claim has been reduced from 22 minutes to just 90 seconds, significantly enhancing the ability for thousands of employees to innovate on the platform. We also engaged with a leadership team from Japan at the event and held a dedicated strategy session for this market. It was thrilling to see such engagement from our Japanese customers, and we're eager to deepen our commitment to the Japanese insurance market. The advancement of our Cloud Platform sets the necessary foundation for P&C insurers to innovate. Rapid advancements in technology, particularly around generative AI, highlight the necessity for a modern cloud platform. At Connections, we shared our vision and plans to incorporate generative AI into our platform and solutions to boost developer productivity and expedite underwriting and claims processing. The positive feedback from customers was overwhelming. Customers increasingly recognize the need for an agile and flexible core platform with modern APIs to maintain competitiveness. The rapid evolution of generative AI capabilities is unprecedented, and leveraging this potential demands a modern core platform. This, combined with the maturity of the Guidewire Cloud Platform, especially regarding easier releases, has positively influenced customer engagement and transformed many of our cloud migration discussions. It's encouraging to witness the ongoing maturity and momentum of our platform. Notably, Gartner's recent Magic Quadrant for Software-as-a-Service P&C core platforms in North America recognized InsuranceSuite as the clear leader. Our partner community is integral to our success, and we continue to see excellent momentum with both systems integrator partners and technology partners. The presence of 33 systems integrator partners, including PwC, Deloitte, Capgemini, Accenture, EY, Sollers, and Cognizant, was impressive and demonstrates our unique strength compared to competitors. Our strategy is to focus on being a best-in-class software company and developing products that partners can implement successfully. This vision transcends merely creating outstanding products; it requires cultivating a distinctive partner ecosystem that fosters successful customer outcomes. It was also uplifting to see marketplace partners seize the opportunity to launch new technologies and integrations at the event. For instance, Hi Marley introduced a conversational first notice of loss experience that utilizes automation and AI to significantly enhance claim initiation speed and ease. Furthermore, Box announced its use of Guidewire Cloud Platform's integration framework to provide a prebuilt integration that automatically retrieves data from Box files and updates corresponding InsuranceSuite records. Insurers can now categorize and analyze claims documents automatically, extracting vital information like policy numbers, incident details, and customer data to expedite claims processing and improve accuracy. Partnerships like these bolster my confidence in our aggressive collaboration across the insurance life cycle, consequentially leading to better customer outcomes. As we grow adoption and deployments of the Guidewire Cloud Platform, we also illustrate increasing leverage in our business model. It's gratifying to witness enhanced operating efficiency with subscription and support gross margins reaching 70% in the first quarter, which Jeff will elaborate on. This continued operational success reassures us about the future and grants us the flexibility to begin planning the next steps. In conclusion, we are building an appealing business characterized by a blue-chip customer base and exceptional customer retention, centered on a platform designed for ongoing innovation and value delivery to our P&C customers. We are at a juncture where the rapid pace of change emphasizes the necessity of a platform like this for insurers, positioning us to cultivate a business that balances durable growth with profitability. I will now turn it over to Jeff to go over the financials.

Thanks, Mike. We're off to a great start in fiscal 2025. I want to touch on four key financial highlights before I jump into the details of the quarter. First, ARR ended at the high end of our outlook at $874 million; second, subscription and support revenue growth accelerated to 33% in Q1; third, subscription and support gross margin hit 70% in the quarter; and fourth, total revenue on a trailing 12-month basis surpassed $1 billion. Combining these financial highlights with the energy we just experienced coming out of Connections, it is clearly an exciting time to be at Guidewire. Now let me dive into the details. Total revenue was $263 million, above the high end of our outlook and up 27% year-over-year. Our total revenue beat was due to higher-than-expected subscription and support revenue and services revenue. Subscription and support revenue finished Q1 at $170 million, reflecting 33% year-over-year growth, which is the highest growth rate in 2 years. This is a reflection of our continued InsuranceSuite cloud momentum. Services revenue finished at $56 million as healthy services bookings translated into higher utilization rates. Turning to profitability for the first quarter, which we will discuss on a non-GAAP basis unless stated otherwise. Gross profit was $167 million, representing 38% year-over-year growth. Overall gross margin was 63% compared with 58% a year ago, and 42% in Q1 of fiscal '23. Our progress on profitability has been fantastic. Subscription and support gross margin was 70% compared to 65% a year ago. This was ahead of our expectations due to higher-than-expected revenue and continued progress on platform efficiency. Services gross margin was 20% compared to 10% a year ago. This profitability benefited from strong utilization rates and lower subcontractor costs. All this positive momentum on gross margins led to an operating profit of $34.7 million. This is a strong result when compared with our outlook of $21 million at the midpoint. About $12 million of this beat came from the gross profit line, with the remainder coming from operating expense discipline. Overall stock-based compensation was $38 million, up 5% from Q1 of last year and higher than expectations due to an adjustment in our accrual for prior year performance-based stock grants, and share price appreciation prior to grant date for recent employee RSU grants. We ended the quarter with over $1.5 billion in cash, cash equivalents, and investments. During the quarter, we completed a $690 million convertible debt offering. Using a portion of the net proceeds of this offering, we retired about 30% of our existing convertible notes that are maturing in March of 2025. The remaining converts due in 2025 are expected to be net share settled at maturity. On Dec 2, we established a $300 million revolving credit facility. This facility gives us incremental flexibility to ensure we have the liquidity necessary to pursue inorganic growth while minimizing shareholder dilution. Operating cash flow ended the quarter at negative $62 million. As a reminder, annual employee bonuses and commission expenses related to Q4 sales are paid out in Q1. As a result, Q1 cash flow is always lower than the other quarters in the fiscal year. Now let me go through our updated outlook for fiscal year 2025. Starting with the top line. We are very pleased with our first quarter performance and feel confident in our pipeline and our ability to hit our annual targets. Given we are just one quarter into the year, we are maintaining our annual outlook for ARR of $995 million to $1.005 billion. For total revenue, we now expect between $1.155 billion and $1.167 billion. We expect approximately $648 million in subscription revenue and $713 million in subscription and support revenue. Given higher-than-expected services revenue in Q1 and improving utilization, we now expect services revenue to be approximately $205 million. Turning to margins and profitability, which we will discuss on a non-GAAP basis, we are increasing our subscription and support gross margin expectations to be approximately 69% for the year, up from the 68% we discussed last quarter. We expect services gross margins of approximately 12% and overall gross margins to be approximately 65% for the full year. As a result of raising our revenue outlook, we are also lifting our outlook for operating income. We expect GAAP operating income of between breakeven and $12 million, and non-GAAP operating income of between $164 million and $176 million for the fiscal year. We expect stock-based compensation to be approximately $159 million, representing 9% growth year-over-year. We still expect cash flow from operations for the year to be between $220 million and $250 million. Turning to our outlook for Q2. We expect ARR to finish between $909 million and $914 million. Our outlook for total revenue in Q2 is between $282 million and $288 million. We expect subscription and support revenue of approximately $175 million and services revenue of approximately $48 million. We expect subscription and support margins of approximately 68%, services margins to be around 6%, and total gross margins around 64%. Our outlook for non-GAAP operating income is between $39 million and $45 million. In summary, Q1 was a great start to the year, and we are very excited for what is ahead. Alex, you can now open the call for questions.

Great. Thanks, Jeff. Our first question comes from the line of Dylan Becker at William Blair.

I appreciate the question. Mike, you touched on this to start. Obviously, we were at Connections, and it was very clear the enthusiasm from customers and partners that you talked to. I'm wondering if you could dive into the importance. You called out kind of now roughly half of the base along this cloud migration journey. I think the vast majority of those are on kind of more frequent versions of the software as well. So how that kind of unlocks more of this ecosystem enthusiasm and how it contributes confidence in your aspirational goal of getting 100% of this ecosystem converted to the cloud over time.

Yes. Thanks, Dylan. I appreciate the question. So I think one of the things that's been hard over the past few years is the use case is not an experimental use case. That the customers we serve in the industry and the use case that we serve for customers is incredibly serious. And so they take the decision to move to cloud very seriously, and they want to see a track record. Many of these customers want to see a track record of success. And so it's kind of one of the things that we're very proud of is just how well we've executed and how consistently we've executed with our cloud programs. They haven't all gone perfectly, but I can genuinely say that they've all gone well and everybody that's made that decision is happy that they made the decision. And so that just really helps us have the conversations with the customers that are still on-prem that are still thinking about when is the right quarter and when is the right year for them to move, and it just adds to the confidence and it reduces the perceived risk that they're taking when going to a platform like ours. Now the other side of your question, which we touched on at the Connections event, is not only are we getting the programs live and not only are they running successfully in production, but we're actually able to keep the customers on current release versions of the product, which is slightly different than the previous way the distribution of releases existed in our on-prem customer base. We're doing a lot technically to validate the implementations and validate the new versions of the software that we write so that we can do these updates more frequently, faster, and cheaper for all of our cloud customers, and so that just adds to the benefit that the on-prem customers think about that they expect they'll see when they get to the cloud. It improves the value proposition and increases the likelihood that they're going to make that decision. And so you add all that up, and it's just changing the nature of the conversations we're having. It's never going to go as fast as we want; we've got to be patient, and we've got to work with the customers based on the set of priorities that they have. But I do genuinely believe that we are going to get 100% of our customer base to our cloud, and that's a pretty amazing thing to say when you think about the scope of what Guidewire has achieved over its 20-year history. I can legitimately say that there's a path to that, and we're committed to that, and I can see it happening. And so it's kind of exciting. And it's going to take a long time, but we're going to do it. I think it speaks to the sort of commitment we make to the industry and our customer base. So, anyway, hopefully, that helps. Thanks for the question.

No, it does appreciate it, and it was great to see the enthusiasm at the event. Maybe Jeff, as a segue to you off of that. You called out the acceleration in subscription and support revenues as a function of some of these larger Tier 1 deals, obviously, 70% gross margin there, tracking well ahead, and how this kind of gives confidence and obviously, the kind of financial implications of this long-term normalization and some of your longer-term targets there?

Next question comes from Ken Wong of Oppenheimer.

Mike, you called out the Zurich deal in your prepared remarks, and I couldn't help but notice a global framework agreement being discussed. I guess maybe help us understand the significance of a global framework. And how much is this something that might materialize near term financially versus something that we might see flowing in more medium, long term as this framework gets rolled out?

Yes, thanks for the question, Ken. Obviously, Zurich is a critical customer for us globally across many countries in many instances. And we've had success; we've got cloud success with various entities as part of the Zurich Group over the past few years. But as our momentum started to pick up and as the concept that this cloud offering that we have is really working, we began to have conversations with the Zurich Group, the global oversight entity that looks to create partnerships worldwide that support every single entity. We started to have conversations with them about what we could do to facilitate the conversations and the negotiations, and the structuring of the deals with each one of the individual entities. And so somewhat, this is a mechanism for us to create a more fluid conversation with each of those entities as we proceed and grease the skids about the decision to move to cloud. So we still have to earn that business with each one of those entities, and we're certainly committed to doing it, but it should make the sales cycles a lot more straightforward because basically, we've negotiated a structure centrally that we can share across all of those entities. It was nice because that agreement kind of lined up to two short-term deals that I called out in the prepared remarks; both of those deals were things that we have been discussing. But once we had the global agreement in place, it became easier for us to get those two deals completed. I don't want to project, but it's certainly not going to slow down our momentum, our sales momentum with Zurich; it could only speed it up. I think it's just a great representation of the incredible strength of this partnership and what we think we can create with Zurich worldwide; it's just an incredible milestone for us, and to have earned their trust to create that structure, I was really proud to get to that point.

And Jeff, I wanted to maybe pick on the subscription support gross margins. Really meaningful step up to 70% this quarter. You called out some of the tailwinds from the top line and expenses, but any one-time uplift that we should be aware of? I know you guided it to step back a little next quarter. Yes, any help there would be great.

Sure. Yes. I mean, there's a couple of things to do. First, we are modeling some significant increased customer usage of the platform as we move throughout the year as we see more and more customers go live. And so that does have an impact. The second thing that is a little bit more nuanced is we had some engineers that were building cloud migration tooling, and some of those engineers transitioned their focus to support cloud customers. As a result, the expense associated with those engineers moved from R&D to cloud COGS. That impact occurred towards the end of Q1. It's pretty common for us with the function of DevOps to take a regular look at how people spend their time and how we're allocating the appropriate expenses associated with their time. And so that did happen; that had an impact. If you look at that impact throughout the whole year, it adds up to about a one percentage impact to gross margin that didn't impact Q1 but will impact the rest of the year. So you take that together; that's the reason why we're not expecting to sustain at 70%, but still tracking a little bit ahead of our expectations for the year.

Great. Our next question comes from Parker Lane at Stifel.

Can you guys hear me okay?

Yes.

Perfect. Jeff, looking at the 1Q performance and the implied guidance for the full year in services. I was wondering if you could dive into that dynamic of growth a little bit more this year. And sort of comment on how close you are to the ideal split of services work being done by partners versus your internal teams.

Yes. I think in general when we've talked about this, we've indicated that it's really critical for us to have a high-performing services team. This is a strategic asset for us, and we have the capacity to do a little bit over $200 million, and as we established the outlook for this year, we thought it would take a little time to build back to that level. But with the guidance that we've given at the end of this quarter, we are now operating at a higher utilization than what we'd expected. I think we're finding a healthy balance right now between the work that our teams are engaging in and the work that the partners are engaged in. The partners continue to lead most of these programs. As we look at utilization rates in Q1 and as we look throughout the rest of the year, I expect utilization to tick off a little bit. We're not expecting to be at 20% margins as we move through the year, but it was a really strong first quarter for us. And John Mullen is here as well, and he can offer up some comments.

I'll just add that I agree. We're reaching that balance point where seeing what's ahead of us gives us that chance to look better at our utilization and what we do from a subcontracting standpoint. The unique part about Q1 was really Q4 we had some really sizable deals in Q4 that created a hot start to the year. So we're a little bit ahead of schedule on utilization. But we're finding that balance Jeff is talking about, and we feel really good about the work that, that team has done. And also the really tight partnership with the systems integrators to make sure that we've got the right mix to ensure success across all of these deals.

Our next question comes from Alex Sklar of Raymond James.

Mike, I just want to follow up on Dylan's question earlier on the cloud migration pacing. You called out some of the highlights around the referenceability, the customers staying more current. AI is kind of an overall driver for customers that want to do anything with AI going into the future. Is there any change coming out of Connections, though, just in terms of your visibility over the next 3-to-5 year window as far as pacing of cloud migrations?

I would say, nothing's changed if you look out 3 to 5 years. I think we've had a couple of conversations coming out of Connections where you could say things have improved, and there's a little bit more of a timeline associated with planning. So like I said, it certainly helps kind of solidify our expectations for opportunities through the remainder of the fiscal year. I think the other characteristic of this is that we have begun to be more clear about what the long-term expectations should be for our ability to support on-prem customers beyond 3 to 5 years. Exactly what that looks like and starting to have real conversations with customers about what they should expect and how they should start to plan. So I would say like the referenceability, the excitement about the product, our ability to support and run these workloads successfully. All of that helps, but it also relates to just what the final outcome of these on-prem implementations. The conversation that we have with all those customers definitely stretches out 5 years. We make a plan for what our expectations will look like each quarter out for the next couple of years, and we continue to hone that with our sales organization and our customer success leaders. So I would say Connections helped a little, but it hasn't changed it dramatically.

I'll add one quick point on that. I think Mike’s keynote message balanced off trust and vision. So much of the conversations we've had have been about gaining trust and proof points, and it does materially start to shift towards that vision for how our brands work together, us and customers and prospects in the industry at large work together to unlock opportunity. Just adding that, that time is up really well with the competitive pressure in general insurance, property and casualty insurance, the need for agility, the need for more precise decision-making is very real. Having the opportunity to sit across the table from these customers and prospects and map out how we can work together and continue to invest in our R&D to help them solve that problem gives me a tremendous amount of optimism about how we continue to work together with them in a more strategic context than just proving out the value of the platform asset.

Okay. Great color. Jeff, maybe just one follow-up for you. In terms of the really strong Tier 1 activity this quarter, any color on what those look like relative to the ARR increase? Any of them that aren't hitting in this Q1 ARR number or any different ramp schedules versus what you've historically booked with Tier 1s in the past?

Yes. So there was one deal in particular where the deal closed this quarter, but the ARR doesn't start until next quarter, and that was one nuance in the quarter. Other than that, it was pretty typical blocking and tackling. Pleased with the progress in Q1. If you're hinting at kind of the size of the ARR outperformance in the quarter. In Q1, we did have a little bit higher churn for the year than what we expect for the rest of the year, and that's kind of considered into our guidance and our forecast. The backlog in Q1 is usually pretty slow and then that ramps throughout the year, and that's what we expect for this year as well.

Great. Our next question comes from David Unger from Michael Turrin's team at Wells Fargo.

So great to be at Connections and good to see the continued success and call out of Tier 1 wins. We got to spend some time with Tier 2 and Tier 3 vendors at Connections. Can you just talk through their engagement levels out of Connections this year versus prior years?

Yes. Let me say something before I can let John give you a perspective; he spent as much or more time with customers at Connections as I did. I would say we called out the Tier 1s just because it's so strategic and there's such a high percentage of the overall premium in the industry that relates to Tier 1 carriers, but we've had tons of success with carriers of all sizes, not just the Tier 1 space. Connections is obviously a great opportunity for us to connect with people one-to-one and find out how are the projects going and what feedback they have about our roadmap and what we're doing. I would say I'm just very, very positive on the direction that we're headed and how it's aligned to where our customers want us to be. I mean, we're not perfect, and we definitely get feedback at these events about where we can improve. We work hard to listen as closely as we can and adjust our approach to delivering on the programs and delivering on the roadmap such that these implementations are successful and fast as possible. There’s a lot of energy behind the idea that we've got PolicyCenter, ClaimCenter, and BillingCenter running in the cloud, and we've got the update system working and the systems generally working. Now we can start to think about what we're doing for your claims experience and your claims adjusters and how we're making sure you can manage indemnity more effectively and what we're doing around underwriting and helping your underwriters and helping the actuaries manage rating systems more effectively. All that kind of insurance functionality that we haven't been as focused on over the past 5 years is starting to bubble its way back up the priority list and into the roadmap, and that's pretty exciting to get feedback from those customers at Connections; it's great. It's validating. So that was my big takeaway, but I'll let John give a comment because he spent a lot of time with these customers there too.

Yes. I'll start with the Tier 3s. I love the conversations and the operating principle at the Tier 3s, simply because they exercise the platform and the application so aggressively. It's such a critical element of their business that we learn so much in the operations with them, great feedback, great opportunity to prioritize our R&D roadmap. The way we stand shoulder-to-shoulder to drive value with those Tier 3s is absolutely critical to our teaming coexistence. The Tier 2s are certainly unlocking value, as Mike mentioned, becoming so much more important to them. The ability to talk about insurance features and functions, risk selection, pricing, and rating—the things that drive their business and their ability to compete really aggressively brings the Tier 2s, which is such a big part of Guidewire's 20-year history, to that chapter of how we shape next chapters together. The thing I take away from Connections more than anything else with these customers is for smaller customers, it's true that working with us, they can operate at a level of scale and leverage that was maybe not available without the partnership. For those that are very large, we're unlocking a level of agility that would be quite difficult for them to achieve standalone. Those two things together create a great basis for conversation and planning.

So you let right into my next question, which was obviously great demos being shown at Connections. Any initial stats you could share as it relates to customer engagement coming off of GenAI thought that could be for the future? Just wondering how that compares across tiers—what those levels of customer engagement out of Connections really look like in GenAI?

On a conversation basis, I would say 100% of our customer conversations have some implications on what their plans are for GenAI and, maybe more specifically, decision-making inside the enterprise. More and more, it's becoming part of the business case that we write together to take that next-step of addressing the core processing environment and modernizing that environment to unlock value. I don't think 100% is an overstatement. What percentage of those work into the business case to make that next important move is critical for those looking at either net new or migration? For those that are customers, the intensity and frequency of conversation is very prevalent in both our customer success organization and our product organization and our analytics organization. The number of conversations we're having in kind of—I don’t want to call them co-design but co-conceptualizing solutions for the market has increased quite a bit in the last 6 months.

Yes. And I can just give you a quick perspective. Generative AI is a tool that can be applied in 1,000 ways to the insurance industry and so it's like every customer we talk to is doing something, doing some level of experimentation. Some have it in production in certain use cases. Everybody is out there doing different things, trying to learn from one another, trying to learn from partners, trying to learn from Guidewire. Aligning what we're learning and what we're doing with what they're learning and what they're doing, it's all very interesting, but there isn't like a deployed generative AI step. That will be done times 1,000 different use cases across the industry, across countries, and across tiers. It's a very ubiquitous technology capability that will be applied all over the insurance life cycle. It's kind of fun to sit down with people and start to think about where we might apply this, especially given this cloud platform that’s set up to enable us to deliver this innovation in a much more fluid way than we were able to do before.

Great. Our next question comes from Aaron Kimson of JMP Securities.

Great, thanks for the questions and for hosting us in Nashville last month. I know it's early on GenAI, and that was part of the vision piece of the Connections keynote. But can you help us think about what the pricing model for GenAI use cases may look like?

I think it's premature for us to talk about it. It's just because we have a lot of options that we'll look at, different ways we could look at packaging it. There are just so many ways that this might go that it's probably premature for me to describe it. I also think I would connect you back to the previous conversation. It's almost like if you say how does the Internet or web browsers interact with your technology? It's everywhere, right? There will be components, solutions, and products that are packaged and priced that are powered by generative AI, and those prices and packages will relate to the solutions and products more so than they will relate to the enabling technology. The enabling capability will certainly be a factor in how much it costs to run and how much it costs to build and deliver. But it will be far more nuanced than just how we price generative AI at Guidewire.

And then Mike, you mentioned recently you have 122 customers running workers' comp on your platform. What type of activity are you seeing within that segment of the P&C market? And what's the incremental opportunity with your existing customer base like for workers' comp?

Well, there's an existing opportunity to expand within the customer base. There’s also a net new opportunity for modernization activity among insurance carriers that are running workers' comp lines and want a modern platform, and we're tracking both of those things uniquely. The other side of this is that we’re also uncovering opportunities to enhance the product and improve it with data and analytics solutions in workers' compensation. Additionally, there are very interesting potential collaborations across multiple workers' comp carriers where they can come together and say, hey, if Guidewire can work with us to do this centrally, we can provide a big lift and benefit. We have spent a year looking at this, and we have an incredible leader at the company named Laura Drabik who's been driving this for us and pulling together a plan across function that we're pretty excited about. I hope that gives you a bit of flavor for why we called it out. I genuinely think it's going to become a more important part of our customer base and the use cases people will attack with the platform.

Great. Our next question comes from Alexei Gogolev of JPMorgan.

Could you provide an update on fully ramped ARR growth levels now that you're entering sort of the back half of those large contracts? When would you expect headline ARR and ramped ARR growth to begin to converge?

Yes, Alex, we only comment on fully ramped ARR on an annual basis. The one thing I would comment on is it was a very strong Q1 for us with respect to overall bookings activity, and so that got us off to a good start. We measure ourselves with that particular metric on an annual basis, so we'll comment on that at year-end.

Another question. Could you elaborate a bit more on some of this cost optimization where you were moving resources around? Does that mean that you can go well beyond $1 billion in ARR with limited additional hiring?

Yes. I mean, we run a cloud operations team and a dev team that formulates how we think about DevOps. We do regular assessments of where those engineers are spending their time. From time-to-time, we have folks that are really building capabilities that should build more appropriately into R&D. Some of these roles in particular were site engineers, and they were more focused on supporting specific customers, so we moved them into the cost of goods sold line on the income statement. This is pretty typical for us; we don’t like to see movement too much, but we do assessments on a regular basis with our accounting team to confirm those are all appropriately resourced. The way we run it, we have some flexibility in how we manage that team, and we can shift resources based on where they are needed. I think the team has done a good job in that capacity. That's just what happened in the quarter, and I flagged that because I wanted to help you all understand a little bit why the margin guide is a little bit below where we landed in Q1.

Okay, great. That's the last question. I'll hand it over to Mike for closing comments.

Well, thanks, everybody, for participating in the call today. We couldn't be happier with the start to the year. It was a great Q1. It was an incredible Connections. We're excited about the prospects for the rest of the fiscal year, and we look forward to seeing everybody over the course of the next few months and maybe at the end of Q2. So thanks, everybody, very much.