GWRE 2023Q4

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

Thank you, operator. Good afternoon, everyone. I'm Alex Hughes, Vice President of Investor Relations. And with me today is Mike Rosenbaum, Chief Executive Officer; and Jeff Cooper, Chief Financial Officer. A complete disclosure of our results can be found in our press release issued today as well as in our related Form 8-K furnished to the SEC, both of which are available on the Investor Relations section of our website. Today's call is being recorded, and a replay will be available following the conclusion of the call. Statements made on this call include forward-looking ones regarding our financial results, products, customer demand, operations, the impact of local, national and geopolitical events on our business and other matters. These statements are subject to risks, uncertainties, and assumptions and are based on management's current expectations as of today and should not be relied upon as representing our views of any subsequent date. Please refer to the press release and risk factors and documents we file with the SEC, including our most recent quarterly report on Form 10-Q and our prior and forthcoming annual reports on Form 10-K filed and to be filed with the SEC. For information on the risks, uncertainties and assumptions that may cause actual results to differ materially from those set forth in such statements. We also will refer to certain non-GAAP financial measures to provide additional information to investors. All commentary on margins, profitability, and expenses are on a non-GAAP basis unless stated otherwise. A reconciliation of non-GAAP to GAAP measures is provided in our press release, and a reconciliation of additional data is also posted in the supplemental on our IR website. With that, I'll turn the call over to Mike.

Thank you, Alex. Good afternoon and thanks everyone for joining today. I want to start the call by expressing sincere appreciation to everyone on the Guidewire team for all of their hard work and determination these last few years. Pivoting a software company, leading its category to a new cloud delivery model was never going to be easy, but I think that if we're being honest, sometimes it felt harder than expected. However, the culture of this company and the determined approach to steady and daily progress all contributed to and culminated in what ended up being a fabulous result for us this fiscal year. The fourth quarter sales results were unprecedented and validate that we are very much on the right track. We are steadily building a franchise that will have a lasting and positive impact on the P&C insurance industry and will produce durable, profitable, long-term growth that is commensurate with a vertical market leader. We closed 17 cloud deals in the quarter, bringing our total for the year to 37. We finished the year at $763 million in ARR, up 15% and just under $900 million in fully ramped ARR, up 17%. And something that I'm particularly proud of, we finished the year at a positive operating margin, significantly ahead of our plan. Underlying these results is a growing acceptance in the industry that the cloud solution we have built, the geological next generation platform capable of supporting the P&C industry's requirements, goals, and aspirations. We are uniquely positioned to be the industry's innovation platform and are now working with carriers of all sizes all over the world to help them engage with customers in new and more efficient ways to innovate and respond to market dynamics quickly with new products and distribution channels and to optimize their operations to help manage through a very challenging business dynamic. The financial results this fiscal year clearly demonstrate our market position and sense of conclusion to what I would say was our cloud transformation. We are very clearly now the leading cloud platform serving our industry, and this position affords us the opportunity to redirect our focus towards the products and innovation that enable insurers to engage, innovate and grow efficiently. As I said, it was an incredible end to an incredible year, and I want to call out several key takeaways that are important for us strategically. First, we saw a broad-based strength for the insurance suite on the Guidewire cloud platform. We made notable progress up market with Tier 1 insurers. We saw momentum in all key geographies and continued to see balanced momentum in both new logos and on-prem to cloud migrations. The sales success this quarter is a great validation of our platform and ecosystem-centered approach and bolsters our confidence in our go-forward position in the market. Sales highlights in the quarter include phenomenal progress with Tier 1 insurers, closing 11 Tier 1 deals this quarter. This includes a win at Progressive Insurance, one of the leading insurance brands in North America, where our partnership is specific to their non-personal auto lines of business and a full suite win at Allstate Canada. Based on the success this quarter, we now have some form of core systems relationship with 13 of the top 15 insurers globally, including 12 with Guidewire Cloud, and with exciting potential to expand these relationships over time. This fact validates the strategic focus that we have always placed on this specific segment of the market and its very demanding and unique set of requirements. We also drove further global expansion of GWCP with three wins in Europe and two in our Asia Pacific market. This international success was highlighted by a major commitment from IAG, a leading Australian insurer, to adopt policy center on Guidewire Cloud platform. This is a tremendous validation of our platform approach combined with the local insurance content required to ensure Guidewire is the right choice in every key market we serve. As I've mentioned in previous calls, we continue to see signals from the market that there is opportunity for us in competitive takeouts. And in Q4, we completed an agreement with West Bend Mutual Insurance to move their claims processes to Claim Center on the Guidewire cloud platform. Competitive displacements are rare in our industry, and I believe our recent momentum in this area speaks to our track record strength of platform and growing market alignment to our vision. It was great to see an insurer now achieve a competitive takeout at a Tier 3 insurer, which represented its largest win in the last five years. As I mentioned in last quarter's call, P&C insurers are working through a challenging and complex environment that has stressed almost every insurance company in the world. The decision to embark on a core transformation in the midst of this market dynamic is consequential, and I believe supports the fact that our relationship with these carriers is highly strategic and expected to last decades. It was very gratifying to see so many of the deals we were working on this quarter close, and I look forward to driving the follow-through expected of us based on the trust that they have placed in our company. Turning to adoption, we continue to make progress in cloud deployments with 13 go-lives on the Guidewire Cloud Platform in the quarter, and we enter our new fiscal year positioned for continued success. Supporting this momentum is a healthy and growing ecosystem of SIs, who continue to be valuable partners as we transition the industry to cloud. We finished the quarter with over 23,000 Guidewire consultants in our system integrator ecosystem, and over 8,000 of these are now cloud certified, a total that grew 53% this fiscal year. Additionally, we continue to drive more efficiency in our cloud product and company overall. Jeff will talk more about this in a minute, but the significant improvements we are driving in cloud efficiency, along with better operating leverage, means we crossed back into positive operating margin this year. The work that Diego Devalle and our development teams are doing to not only ensure we're building out a secure and reliable service but also beat their efficiency targets was tremendous. This is a meaningful milestone that we were able to achieve ahead of plan, and it gives us increased confidence that we will continue to grow steadily into our target model. Finally, our pipeline entering fiscal '24 is healthy. As we continue to enhance the capability of our platform with each release, as we continue to grow our ecosystem of partner applications on our marketplace, and as we continue to hone our analytics and data offerings, the value proposition we offer to our customers improves, and our competitive position strengthens. This sets us up well for the new year and gives us a clear path to our fiscal '25 targets of $1 billion in ARR and 14% non-GAAP operating margin. Jeff will talk more about our deal dynamics and how they translate to ARR and fully ramped ARR. But coming out of a tremendous Q4, we feel great about the business, our pipeline, the success customers are seeing in our platform, and how we are tracking towards our long-term targets. Last comment before turning it over to Jeff. While we are proud of the work we have done to put us in a position to hit our financial targets, we are more proud of the potential we've created to meaningfully and positively impact the industry we serve. Our position as the leading cloud platform for the P&C industry affords us the opportunity to now amplify our focus on the business processes and decisions that drive improved insurance outcomes. We can legitimately improve the efficiency of the broader industry, which ultimately helps people, families, and corporations better manage and transfer risk. I'm very excited about this potential and I'm confident in sitting on behalf of everyone at Guidewire that we are all motivated to continue driving this mission forward. With that, I'll turn it over to Jeff to discuss the financials.

Thanks, Mike. Fourth quarter ARR ended at $761.4 million, up 15% year-over-year on a constant currency basis ahead of our expectations. As a reminder, we measure ARR on a constant currency basis throughout the year and then update ARR for year-end FX rates. Making this update modestly impacted ARR by $1.1 million, resulting in ARR of $762.5 million. This outcome was ahead of our expectation due to very strong sales activity in the quarter. As Mike noted, this Q4 saw tremendous execution and was our largest quarter ever. Fully ramped ARR, which is defined as the fully ramped annual price outlined in our customer contracts, grew 17% year-over-year on a constant currency basis. This is a meaningful acceleration compared with 14% growth last year and again, is a reflection of the better-than-expected Q4 sales activity. Our sales activity in Q4 is a validation of our investment strategy as we work to modernize this industry. Total Cloud ARR, which includes ARR for all of our cloud products and for customers that have contracted to move to the cloud, grew 28% year-over-year and comprised 59% of total ARR. Total revenue for the year was $905 million, ahead of our expectations due to stronger performance across all components of revenue. Notably, cloud strength continues to be visible in subscription revenue, which was $352 million, up 36% year-over-year. It is exciting to see the progression of our subscription revenue line. In 2018, our subscription revenue was just over $30 million, primarily from acquired products. Since that point, we have delivered a five-year CAGR of 60%. Subscription and support revenue was $430 million, up 25% year-over-year. Turning to profitability for the fiscal year, which we will discuss on a non-GAAP basis, gross profit was $495 million. This was up 18% year-over-year. Overall gross margin was 55%, compared to 52% a year ago. Subscription and support gross margin was 55%, an 8 percentage point increase over last year, driven by margin improvement on our subscription line. We are delivering on the expected benefits associated with running a cloud platform at scale. Services gross margin was just under breakeven, compared to positive 3.5% a year ago. Notably, in Q4, services gross was positive 10.5% compared to negative 6.4% a year ago. This is due to the multi-quarter strategy that we have been talking about for some time that includes moving away from fixed bid arrangements, lowering our reliance on subcontractors, and increasing overall services utilization rates. We are pleased with our progress here and expect this to continue into FY '24 and beyond. Operating income was $11.7 million, better than our guidance range due to higher-than-expected total revenue, strong expense management, and better-than-expected services gross profit. Overall stock-based compensation was $143 million for the year, up 4% and a little higher than our expectations due to low employee attrition levels. Share repurchase activity in 2023 more than offset the effects of stock-based compensation dilution. Total shares issued and outstanding ended at $81.4 million compared with $84.1 million ended last year. For the year, we bought 4 million shares at an average price of $64.78 per share. Operating cash flow ended the year at $38 million. We are pleased with our collections in the quarter. We ended the quarter with $927.5 million in cash, cash equivalents, and investments. After multiple years of strategic investment in our business to drive our industry's adoption of cloud core systems, a key priority in 2023 was to drive efficiency and margin expansion. We are pleased to see strong progress with key profitability measures this year. We are confident in the long-term cash generation potential as we have established our cloud leadership and accelerated our market-leading position. Now let me turn to our outlook. For fiscal 2024, we expect ARR of between $846 million and $858 million, representing 12% constant currency at the midpoint. In FY '25, we expect ARR growth to accelerate to 16% to 17%. The driving force behind these growth rates are committed ramps embedded into our cloud contracts. As I've already noted, fully ramped ARR grew 17% this year. This is the highest growth on this metric since 2019. When we look at the shape of the ramps for deals sold in fiscal 2023, we see a pronounced acceleration of annual fees in year three, which is our fiscal 2025. Total revenue for the year is expected to be between $976 million and $986 million. We expect that subscription revenue will be approximately $471 million, representing 34% growth. Support revenue will decline by about $8 million year-over-year as a result of the continued migration of our installed base to cloud, resulting in approximately $541 million in subscription and support revenue. As a reminder, support revenue attaches to term license customers for cloud customer support activities included in the subscription fee. We expect license revenue to decline due to steady progress on cloud migrations. Our outlook for services revenue is approximately $200 million. We are shifting more services work to our partners who have made large investments to align with our cloud approach. This approach allows us to work together with our partners to standardize this industry on the Guidewire Cloud Platform. We expect total gross margins for the year to be approximately 60%. Subscription and support gross margins to be approximately 59% and professional services gross margins to be approximately 15%. We are pleased with this progression as we work to continue to drive margin improvement. With respect to operating income, we expect an operating income of between $62 million and $72 million for the fiscal year. We expect growth in operating expenses to continue to be muted in fiscal year 2024. Cash flow from operations in fiscal 2024 is expected to be between $95 million and $125 million. Our CapEx expectations for the year are between $20 million and $25 million, including $15 million in capitalized software development costs. Our Q1 outlook can be found in our earnings press release, but let me provide a bit more color. Given the strong sales activity in Q4, we did not have many deals slip into Q1, so we expect typical seasonality for our first quarter, which impacts sequential ARR growth expectations. We expect subscription and support revenue of approximately $123 million and services revenue of approximately $43 million. Also, annual employee bonuses and commission expenses related to Q4 sales are paid out in Q1, which impacts cash flow. As a result, we expect cash flow from operations to follow a similar pattern to what we experienced last year. Finally, let me make a comment about our FY '25 targets that we have been tracking for some time now. We will address this in more detail at our Analyst Day, but I wanted to make a comment quickly here. As Mike noted, we remain focused on achieving our target of $1 billion in ARR, and the strength of Q4 sales activity demonstrates the path to achieving that goal. Total revenue is also tracking to our prior range. On the margin side, we're progressing a bit ahead of plan that we discussed at the last Analyst Day, and our expectations for subscription and support gross margin, total gross margins, operating margins, and cash flow from operations margins for fiscal 2025 are now expected to finish closer to the high end of previously discussed ranges. We are thrilled with the progress we made in FY '23 to allow us to deliver increasing confidence towards our long-term targets. We have built a tremendous cloud company at Guidewire, and I want to give special thanks to the finance team for helping Guidewire manage through what has been a complicated business model transition. In summary, we're proud of what the team was able to accomplish in fiscal 2023 and are excited for what fiscal 2024 will bring. With that, let's open the call to questions.

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

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

Yes, we're very pleased with the activity we observed in Q4. Our cloud contracts often involve several years of committed fees, which we refer to as ramps. The structure of these ramps can be influenced by various factors, such as the rollout schedule of our insurers, their implementation strategies, and the business case supporting that investment. In the previous quarter, we expressed excitement about the activities and the conditions in the market, and while we're working on some of these ramps, they are taking a bit longer to mature. My main focus is achieving an appealing fully ramped value, and I was very pleased with the activity during the quarter that contributes to this goal. This also supports our fully ramped ARR growth of 17%. Upon reviewing the cohort analysis and the deals driving the activity in Q4, we did identify a somewhat slower development that affected our forecast regarding how much ARR will be recognized from the backlog in FY '24. However, we anticipate significant acceleration in FY '25, providing us with a clear perspective on the longer-term targets we discussed. Overall, we are excited about the groundwork being laid for FY '24 and FY '25.

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

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

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

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

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

Thank you for the question. It certainly depends. I would say part of it is some frustration with existing vendors. This is not limited to one; there are several installed vendors involved. I'd say there is some frustration around this. However, that frustration might be better understood in the context of our innovation vision and the track record we have established with our platform and the successful implementations that are now operational. Reflecting on my four years at Guidewire, there has been a notable shift in how we present a vision and collaborate with companies to sell it, complete projects, implement it, and have it running smoothly. This has now become more common, and we feel very confident about it, as do the system integrators. This alignment with our vision highlights the difference between the experiences these companies are having with other vendors. We have observed this trend for a couple of quarters now and felt it important to recognize that this represents a reasonable redefinition of how we view our total addressable market. While you might see Guidewire as only targeting legacy systems, if you broaden that perspective to include systems that are modernized but not to Guidewire's standards, it signifies a substantial positive change for us. Each quarter, as we see these examples, we become increasingly excited, and we look forward to welcoming more customers into the Guidewire ecosystem.

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

We are feeling increasingly confident in identifying everything necessary to ensure smooth execution of these projects. We are eager to share our expertise and insights with the SI ecosystem, which will allow a larger group of people to assist in successfully carrying out these migrations. While I wouldn’t say this will impact our pipeline or business run rate, it does signal our confidence in these programs, allowing us to extend them to partners and develop specialization with them to ensure we can adequately meet demand in the coming years. It has been encouraging to see a balance in our bookings over the last few quarters between new business and migrations of our existing customer base, which is progressing well. I appreciate you recognizing the program we launched this quarter.

Thanks, and congrats on the quarter.

Hey, thanks a lot.

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

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

Yes, I think it's two things. First, as Jeff mentioned, we have clear visibility into what we internally refer to as the waterfall, which includes contracted ARR that will contribute to the model based on existing agreements. Jeff explained that the progress of the ramps we've already completed provides good insight into what we can anticipate in '24 and '25 and beyond. We also incorporate projections based on the pipeline we see for fiscal '24, which informs the guidance we provided. It's crucial to understand the strength of our business and our current performance, particularly noting the 17% growth in fully ramped ARR, and to evaluate our confidence in the fiscal '25 targets. Given the ARR flow projected from the rents for fiscal '25, we feel secure in maintaining those targets, which indicates an acceleration in year-to-year ARR growth. This visibility into future contracted revenues is somewhat unique to our business model, and we've had an excellent year in terms of bookings, successfully securing deals and significantly increasing our fully ramped ARR this year.

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

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

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

Thank you.

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

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

I will briefly address this and then let Jeff add his thoughts. In my opinion, expanding margins will occur through increased cloud sales, continuing to close more cloud deals, and gradually ramping those deals to their full value. We will also keep enhancing the efficiency of our cloud platform. It’s a combination of these factors. We're growing our top line while managing fixed headcount expenses very carefully. Additionally, we are continuously optimizing our services to make the platform more efficient with each period and release. Together, these factors will drive improved margins. I want to clarify that our progress doesn’t rely on retiring older versions of the cloud. We plan to work closely with customers to migrate them to our Guidewire Cloud platform. However, as I have mentioned in previous calls, our targets are not dependent on these transitions. We are committed to supporting those customers during this process while also achieving our margin growth and executing the necessary engineering projects for efficiency. That’s how I view the situation.

Yes. I would like to add that as we navigate this transition, we initially focused on some of the earlier cohorts to understand their cloud needs, which led to the development of the Guidewire Cloud Platform. We standardized our customers on this platform, and we're now in the process of scaling it. As we've mentioned previously, we invested in building a cloud operations team to ensure the success of these early cohorts. Now that we are scaling the platform, we can take advantage of that investment. We do not need to increase our cloud operations staff because we've anticipated this demand and are now experiencing the expected scale benefits. Overall, things are unfolding as we anticipated. Another aspect to consider is the dynamics of ARR and cash collection cycles. We have noted a strong increase in FY '25, particularly when examining the deals sold in FY '23. Subscription revenue is normalizing under ASC 606, and we are seeing robust and sustainable growth in subscription revenue. The midpoint of our guidance suggests continued growth of over 30 percent in subscription revenue, which is also significantly contributing to our margin expansion.

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

Yes. John has been a fantastic addition to our leadership team. I would also mention David Laker, who has joined us and has been a significant asset, along with Michael Mahoney, who has also greatly enhanced our leadership. We are very pleased with the customer aspects of our team. Additionally, I credit Christina Colby, our Chief Customer Officer, for her efforts in ensuring the success of our projects. I am very confident in our team and the innovation and energy they have brought to the company. Their contributions are vital, as is the maturity of our product and the overall experience we have gained as an organization in navigating these projects successfully. We have previously discussed the nature of conversations with insurance buyers, who are often hesitant to adopt new programs until they see successful examples from others. However, we are now witnessing a shift, as evidenced by the increasing number of Guidewire Cloud customers and the steady growth in successful production launches each quarter. This experience plays a crucial role in building the confidence necessary to close these deals. While it's certainly due to John and our enhanced team, many factors contribute to this success. I would like to emphasize that John has prompted us to think more critically about the insurance-specific value we can incorporate into our products and solutions. We have dedicated a significant amount of time and effort to creating a platform that is functional worldwide and can efficiently scale for Tier 1, Tier 2, and Tier 3 insurers globally. Although we are not finished, we have reached a stage where we can refocus on innovations that improve claims processing, underwriting risks, and leveraging the data and analytics generated by the system. John has brought valuable expertise regarding the insurance industry and what can significantly impact insurance carriers worldwide. I believe this encapsulates my sentiments about the team and the multitude of factors that led to our success this quarter.

Great. Thank you.

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

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

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

Yes, I would add that last quarter we mentioned being cautiously optimistic about our ability to transact in this environment. Coming out of Q4, we are very pleased with our transaction capabilities. However, we did notice that some of the ramps are taking longer than usual to result in significant annual recurring revenue, impacting FY ‘25 more than FY ‘24. We continue to see this trend we identified last quarter, but we're definitely happy with our transaction performance during the quarter.

Got it. Yes, it's great to see the fantastic results in this tough environment. Jeff, quickly on subscription and support gross margins, '25 shows a nice step-up from where you closed out in '24, and I mean from where you were at the end of fiscal '23. Looking at the exit trajectory, you're at $58 million. Can you walk us through some of the reasons why it would be higher, building off of a very strong Q4 number?

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

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

Thank you.

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

Hey, thanks. This is David Unger on for Michael Turrin, tonight. Just one for me. Great to see the meaningful cash on the balance sheet with a seasonally strong Q4. Can you guys remind us the best way to think about capital allocation, pecking order at this point in the cycle? Thank you.

We have a very strong balance sheet, and our customers value the long-term decisions they make with us. They appreciate partnering with a well-capitalized company. We have previously discussed our minimum cash balance needs to run our operations, which we estimate to be in the $400 million to $500 million range. We have also been engaging in some repurchase activities. Looking ahead, we consider ourselves a potential acquirer in our industry, so it’s important to maintain some cash for strategic purposes. Currently, we feel positive about our position in the cloud transition, and we may explore more strategic M&A opportunities. However, we will remain disciplined and cautious regarding pricing in any M&A activity.

Great, congrats. Thank you.

Thank you.

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

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

Yes, it was a very strong close for us in Q4, which aligns with the expected percentages for deals closing and supports our vision, team, and execution. This is excellent news. Generally, software companies experience some deals slipping into Q1, but with a great Q4, we see fewer deals push into Q1. This influences our Q1 outlook positively; closing deals early is certainly a good sign. Regarding the pipeline, we have strong confidence in our visibility for the fiscal year. Our current position continues to improve, as I mentioned in my prepared remarks. We are optimistic about the product, customer success, and our competitive standing, all trending positively. Over the past couple of years, we've focused on creating a more consistent business throughout the year, aiming to pull as many deals forward as possible. This also helps bolster our confidence in our projections. It's important to note that a portion of what we closed contributes to this year's ARR, but a significant amount, as Jeff highlighted, will ramp into fully realized ARR over the coming years. I increasingly view Guidewire as a multiyear business, which is reflected in how we engage with our customers, our investment strategy, and our company operations. We are establishing long-term relationships, and their strength reinforces this approach. So while we discuss Q1, we’re also considering the entire fiscal year and even fiscal year '25. This gives us a strong sense of confidence in the business and our current execution, justifying our expectation for ARR acceleration in fiscal '25. I hope this conveys our confidence in the business at this moment.

It did. Thank you very much.

I appreciate it.

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

I want to thank everyone for joining the call today. It was an outstanding fourth quarter and an exceptional fiscal year for us. We are very enthusiastic about the future of the business. I hope to see all of you at our Connections event and Analyst Day in November. We look forward to hosting everyone in Nashville and hopefully meeting in person if possible. Thank you very much.

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