GWRE 2024Q4

Greetings, and welcome to the Guidewire Fourth Quarter and Full Year Fiscal 2024 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. As a reminder, this call is being recorded. I would now like to turn the call over to Alex Hughes, Vice President of Investor Relations. Thank you, Alex. You may begin.

Thanks, Paul. I'm Alex Hughes, Vice President of Investor Relations, and with me today is Mike Rosenbaum, Chief Executive Officer; Jeff Cooper, Chief Financial Officer; and John Mullen, President and Chief Revenue Officer, who is joining us to provide a year-end recap of adoption activity. 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, outlook, and targets, our future business momentum relating to our products, cloud deals, customer demand, operations, the impact of local, national, and geopolitical events on our business, our associate business plan and strategy, among 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 our press release and risk factors and documents we file with the SEC, including our most recent quarterly reports on Form 10-Q and our prior and forthcoming annual report on Form 10-K filed and 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. 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. And with that, I'll now turn the call over to Mike.

Thank you, Alex. Good afternoon, and thanks everyone for joining today. I'm thrilled to have the opportunity to report stellar fourth quarter results, capping off what was an incredible year for Guidewire and our community of customers and partners. This quarter marked five years at Guidewire for me and the results in the quarter and fiscal year feel like a clear validation of the hard work and determination everyone here has contributed to our cloud transformation. We have now established a consistent track record of customer program success with our cloud applications and we are seeing the maturity and reliability of our cloud platform continue to drive demand from new and existing customers. The referenceability of customers choosing Guidewire Cloud platform continues to grow and that reputation continues to drive demand, new sales and adoption, and ultimately customer program success and the associated insurance outcomes the P&C industry demands. The market momentum we've established is clearly reflected in strong ARR and fully ramped ARR growth. ARR was up 14% on the year, while fully ramped ARR accelerated to 19% as we continue to sign larger deals with more significant fully ramped value. We closed 16 cloud deals in the quarter and 42 for the year. John Mullen, our President, will go into more detail on cloud adoption, but I'll just say that the strength across these metrics is a result of the combined efforts of every single member of our global organization. The results this quarter and this year position us well to achieve our $1 billion ARR target this fiscal year. As we continue to drive cloud adoption, we are also seeing greater leverage in our cloud model. Guidewire Cloud platform is demonstrating greater scale and efficiency with subscription and support gross margins increasing 10 points to over 65% for the year. We feel very confident in our objective to achieve our long-term margin targets as we continue to scale the platform. We are also continually driving better overall company operational discipline and efficiency, generating non-GAAP operating profit of nearly $100 million and operating cash flow of nearly $200 million. We also expect to be GAAP profitable in fiscal 2025. These outcomes clearly demonstrate the power of the software as a service business model we have created here. Looking forward, we are excited to enter the new fiscal year with momentum. We continue to see acceleration in the number of conversations around cloud transitions and modernizations. Customers realize that they need greater agility in their core operations and based on our track record of referenceable success stories, we are distancing ourselves from alternatives. As a result, our pipeline continues to build and is very healthy going into the year. In November, we will be back in Nashville to hold our Annual Customer Conference Connections, which is attended by 3,000 members of the broader Guidewire community. This will give us another valuable opportunity to showcase the latest innovation at our platform and handle the opportunity for customer success. I'll finish by saying that this past year and these last five years sometimes seem like a remarkable achievement. We have taken a market-defining on-premise vertical software leader and re-platformed it to become a vertical software as a service leader. I have spoken to many people in the past few months. This achievement and our success was somewhat surprising. But looking back now, it all looks pretty logical to me. We made a straightforward plan that made sense, required nothing miraculous, and focused on execution, all the while ensuring that every single customer who chose to trust us never doubted their decision. We are not, and will never be perfect, but we will continue to prioritize our customers and the programs they run on our platform. We will continue to optimize our technical decisions for the long term and we will strive every day to earn the trust our customers place in us. We are right now very well aligned with our customers and in a unique position to help shape the future of the industry we serve. We continue to execute in the fashion we have demonstrated over the past few years, and I'm confident we will continue to hit the forward-looking objectives we set for ourselves. With that, I'll hand it over to John to provide a year-end perspective on the insurance industry and discuss in more detail around customer adoption and success on the Guidewire Cloud platform.

Thanks, Mike. Good afternoon, everyone. It's been a very successful year at Guidewire. We have the pleasure of serving a customer base that is both critical and resilient. This year, we saw property and casualty insurance navigate a convergence of pressures and continue to evolve with both the agility and precision with which they respond to inflation, the evolution of risk in the world, and the increased expectation of consumers and businesses. We remain very confident in the durability of our relationship with the market and optimistic regarding the pace of change that we can help drive with and forth P&C industry. Reflecting on the 42 cloud deals we did for the year, we closed 13 InsuranceSuite cloud deals in Q4, bringing our total InsuranceSuite Cloud deals for the year to 37. We also closed three InsuranceNow deals in the quarter. What we are seeing is the positive effect of a portfolio approach that is delivering a healthy balance across the business. We've been working hard to drive specific plans and accountabilities into markets, region, country, and line of business, and with specific carriers across all deal types. We added four net new customers in Q4 and saw continued strong win rates with insurers looking to modernize their core systems. A super regional personal lines carrier elected to adopt our full suite and broad selection of our data products in order to standardize on a modern core system and facilitate their growth ambitions. Argonaut Managed Services, a leader in excess and surplus, selected ClaimCenter to consolidate multiple claim systems and improve operational efficiency. Our track record and commitment to customer success were key factors in their decision. Preferred Mutual, a personal and commercialized carrier in the Northeast of the US, selected the full suite to leverage the Guidewire Cloud platform and its digital capabilities. And finally, Pearl Holdings, a single-state non-standard auto MGA, headquartered in Miami, Florida, selected InsuranceNow and Predict to modernize their core with an emphasis on claims. I highlight these net-new wins because they exemplify our ability to execute and compete across a broad range of carrier sizes and complexity. It was also a strong quarter for cloud migration activity with a total of seven InsuranceSuite cloud migrations. Five of the InsuranceSuite migrations included meaningful expansions beyond the scope of work we were addressing on-prem. One of the themes in the quarter was our customers' willingness to make bigger commitments on Guidewire Cloud, which was a key driver of our 19% fully ramped ARR growth. Notable in the quarter were deals that initiated as a single-product discussion and evolved into broader full suite outcomes. For example, a Tier-1 commercial insurer significantly expanded adoption of Guidewire Cloud platform for its scalability, total cost of ownership, and platform unity across policy billing and claims. The reference ability of our relationships and the power of full suite and data is resonating in the market. We saw healthy sales activity in both Asia-Pac and EMEA for the year. Our strength in North America really delivered in Q4. Looking at global deals by Tier, Q4 was fairly balanced with three Tier-1 deals, seven Tier-2 deals, and the remaining are coming from Tiers-3 and Tiers-4. Turning to our ecosystem. We are seeing continued momentum. There are now over 25,000 professionals from 38 SIs working with us today. And in the fourth quarter, the number of cloud-certified partner professionals from these firms increased 22% year-over-year to 9,500. The pace of uptake on our ski release training with this community affirms the SI shared commitment to the model. Similarly, our solution partner community continues to expand. Guidewire Marketplace now has over 215 technology partners. Finally, we saw strong results on customer programs in Q4. We achieved seven initial cloud go-lives on Guidewire Cloud platform in the quarter. We are seeing, as expected, significant increases in the number of cloud updates throughout the year, which speaks to the growing efficiency of our platform inside the customer environment. The services organization achieved higher-than-expected revenue and gross margins in the quarter. The team has been working hard to improve predictability and while we have more work to do, Q4 was a positive step forward. Successful customer outcomes are our primary objective and our services organization in collaboration with our SI partners, have worked well together in this last year to drive pace and predictability for our community. In summary, fiscal year '24 demonstrates strong execution and we look ahead to fiscal year '25 confident in our ability to continue to build momentum. With that, I'll hand it over to Jeff.

Thanks, John. The financial highlight of the quarter was the impressive combination of 19% constant-currency fully ramped ARR growth and a 20% cash flow from operations margin. Our ability to achieve sustainable profitable growth shows the value we provide to the industry. Now, let's get into the details. Fourth quarter ARR ended at $872 million, which is a 14% year-over-year increase on a constant-currency basis and ahead of our expectations. We measure ARR on a constant-currency basis and then adjust for year-end FX rates. This adjustment negatively impacted ARR by $8 million, bringing it down to $864 million. Fully ramped ARR, defined as the annual price outlined in our customer contracts, grew 19% year-over-year on a constant-currency basis. This fantastic result reflects the hard work we're putting in to win in the market and execute effectively across the organization. Total cloud ARR, which includes all of our cloud products and customers contracted to transition to the cloud, grew 28% year-over-year, accounting for 66% of total ARR. Total revenue for the year reached $980 million, exceeding our expectations due to strong performance across all revenue components. Our cloud strength was evident in subscription revenue, which totaled $477 million, a 36% increase year-over-year. It's exciting to see our subscription revenue lines progress, finishing the year just below 50% of total revenue. Subscription and support revenue was $549 million, up 28% year-over-year. License revenue was $250 million, which is a 6% decline year-over-year as we continue to move our on-premise customers to the cloud. Initially, we expected the decline to be closer to 10% year-over-year, but we benefited from stronger-than-expected true-ups during the year. Services revenue ended at $181 million, down 14% year-over-year as we allocated more implementation work to our SI partners and reduced reliance on subcontractors. Services revenue in Q4 was $51 million, up from a low of $38 million in Q2. We are pleased with how we concluded the year and anticipate modest year-over-year growth in services revenue in fiscal year 2025. Regarding profitability for the fiscal year, gross profit was $618 million, a 25% increase year-over-year. Overall gross margin was 63%, compared to 55% last year. Subscription and support gross margin was 65.5%, which reflects a more than 10 percentage point increase. Our investments in the cloud platform are leading to a more efficient cloud operations function as we provide industry-leading cloud service with an increasingly favorable gross margin profile. Services gross margin was 7%, compared to just below breakeven a year ago. Notably, in Q4, gross margin was 14%, bringing us closer to our longer-term margin expectations for this business. Operating income was $99.5 million, slightly above the midpoint of our outlook. The positive impact from higher-than-expected revenue was offset by higher employee bonus accruals due to the strong performance of key financial targets. Overall stock-based compensation was $146 million for the year, an increase of 2.5%. Operating cash flow for the year was $196 million. We noted at Analyst Day last year that we were at an exciting turning point in profitability and cash flow, and our progress on cash flow from operations and free cash flow significantly exceeded our expectations owing to strong collections. We finished the quarter with $1.1 billion in cash, cash equivalents, and investments. Additionally, we have $400 million in convertible debt maturing in March, which we expect to settle in cash. Now, let's discuss our outlook. For fiscal 2025, we anticipate ARR will be between $995 million and $1.005 billion, which translates to 16% constant-currency growth at the midpoint. Updating our forecast model to reflect current FX rates has negatively impacted our fiscal '25 outlook by about $9 million. We expect total revenue for the year to fall between $1.135 billion and $1.149 billion. Subscription revenue is projected to be approximately $642 million, which represents 34% growth, reflecting the strength of the cloud deals we secured in fiscal '24. Support revenue will decrease by about $3 million to $4 million year-over-year due to the continued migration of our installed base to the cloud, resulting in around $710 million in subscription and support revenue. As a reminder, support revenue is associated with term licensed customers, while for cloud customers, support is included in the subscription fee. We anticipate a slight decline in license revenue due to ongoing cloud migrations, partially offset by contract true-ups from our on-prem customer base. Our forecast for services revenue stands at around $190 million. We expect total gross margins for the year to be approximately 65%, with subscription and support gross margins around 68% and professional services gross margin near 12%. We are pleased with this progress as we strive to drive margin improvement. Regarding operating income, we project a non-GAAP operating income between $157 million and $171 million for the fiscal year, and GAAP operating income between negative $4 million and positive $10 million. Given the robust performance of the business, we can achieve our profitability goals and, in many cases, raise our targets while also increasing some operating expenses, particularly in R&D as we invest in the significant opportunities ahead to help insurers leverage modern applications for engagement, innovation, and growth. I expect R&D expenditure to rise by about 14% in fiscal '25. Sales and marketing expenses should grow slightly less than that, while G&A will increase in the mid-to-upper single digits. Cash flow from operations in fiscal 2025 is projected between $220 million and $250 million. Our CapEx expectations for the year are between $20 million and $25 million, including approximately $12 million for capitalized software development costs and $7 million for office build-out projects in India. Our Q1 outlook is detailed in our earnings press release, but I want to provide additional insights. Due to strong sales activity in Q4, we did not have many deals shift into Q1, so we anticipate typical seasonality in our first quarter, affecting sequential ARR growth expectations. We expect subscription and support revenue of around $167 million and services revenue of about $50 million. We foresee subscription and support margins between 67% and 68%, services margins around 11%, and total gross margins around 61%. Also, annual employee bonuses and commissions related to Q4 sales are paid out in Q1, which impacts cash flow. Consequently, we expect Q1 operating cash flow to follow a similar trend to what we witnessed last year. In summary, we are extremely proud of our performance in FY24, and we are on track to meet or exceed the targets we established during my first Analyst Day as CFO back in October 2020. We look forward to seeing many of you at our Analyst Day on October 10th in New York. Now, let's open the call for questions.

Thank you. We will now be conducting a question-and-answer session. Thank you. Our first question is from Ken Wong with Oppenheimer & Company. Please proceed with your question.

Great. Thank you for taking my questions. This first one for either Mike or John, can you provide a little color on the context of some of these fully ramped deals? Are we seeing this across the board with customers? Are these kind of one-off large deals? Would you say that these are typically kind of flatter upfront and steep in the back or fairly linear? Just any color to help us think through the dynamics would be fantastic.

Sure. I'll keep it brief before I hand it over to John. First, I want to clarify that there's nothing to infer about ramps from this. We're experiencing normal ramp structures and activities, and we'll share more details at Analyst Day. In relation to last year's comments about ramp structures and their effects on ARR, please don't read into this. We had an outstanding quarter in terms of bookings with strong deals overall. The deals were of reasonable size, resulting in a total deal value that contributes to a robust fully ramped number. I'm really proud of the team's execution, which highlights the strength of the business. That's the key takeaway for me—an exceptionally successful quarter driven by numerous great deals that resulted in that fully ramped number. John, do you have anything to add?

I want to point out that when looking at the last quarter, there are two key aspects to consider. One is that some of the larger lines of business have contributed, but more importantly, we are expanding our scope into additional areas. The team is becoming more focused on listening for and addressing business problems instead of just sticking to the initial scope. As a result, the strength of our suite is leading to more discussions, which was particularly evident in the Q4 deals.

Perfect. And then just a quick one for Jeff. Maybe kind of also building on the fully ramped number, guiding to about 16% in fiscal '25, I guess when we kind of compare that with a 19% fully ramped number, I guess, would it be wrong for us to assume that there's potentially an acceleration in the future or what's the right way to read that fully ramp versus what we're looking at in '25?

Yes, the fully ramped outcome certainly gives us confidence as we look at the durability of the growth. I'm not sure I would model in accelerations above kind of that 16% range, but I do think it kind of creates a bit more for us and a bit more visibility into the durability of kind of ticking above mid-teens a bit on the overall ARR growth side.

Thanks, Ken.

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

Hey, great. Thanks, and congratulations on the year's close. My first question is for either Mike or John. It seems you're experiencing a series of positive trends that feel stronger than what we see across the software industry. I would love to get your thoughts on the overall demand environment, your position in terms of cloud growth, and the competitive landscape, along with your observations as we approach the end of the year.

Sure. Thanks for the question. There are certainly a lot of factors that seem to be working in our favor. Firstly, the industry we serve is very resilient. Premiums are rising across the insurance sector, which aligns with our pricing strategies. Our contract structures are contributing to an increase in our annual recurring revenue due to the rise in direct written premiums. I also believe we are setting ourselves apart from alternatives, thanks to the successful track record we have built with our cloud products over the past five or six years. Although it's still a competitive market and we are competing intensely for every deal, we are securing a good share of those opportunities, which I believe is reflected in our strong performance over the quarters. We are also witnessing a notable strength in converting deals, as the opportunities we are pursuing are closing more often than we anticipated a couple of years ago. This reflects the trust and confidence in our platform, our programs, and our overall community. Collectively, our capability to implement these programs successfully contributes to the notable success we achieved this quarter. That's my perspective, and I'm sure John has additional insights to share.

Yes, while the industry is large by surface area, it's small by community. And to Mike's point, really the reference ability of the programs that we've been driving has provided a nice ability for that conversion rate. But I think the biggest tailwind we face is that chapter of moving from defending a cloud platform to really scaling and solving business problems with the cloud platform, as certainly, the industry has a tight convergence of IT needs and business needs that are no longer two different dimensions; they're merging together every day, and we're in a really good spot to help navigate that, and that's really what I think we saw over the course of this year.

Thank you for your insightful comments. Jeff, in the press release, you're highlighting cash flow, and I've noticed that the cash flow margin for fiscal '25 appears to be ahead of your target. Could you share more about the growing emphasis on cash flow and what factors are contributing to this positive conversion? Thank you.

Yes. We're really pleased with how the model is improving from a cash flow perspective. Ultimately, that’s the key metric for evaluating software companies, and we are satisfied with our progress. We've noticed some interesting dynamics related to the timing of revenue elements, which causes some differences between non-GAAP operating income and cash flow aspects. We will discuss this further at Analyst Day, but it highlights the strength of our model. This focus has been part of our strategy for several years, and as we refine our long-term model, we always kept this phase in mind. It's encouraging to see it come to fruition, and we will continue to assess our objectives against the targets we've set, which we still believe are very appropriate, and we'll elaborate on that during Analyst Day.

Thank you. Our next question is from Alexei Gogolev with JPMorgan. Please proceed with your question.

Hi, everyone. Mike, firstly, congratulations on the five-year anniversary and hope you managed to fight off those sparking beasts. Can I ask you a bit more about the demand environment, especially around commercial lines, because I've seen some data from Council of Insurance Agents, they were talking about some softness in commercial P&C. Are you seeing anything of that sort or are you winning more market share, which is not reflecting in sort of the dynamics that we're seeing for you?

Hey, Alexei, I want to thank you for the compliment. I appreciate it very much, and I'll let John answer your question about commercial lines.

All right. So Alexei, we believe that there may be some softening in the market for commercial lines primarily due to large commercial and property sectors. However, excess and surplus specialty as well as the middle market remain very dynamic in terms of rates. As we move forward, we are experiencing great success with our commercial lines opportunities. The London market has been very favorable for us; large commercial in North America, along with excess and surplus specialty, have performed well. Additionally, transitioning to enterprise data and making large-scale, sustainable core processing decisions transcends the cycles of hard and soft markets. It is crucial for large commercial carriers to continuously refine their pricing ability, product changes, market adjustments, and rating decisions, which is challenging without a modern core platform. We are confident in our ability to navigate the fluctuations of hard and soft markets, and we are actively identifying opportunities to accelerate our efforts.

Thank you, John. And Jeff, just a quick question for you. Can you elaborate on the benefits from the AWS contract to gross margins going forward? I think last time we spoke, you mentioned that there was some front-loaded R&D investment. As it sort of fades away, do you expect more benefits to gross margins?

Yes. We have a long-standing partnership with AWS, and while I won't dive into the specifics of that agreement, we do have certain incentives in the contract that we benefit from over time. The key aspect that contributes to our margin expansion is the investments we've made in the Guidewire Cloud platform and the efficiencies gained from that. I think it's more important to focus on the engineering teams that have worked hard to enable our margins rather than the specific details of the arrangement.

Thank you very much.

Thanks a lot, Alexei.

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

Hi, thanks for taking my questions. Mike, I wanted to ask you about just overall migration activity. How would you characterize kind of momentum there? Are you seeing kind of interest from customers who are on-premise? Is that starting to build? How do you think that plays out as we head into fiscal '25?

Yes, thank you for the question. I would say that it is gradually improving and developing. This is related to our proven success, the reliability we have shown, the success stories, and the customers who have transitioned. Customers are no longer facing a pioneering challenge regarding migration to Guidewire Cloud; instead, it is more about determining the right timing for their business considerations and planning with them, leading to this gradual progress. One of the strengths of Guidewire is our robust customer base, which presents us with opportunities to grow annual recurring revenue and assist those customers in becoming more agile. This process resonates with them, and while it won't all happen within a single year, it will be spread over several years, and we are prepared for that challenge. So, yes, it is steadily increasing, and we are quite pleased with the current status, particularly the balance between migration activities and new customers or new use cases for existing customers linked to migration; all aspects of the business are performing well for us at this time.

That's great. And maybe one for Jeff on the premium true-ups. You talked about some of the impact of the license revenue, but just curious kind of how that true-up is affecting the model more broadly in terms of ARR revenue, anything you can share to help kind of give context to kind of how that's impacting the broader model?

Yes. No, we saw a healthy backdrop of both CPI and DWP true-ups this year. It added a couple of percentage points to overall ARR growth above and beyond what we would see in a typical year. And we expect it to be pretty resilient looking into next year that would remain at slightly elevated levels. It was balanced, right? I mean, I think if you look at the overall true-up activity, there was proportionally more coming from the on-prem installed base. But given now the scale of our ARR in the cloud, we also saw a healthy amount coming from the cloud installed base, and so on an absolute dollars, it was pretty balanced between both on-prem and cloud.

Great. Thank you.

Thanks, Kevin.

Thank you. Our next question is from Dylan Becker with William Blair. Please proceed with your question.

Hey, guys. Appreciate the question here. Maybe going back to Jeff and John, the point on fully ramped ARR, seeing larger deals, and seeing more full suite adoption, is that a function? It's probably a little bit of both, but of increased willingness from those Tier-1 carriers who maybe look to adopt a bit more piecemeal, is that a step-functioning change in how they're looking at the ecosystem? Or I think, John, you made a point of better sales targeting being able to expand that scope. I'm sure it's a little bit of both, but maybe some additional color there. Thanks.

I would say this reflects our ongoing progress in sales. I wouldn't specifically link it to Tier-1 activity, though we have observed some healthy Tier-2 activity as well. The team has performed admirably, particularly in migration and possibly extending beyond the initial on-prem footprint. There is a growing recognition of the platform's maturity, which is reassuring customers and facilitating some larger commitments that have been delayed. I don't know if there's anything else you'd like to add.

The ability for customers to engage with one another and have meaningful discussions about the appropriate pace and structure of programs, as well as the value of the suite, is truly driving the momentum. I want to emphasize what Jeff mentioned. At this moment, I don't believe it’s limited to any specific tier. The Tier-1s are still engaged in customized, one-on-one conversations to determine the best size and fit for their needs.

Thank you, everyone. Mike, I'm curious if you've encountered discussions regarding the current labor constraints in our ecosystem. This seems to be an emerging topic, particularly how it relates to capacity and the skills gap, and whether it's influencing the modernization efforts of core systems. Thank you.

Yes, what you're describing certainly comes up. I think it appears sometimes in the context of attracting younger people to work in the industry and providing them with systems that meet their expectations about how computer systems should function. It also relates to the development teams and the tasks you are asking them to handle, including whether you can retain individuals capable of managing legacy systems that have been in place for sometimes 20 or 30 years. This is definitely a recurring theme. The entire industry is continuously seeking to become more efficient and accomplish more with the existing workforce to operate more effectively. The IT agility, operational efficiency, and insights we can help provide assist in all these areas. So, it is certainly an important factor, among many others, in the overall effort to modernize the industry.

Thank you. Our next question...

Thanks, Jeff. Thanks a lot.

Our next question is from Rishi Jaluria with RBC. Please proceed with your question.

Thank you for taking my questions. It's great to see the continued momentum in the cloud transition. I have two questions. First, considering that some customers are now live on the Guidewire Cloud platform and are approaching full ramp-up, what have you observed regarding the spending behavior of customers who have fully migrated? Specifically, I'm interested in their willingness to expand. For instance, how does the net revenue retention for on-premise Guidewire InsuranceSuite Cloud customers compare to that of similar customers on the InsuranceSuite Cloud when they are fully ramped? I have a quick follow-up as well.

I'm not going to go into the net renewal rates of the different cohorts. We've observed a healthy expansion within the cloud installed base, which includes growth related to how customers utilize the Guidewire Cloud platform and their requirements for different environments that boost platform spending within Guidewire. Additionally, there may be an increase in adoption of various products from our data and analytics suite. It's still early to assess the overall attachment rate, but it’s something we are monitoring. We've also seen some growth in direct written premiums, which influences our thoughts on net renewal rates for the cloud installed base. I believe there is greater potential in the cloud, especially when considering the future marketplace, compared to on-premises, although it’s probably too early for substantial comparisons.

It's progressing very well. This component of our business model is going very well. While I won't say it's exactly according to plan and we don't track it that closely, it aligns with my expectations and is tied to our track record of success. If we help these customers succeed, they will want to engage with us further and identify other core system use cases that make sense for expansion, which is based on the success we can achieve with the program and the relationships of the various applications within InsuranceSuite. Jeff mentioned additional opportunities with the platform, partners, data, and analytics, which will increasingly be part of our story going forward. Currently, things are going according to plan. It's an insightful question, and while it’s early, everything is going very well.

Okay, I understand. That's very helpful, thank you. Mike, in your opening remarks, you highlighted some of the success with InsuranceNow. Can you discuss the improving momentum in InsuranceNow over the past year? What factors from both the industry and product perspectives are contributing to this? Additionally, can you explain the potential progression for insurers who start with InsuranceNow but may eventually need to transition to InsuranceSuite Cloud? What does that upgrade process look like? Thank you.

We have previously considered the core strategy for InsuranceNow and InsuranceSuite during our cloud transformation. We decided to keep both applications and ensure they utilize common infrastructure while continuing to invest in both. This decision reflects our commitment to our customer base, which is very satisfied with InsuranceNow. There is a solid group of insurance companies in North America where InsuranceNow is a great fit, and we are quite competitive in that area. It is an excellent product and an important business unit for the company. Over the past couple of years, its growth is a result of our clear commitment and investment in it, which helps us outperform competitors in direct comparisons. Regarding transitioning to InsuranceSuite, we focus on ensuring the customer starts on the right platform, as moving from one to another involves substantial implementation efforts. Therefore, we aim to get that aspect correct from the outset. We can add more value through our additional analytics and data offerings. By migrating the infrastructure to the Guidewire Cloud platform, we can improve our margins and operate more efficiently, which benefits us and our InsuranceNow customers. Ultimately, we are dedicated to these customers and committed to ensuring their success, which has been working well for us.

Wonderful. Thank you.

Thanks, Rishi.

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

Hey, guys. Thanks for taking the question. Good to see the momentum with the net new customers. I think it was four during the quarter. Mike and John, any common themes on those customers that you talked about during the prepared remarks, either in terms of the systems you're replacing or common challenges that they face that precipitated the decision to move in Guidewire?

I believe a primary theme is the long-standing relationships we've built with our customers. We've maintained close communication and engaged with them about various new opportunities, focusing on their business challenges. The key theme revolves around the potential for growth and the necessity to act quickly, paired with the capability to enter and exit markets with appropriate products and pricing. In some instances during the quarter, as I noted in my prepared remarks, initial discussions regarding claims or billing quickly evolved into broader conversations. This shift was primarily due to the trust in our execution and early commitments. Thus, I would highlight two significant themes: first, the urgent pressure to compete swiftly is very real, emphasizing the importance of being close to our customers to facilitate timely discussions. Second, due to our platform's current confidence, we can expand our offerings. I mention this because this expansion may displace some relatively recent system implementations, yet we feel assured in our ability to handle those transitions effectively during the sales process.

Got it. Very helpful. Thank you.

Thank you.

Thank you. Our next question is from Joe Vruwink with Baird. Please proceed with your question.

Hi, great. Thanks for taking my questions. The difference between 19% growth in fully ramped ARR and the 16% growth you were talking about a quarter ago, the implication for the net-new value that booked in 4Q, that's just very far above your original plan it would seem. And I wanted to put a finer point on what drove that. John just made the comment that you're getting more full suite deals. Did you originally pencil in that some of these deals in 4Q were maybe modules and not full suites? I think win rates came up, did that skew more favorable, and you ended up grabbing some deals maybe you weren't expecting? And then I wanted to ask just does any of the deals perhaps close a bit earlier so there's simply a timing factor behind the 4Q strength?

Yes, you mentioned some important aspects. We had a very strong fourth quarter and tried our best to maximize our performance, but nothing caught us by surprise in terms of deal closures. It was quite typical in that regard. We're noticing a willingness to start small and gradually increase commitment, which we didn’t see two years ago. There seems to be a growing readiness to make substantial commitments right from the beginning. From the insurer's standpoint, they can leverage their negotiating power effectively and feel confident in our platform's ability to support large programs. This willingness is more evident now compared to two years ago. Although we experienced strong results last fourth quarter, we didn’t assume it was a trend because it was a particularly strong quarter for us. We have now followed that up with another solid fourth quarter.

That's great. I wanted to clarify something regarding the larger average deals and customers committing fully from the start. Many people might think that these deals are primarily from larger carriers, but I believe I heard correctly that 13 out of the 16 cloud deals this quarter originated from Tier-2 to Tier-4 customers. I'm curious if the strategy you've outlined is resonating more with smaller markets than it has in the past. Does this potentially enhance your ability to gain referrals in the future? You have a strong presence in Tier-1 and Tier-2, but are you noticing significant progress in the lower market segments?

I'd say, first of all, Tier-2 encompasses a wide range of carriers. It can actually be divided into three or four different segments, so it's encouraging that two of the deals we discussed are towards the higher end of Tier-2. We're seeing positive responses at that level and even further down the market. Now, regarding Tier-1, it still stands out with its own specific proof points. We focus on conducting proofs of concept and diving deeply into technical aspects. The feedback I've received is that the more involved a customer gets, the more favorable the outcomes from our analyses are. Tier-2 has significant referenceability, and we've even seen some movement of professionals across carriers, which enhances relationship portability, a very powerful asset. As we engage deeper with Tier-1s, participating in proofs of concept and in-depth discussions, we are moving beyond just technical validation. As Mike mentioned earlier, we are now focusing on aligning with the best business timing and optimizing the outcomes related to their existing work and the market drivers they are looking to enhance. Overall, things are progressing well. Tier-2 conversations are very transferable across the different segments, while discussions in Tier-1 remain focused and unique to each carrier.

That's great. Thank you very much.

Thank you. Our next question is from Alex Sklar with Raymond James. Please proceed with your question.

Great. Thank you. John, I want to follow up on Dylan's question about Tier-1 customers, but I’d like to frame it a bit differently. Has there been any change in the discussions that suggest a greater willingness among the leadership to standardize across all commercial lines of business or all personal lines of business, or does it still seem like decisions are being made separately for each line of business? Thanks.

It's very specifically still a line of business by line of business conversation. And we're okay with that because we know the depth of proof points, we're going to have to dig in and improve it out, and expand from there, which gives us a tremendous amount of long-term opportunity. But for good or for bad, and it is, I think, good because it allows us to go deeper. It's very specific to lines of business or specific products?

Okay, great. Thanks. And then, Jeff, one for you. Just the smoothing of quarterly bookings is something that you've kind of had a lot of success with over this past year, landing earlier in the year upfront, any change to how you're thinking about seasonality as we go into this upcoming year?

Yes, we put a lot of effort into that and then experienced a strong performance in Q4. I believe we observed typical linearity for us. The team worked hard in Q1, Q2, and Q3 to position us strongly. We are making sure not to overly depend on Q4s, considering the size of our sales team and the vertical we focus on. The team is doing an excellent job, and I expect this year to be similar.

I'll add one point about linearity. It has largely been due to the team's execution and focus on our smoothing, but the real advantage of linearity is aligning our financial activities more closely with those of our customers and the market. This helps make Q2 an increasingly important quarter for us and improves our planning from the customer's perspective.

Thank you, both, for that.

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

Hey, good afternoon. Thanks for taking the question. I just wanted to touch on the partner community, especially on the services side of it. Our conversations continue to talk about improving relationships there and a lot better communication back-and-forth, but I guess, John, where do you feel like you're at in terms of the plan you've implemented? Obviously, knowing both sides of the house now very well, is there still more work to be done, or is it just a matter of continuing to execute on the plans in place and just sort of incremental changes here and there?

Thank you for the question. Looking ahead, our work is largely more of the same. However, as we explore regional specifics, our next focus will be on Europe and Asia-Pacific, particularly Japan, which have unique needs and requirements for partnerships. We are collaborating closely with our Managing Directors in these regions to ensure we have the appropriate strategic plan for market entry and an effective services plan for collaboration. The core elements of how we collaborate on programs remain unchanged, and we are committed to ensuring that the system integrators can lead these initiatives to enhance scale and predictability within the community. Overall, we are pleased with the progress made over the past year.

Okay. Yes, very helpful. And then maybe dovetail in a little bit on the ability to expand more quickly as more customers are on GWCP, when we look at it from sort of the marketplace and some of your technology partners out there, how are you balancing that element of cultivating a lot more partners, getting into very specific use cases or even very regionally dependent items versus building out more of that internally, now that you have the majority of your customers either on or on the path to being on essentially one version of the platform?

This is a challenging strategic question. I believe our goal is to create an ecosystem that our customers expect from us as a vendor. They want options and for Guidewire to offer solutions that are open enough to allow safe, secure, and reliable connections to the cloud system we provide. We will have clear goals regarding what we develop, sell, and deliver directly, and while we won't be able to do everything, we certainly plan to do more. We are strategically positioned to offer increasing value to our customers in this industry and will work on a product strategy that we intend to communicate openly. There may be times when our offerings overlap with those of partners, which can create a dynamic that benefits customers using Guidewire. Ultimately, our focus is on fostering a community of customers on our cloud, which will in turn create significant opportunities for insurtechs and technology partners to connect with Guidewire and develop integrated applications. This, I believe, will enhance our entire ecosystem. Managing and addressing every specific use case can be complex, but at a high level, this outlines our approach.

All right, great. Thank you.

Thank you. Our next question is from Aaron Kimson with Citizens JMP. Please proceed with your question.

Great. Thanks for the questions. Would it be fair to classify the current state of the P&C end-market as a bit of a golden age where your customers are simultaneously in a robust hard market and have high interest rates to reinvest the flow? So, how do you think about the sustainability of the end-market strength as it flows through to Guidewire in on both the hard market piece and if we start to see rate cuts?

I really appreciate the resilience of this industry. While there will be both hard and soft markets, my main goal is to provide agility to this industry. I aim to help our clients operate their businesses more efficiently, make quicker decisions, and adapt to changing dynamics swiftly, which is something that our core systems and Guidewire can accomplish in a distinctive manner. This market has a clear need for modernization, and its durability is a major advantage. Although the insurance industry outlook may be improving, I don't want anyone to think that we foresee a time when this reverses. There is a significant opportunity to help modernize the industry, which I believe will continue to grow steadily over the next 10 to 20 years. This presents a valuable opportunity for Guidewire. Regardless of current conditions, whether regarding interest rates, risk, or premiums, this industry will remain durable and will continue to need modernization. My focus for Guidewire is on how we can serve this industry over the next decade or two.

That's really helpful. Thank you. And then the second question I have is, it's now been 9.5 months since you talked about wanting to be more opportunistic around M&A. You spoke today and last quarter pretty poignantly about organic product investments, what are you seeing in private market valuation expectations? And has your outlook on organic versus inorganic investment changed over the last few quarters? Thank you.

Yes, we are definitely in a better position to seriously consider mergers and acquisitions compared to the past. Our business is getting stronger, and our customer base is growing. The increasing stability of our business allows us to explore inorganic growth more feasibly. However, we are being very cautious. We want to ensure that any potential acquisition aligns with the right price, technology, culture, and team, and fits well with Guidewire. We believe we have something unique at Guidewire as a software company, and we don't want to jeopardize that, so we are approaching this carefully. While we are more open to opportunities and actively looking, we are also quite selective, ensuring that we execute any potential deal correctly. I also want to emphasize that I have a strong confidence in our ability to build products at Guidewire. We have demonstrated our capability to develop software effectively over the past five years. Therefore, in certain areas, we may choose to grow organically, which might take some time, but I am confident we will succeed. That's my perspective on the situation. Although we are open to M&A, it is not a necessary step for us to achieve our long-term goals.

Great. Thanks, Mike.

Thank you.

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

I just wanted to say, thank you to everybody at Guidewire who put in all the work to deliver a great year. I appreciate everybody joining us on the call today and look forward to seeing you if possible at our Analyst Day in New York or maybe Connections a little bit later in the year. So thanks for joining, everybody.

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